2019 (7) TMI 1493 - AT - Income Tax

Disallowance expenses u/s 14A - disallowance of interest expenses deleted by the CIT(A) but, estimated administrative expenses retained in terms of Rule 8D(2)(iii) - HELD THAT - We straightway notice that exempt income is out of investments in mutual funds. The Co-ordinate Bench in Academy for Computer Training 2016 (11) TMI 1527 - ITAT AHMEDABAD has taken a view that separate disallowances towards administrative expenses is not called for where exempt income is generated from mutual funds. It was held that in the case of a mutual funds, administrative and managerial expenses are factored in the investments itself. In such a scenario, the explanation offered by the assessee of no expenditure incurred appears to be in congruity with the market practice. Accordingly, we do not find it a fit case for resorting to double disallowance of the similar expenditure in the garb of Rule 8D(2)(iii) of the IT Rules. In consonance with the view also taken on the subject, we find merit in the plea taken by the assessee for deletion of disallowance. The order of the CIT(A) is thus set-aside and the AO is directed to delete the disallowance made towards administrative expenses under s. 14A r.w.r 8D(2)(iii) of the Rules - cross objection of the assessee is allowed.

Summary

Issues:
Disallowance of administrative expenses under section 14A of the Act.

Analysis:
The Appellate Tribunal ITAT Ahmedabad addressed a cross objection filed by the assessee against the order of the CIT(A) concerning the Revenue's appeal for the assessment year 2012-13. The Revenue's appeal was dismissed due to low tax effect as per CBDT Circular No. 21/2015. The only issue remaining was the cross objection by the assessee regarding the disallowance of ?10,81,692 out of a total disallowance of ?25,06,920 under section 14A of the Act. The disallowance pertained to administrative expenses and interest expenses made by the Assessing Officer using Rule 8D of the IT Rules.

The CIT(A) had deleted the disallowance of interest expenses but retained the disallowance of administrative expenses, leading to the assessee's grievance. The assessee argued that the substantial disallowance was excessive as the investments in mutual funds generating tax-free income did not require the assessee's active involvement. The Appellate Tribunal considered the statutory formula for estimation of disallowance under Rule 8D(2)(iii) and the contention of the Revenue and the assessee.

The Tribunal referred to a previous decision where it was held that separate disallowances for administrative expenses were not warranted when tax-free income arose from mutual funds. It noted that mutual fund investments involve expert supervision with administrative and managerial expenses factored into the investments. Therefore, the Tribunal found merit in the assessee's argument and directed the AO to delete the disallowance of ?10,81,692 made towards administrative expenses under section 14A read with Rule 8D(2)(iii) of the Rules.

In conclusion, the cross objection of the assessee was allowed, and the order of the CIT(A) sustaining the disallowance under section 14A was set aside. The Tribunal's decision was in line with the view taken on similar matters, emphasizing the specific nature of investments in mutual funds and the reasonableness of disallowances under section 14A of the Act.