2020 (11) TMI 762 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - AR submitted, no disallowance of interest expenditure under Rule 8D(2)(ii) can be made as no interest bearing fund was invested in exempt income yielding asset - HELD THAT - Claim of the assessee requires factual verification, in case it is found that the assessee had sufficient interest free funds available with it which can take care of investment made in exempt income yielding assets, no disallowance of interest expenditure under Rule 8D(2)(ii) can be made. AO is directed to factually verify assessee s claim in this regard. In so far as, disallowance of administrative expenditure under Rule 8D(2)(iii) is concerned, it is the contention of the assessee that for availing loan from a co-operative bank, the assessee mandatorily has to invest in shares of the bank. As submitted, the dividend income earned on such shares are directly credited to the bank account of the assessee and hence, the assessee is not required to incur any expenditure for earning dividend income. Whether or not the assessee has incurred any expenditure has to be established through supporting evidence. In any case, as per section 14A(3) whether or not the assessee has incurred any expenditure for earning exempt income, a part of the expenditure has to be attributed towards earning of exempt income - assessee has not been able to establish on record that no expenditure is attributable towards earning of exempt income. Therefore, in our considered opinion, disallowance of administrative expenditure has to be made under Rule 8D(2)(iii) of the Act. However, such disallowance has to be computed by taking into consideration only those investments which have yielded exempt income during the year - Assessee appeal is allowed for statistical purposes.

Summary

Issues:
Disallowance under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax for the Assessment Year 2012-13, focusing on the disallowance of &8377; 6,17,274 under section 14A of the Act. The Assessing Officer disallowed interest and administrative expenditures under Rule 8D, which was upheld by the Commissioner (Appeals).

The Authorized Representative argued that no disallowance of interest expenditure should be made as no interest-bearing fund was invested in exempt income assets, and the assessee had sufficient surplus funds for investments. Additionally, it was contended that no disallowance under Rule 8D(2)(iii) could be made as the Assessing Officer failed to record satisfaction as required by the Act. The Authorized Representative also emphasized that disallowance should not exceed the exempt income earned during the year.

The Departmental Representative opposed these contentions. The Tribunal noted that the Assessing Officer did not need to record satisfaction if no expenditure was disallowed under section 14A in the return. The Tribunal directed factual verification of the claim regarding interest-free funds and investments. It was stated that if the assessee had sufficient funds to cover investments, no disallowance of interest expenditure should be made. Regarding administrative expenditure, the Tribunal held that some expenditure must be attributed to earning exempt income, and directed the Assessing Officer to compute the disallowance considering only investments yielding exempt income.

The Tribunal concluded that the disallowance under Rule 8D should not exceed the exempt income earned during the year. The issue was remanded to the Assessing Officer for fresh adjudication in line with the Tribunal's observations. The appeal was allowed for statistical purposes.