2021 (1) TMI 393 - AT - Income Tax

Disallowance under section 14A read with Rule 8D(iii) - actual claim of administrative expenses apportioned to the exempt income - quantum of indirect / administrative expenditure disallowance u/r 8D(2)(iii) - HELD THAT - It is evident that the assessee is primarily aggrieved by indirect expenditure disallowance u/s 14A which has been computed as per Rule 8D(2)(iii). The issue of interest disallowance made by Ld. AO u/r 8D(2)(ii) has already attained finality and the same is not under dispute and not a subject matter of present appeal. This is the second round of litigation since the matter in the first round was remanded back to the file of Assessing Officer AO by coordinate bench of this Tribunal 2016 (10) TMI 1253 - ITAT MUMBAI We find that the assessee has made adhoc disallowance of Telephone expenses, stationery expenses and salary expenses. The salaries component is based on estimated proportionate time spent by certain employees who could be said to have devoted time towards investment activity. The disallowance is in the range of 10% to 25% of salary cost of these personnel.AO was not satisfied with the aforesaid disallowance since the assessee would have incurred expenditure under other heads as well. Assessee has identified the composite expenditure under each head and apportioned the composite expenditure in the ratio of exempt income vis- -vis total receipts during the year. The employee cost has separately been apportioned on the basis of time devoted by certain employees which could be said to have been engaged in investment activities. Upon perusal of the same, we find that this method of computing the disallowance was very fair, reasonable and scientific and therefore, was to be accepted. As per the provisions of Sec.14A, disallowance has to be computed having regards to the accounts of the assessee and if the said method adopted by the assessee was found to be not satisfactory, only then the computation was to be done as per Rule 8D. Therefore, we are of the considered opinion that the computations made by assessee to identify the disallowance was quite fair and reasonable. Disallowance u/r 8D(2)(iii) is accepted at ₹ 24.50 Lacs - Since the assessee has already disallowed a sum of ₹ 16,51,524/- in its computation of income, the net disallowance would work out to be ₹ 7,98,476/-. The Ld.AO is directed to recompute assessee s income in terms of our above order.

Summary

Issues Involved:
1. Disallowance under section 14A of the Income-tax Act read with Rule 8D(iii).
2. Non-granting of interest under section 244A of the Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D(iii):

The primary grievance of the assessee was the disallowance of indirect expenditure under Section 14A, calculated as per Rule 8D(2)(iii). The initial disallowance of interest under Rule 8D(2)(ii) was not in dispute.

This was the second round of litigation. In the first round, the Tribunal had remanded the matter back to the Assessing Officer (AO) with specific directions to compute the disallowance of administrative expenses as per Rule 8D, ensuring that the disallowance did not exceed the actual expenditure claimed by the assessee apportioned to exempt income. The AO was to compute the total expenditure for composite activities resulting in both taxable and non-taxable income and restrict the disallowance to the actual total claim if it exceeded the computed disallowance under Rule 8D.

Upon reassessment, the AO framed the assessment under Section 143(3) read with Section 254 on 15/12/2017. The assessee provided a detailed breakdown of investments and apportioned an aggregate expenditure of ?16,51,524/- towards exempt income. This included Telephone Expenses (?35,000/-), Stationery Expenses (?2,04,000/-), and Salaries (?14,12,524/-) based on the proportionate time spent by certain employees.

The AO, however, was not satisfied with the apportionment and computed the disallowance as per Rule 8D, resulting in a disallowance of ?125.67 Lacs, being 0.5% of average investments of ?251.35 Crores. After adjusting the assessee's suo-moto disallowance, the differential amount of ?109.16 Lacs was added to the income.

Upon further appeal, the CIT(A) directed the AO to exclude those investments that did not yield any exempt income during the year, reducing the disallowance to ?123.02 Lacs. Still aggrieved, the assessee appealed further.

The Tribunal found that the assessee's method of apportioning expenses was fair and reasonable. The assessee had identified composite expenses and apportioned them in the ratio of exempt income to total receipts. The Tribunal accepted the assessee's proposed disallowance of ?24.50 Lacs as fair, reasonable, and scientific. Consequently, the net disallowance was computed to be ?7,98,476/- after considering the suo-moto disallowance already made by the assessee. The AO was directed to recompute the income accordingly.

2. Non-granting of Interest under Section 244A:

The assessee was aggrieved by the non-grant of interest under Section 244A from the first day of the assessment year to the date of refund. The Tribunal directed the AO to grant interest in accordance with the law.

Conclusion:

The appeal was partly allowed. The Tribunal accepted the assessee's computation of disallowance under Section 14A at ?24.50 Lacs and directed the AO to recompute the income. Additionally, the AO was instructed to grant interest under Section 244A as per the law.

Order Pronounced on 22nd October, 2020.