2020 (12) TMI 1112 - AT - Income Tax

Disallowance under the provisions of Section 14A read with Rule 8D - AO was of the view that he is not under the obligation to prove the nexus between expenditure incurred viz a viz exempted income but to make the disallowance as per the provisions of Rule 8D - HELD THAT - Primary onus lies upon the assessee to justify the stand taken based on the material facts or the provisions of law. Assessee has nowhere made any rational submission for adopting the disallowance on estimation basis. Thus, in absence of any material by the assessee, we reject the basis adopted by it (the assessee) in making the disallowance under the provisions of section read with Rule 8D of Income Tax Rules. Whether the AO is under the obligation establish the nexus between the expenditure incurred by the assessee viz a viz the exempted income earned by it? - In the case on hand, the assessee failed to make any submission about the same. As such the onus shifts from the assessee upon the AO when he makes the submission to the AO with the documentary evidence that it has not incurred any expenditure in connection with the exempted income. But, we find that the assessee has not made any submission except disallowing the expenses on estimation basis. As such we find that the AO has derived the satisfaction by recording in the assessment order. ITAT in the own case of the assessee involving identical facts and circumstances has confirmed the disallowance made by the authorities below. Investments were made on the advice of the PMS and for this purpose PMS was compensated by the assessee by way of fees paid to them which has already been disallowed by the assessee. Therefore, further consideration of such investments for the purpose of disallowance of expenses under Section 14A r.w.r. 8D would lead to double disallowance which is unwanted under the provisions of law. Diminution in the value of investments should also be considered while working out the disallowance to be made under the provisions of Section 14A read with Rule 8D of Income Tax Rules. It is because such benefit was extended by the AO in the assessment framed under Section 143(3) of the Act for the Assessment Year 2007-08 vide order dated 10- 12-2009 which was not disputed by the Ld. DR for the assessee. There being no change in the facts and circumstances or the provisions of law, in our considered view the principles of consistency should be followed by the Revenue. Accordingly, we direct the authorities below to extend the benefit of the assessee on account of diminution in the value of investments while working out the disallowance to be made under the provisions of Section 14A read with Rule 8D of Income Tax Rules. Addition under the provisions of Section 94(7) - AO during the assessment proceedings found that the assessee has earned short-term capital gain only which was not disclosed in the Income Tax Return - HELD THAT - There is no dispute to the fact that the loss claimed by the assessee with respect to the sale purchase of the units were in violation of the provisions of Section 94(7) - Short-term capital loss incurred with respect to the units which were purchased within a period of three months prior to the record date and sold within a period of nine months after such record date, shall be ignored to the extent of such loss, not exceeding the amount of dividend income for computing the income chargeable to tax. In view of the above we find no infirmity in the order of the authorities below. Hence, the ground of appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of Income Tax Rules.
2. Addition under Section 94(7) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D of Income Tax Rules:

The assessee, a private limited company engaged in manufacturing electrical engineering products, declared exempted income from dividends and share of profit from a firm. The assessee made a suo-moto disallowance of expenses associated with the exempted income. However, the Assessing Officer (AO) was dissatisfied with the method adopted by the assessee, which was based on an estimation of 0.5% of the exempted income. The AO, invoking the provisions of Section 14A read with Rule 8D, made a higher disallowance. The AO's stance was that he need not prove the nexus between the expenditure incurred and the exempted income but should follow the method prescribed under Rule 8D.

The assessee argued that the AO failed to record dissatisfaction with the method used for disallowance and contended that the investments were managed through portfolio management services (PMS), thus no additional administrative expenses were incurred. However, the CIT (A) upheld the AO's application of Rule 8D, directing the exclusion of investments in foreign subsidiaries and debentures from the calculation but included investments made through PMS.

Upon appeal, the Tribunal noted that the AO had recorded dissatisfaction with the assessee’s method and that the primary onus was on the assessee to justify the expenditure claimed. The Tribunal upheld the AO's method under Rule 8D, emphasizing that the assessee failed to provide a rational basis for its estimation. However, the Tribunal agreed that investments managed by PMS should be excluded to avoid double disallowance and directed the authorities to consider the diminution in the value of investments, following the principle of consistency from previous assessments.

2. Addition under Section 94(7) of the Income Tax Act:

The AO found that the assessee had not disclosed short-term capital gains and had incurred short-term losses on certain investments, which were adjusted against the short-term capital gains. The AO disallowed these losses under Section 94(7), as the transactions were within the specified time frames relative to the record date for dividends, making the losses ineligible for set-off.

The CIT (A) upheld the AO's decision, stating that the provisions of Section 94(7) were clear and unambiguous, and the assessee’s claim that the losses were not incurred intentionally was irrelevant.

The Tribunal agreed with the authorities, noting that the provisions of Section 94(7) were applicable regardless of the assessee’s knowledge of the record date. The Tribunal found no infirmity in the order of the authorities below and dismissed the assessee’s appeal on this ground.

Conclusion:

The Tribunal partly allowed the appeals, directing the authorities to exclude PMS-managed investments and consider the diminution in the value of investments while calculating disallowance under Section 14A read with Rule 8D. The addition under Section 94(7) was upheld, dismissing the assessee’s appeal on that ground. The decisions applied mutatis mutandis to subsequent assessment years, resulting in the partial allowance of the assessee's appeals for those years as well.