2021 (10) TMI 419 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D (2)(iii) on account of disallowance of expenditure incurred to earn tax exempt income - Suo moto disallowance made by assessee - HELD THAT - Window for disallowance indicated in section 14A is only to the extent of disallowing the expenditure incurred by the assessee in relation to the tax-exempt income. This proportion or portion on the tax exempt income surely cannot swallow the entire amount of tax-exempt income. In the case, in hand, no disallowance is attracted on account of interest expenditure. The only disallowance attracted is in relation to the administrative expenses. The assessee has suo-moto disallowed the sufficient on account of fees paid to the portfolio manager - we do not find justification on the part of CIT(A) in confirming the disallowance made by the AO by invoking the formula under Rule-8D(2)(iii), merely on assumption basis without recording the satisfaction as to how the suo-moto disallowance made by the assessee was not co-relating to the accounts of the assessee vis- -vis other circumstances - the impugned order of the Ld. CIT(A) is set-aside and the disallowance u/s 14A is restricted to that has been suo-moto made by the assessee. Appeal of the assessee stands allowed.

Summary

Issues:
Disallowance of expenditure under section 14A read with Rule 8D for earning tax-exempt income.

Analysis:
The appeal was filed against the order of the Ld. Commissioner of Income Tax (Appeals) for the Assessment Year 2014-15, regarding the disallowance of expenditure under section 14A read with Rule 8D for earning tax-exempt income. The Assessing Officer noted that the assessee earned tax-exempt dividend income but only disallowed a minimal amount as expenditure. Subsequently, the Assessing Officer applied Rule 8D(2)(iii) to calculate a higher disallowance. The Ld. CIT(A) upheld the Assessing Officer's decision, leading to the appeal before the ITAT.

The assessee contended that investments in mutual funds were managed through a Portfolio manager who charged fees, and the only disallowance made was on this account. The Ld. CIT(A) disagreed with the assessee, assuming additional overhead expenses due to high investments. However, the ITAT found the Ld. CIT(A)'s reasoning vague and unfounded. It was emphasized that the disallowance under section 14A should only relate to expenditure incurred for earning tax-exempt income, as per the decision in Joint Investment Pvt. Ltd. vs CIT. Since the assessee had already disallowed a significant amount in relation to fees paid to the Portfolio manager, the ITAT concluded that the Ld. CIT(A) erred in confirming the higher disallowance calculated by the Assessing Officer without proper justification.

Therefore, the ITAT set aside the Ld. CIT(A)'s order and restricted the disallowance under section 14A to the amount already disallowed by the assessee. Consequently, the appeal of the assessee was allowed, and the judgment was pronounced on 08/10/2021.