2022 (6) TMI 289 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - Suo moto disallowance by assessee - AO by applying the method under Rule 8D(2)(iii) made further disallowance - as argued when there is no investments made in the year under consideration the disallowance made by the AO under Rule 8D(2)(iii) is not maintainable - HELD THAT - Sub-section (2) of section 14 clearly explains that the AO is empowered to determine the expenditure in accordance with such method as contemplated under Rule 8D, if it is satisfied with the correctness of the claim of assessee in respect of such expenditure. In the present case, the assessee made disallowance on its own at 5% of exempt income to an extent of Rs.91,875/-. The AO did not accept the same and proceeded to invoke Rule 8D(2)(iii) of Rules which resulted disallowance of Rs.8,11,416/-. AO has also empowered to determine the amount of expenditure if no claim of expenditure incurred in relation to exempt income under sub-section (3) of section 14. Therefore, the method adopted by the assessee by disallowing at 5% of exempt income has no basis. Therefore, the AO is correct in invoking Rule 8D(2)(iii) which was confirmed by the CIT(A) by holding that the AO is justified in not accepting the disallowance made by the assessee on its own at 0.5% of average investments. There is no such provision in the statute that no disallowance of expenditure could be made on investments made in the earlier years. Admittedly, the exempt income was earned on the investments made in the earlier years and the exempt income was earned in the year under consideration. Therefore, the disallowance made by the AO which was confirmed by the CIT(A) under Rule 8D(2)(iii) is justified. Thus, we find no infirmity in the order of CIT(A). Accordingly, the grounds raised by the assessee are dismissed.

Summary

Issues:
Confirmation of addition made under section 14A r.w. Rule 8D by the CIT(A) for assessment year 2015-16.

Issue Analysis:

1. Addition under section 14A r.w. Rule 8D:
The appeal raised by the assessee challenges the addition made by the AO under section 14A of the Act, which was confirmed by the CIT(A). The assessee argued that no investments were made in the relevant year, and the disallowance made by the AO under Rule 8D(2)(iii) is not justified. The assessee referred to a previous Tribunal order in its own case for A.Y. 2012-13, where a similar disallowance was deleted based on the source of funds for investments. However, in the present case, the disallowance was made under Rule 8D(2)(iii) only. The Tribunal noted that the investments were not made in the year under consideration, and the disallowance was based on 0.5% of average investments. The AO did not accept the assessee's self-disallowance at 5% of exempt income, invoking Rule 8D(2)(iii) resulting in a higher disallowance. The Tribunal held that the AO's decision to apply Rule 8D(2)(iii) was justified, as the method adopted by the assessee had no basis. The disallowance made under Rule 8D(2)(iii) for the exempt income earned from investments made in earlier years was deemed appropriate, and the CIT(A)'s confirmation of the addition was upheld. The Tribunal found no error in the CIT(A)'s order and dismissed the appeal, affirming the addition made under section 14A r.w. Rule 8D for the assessment year 2015-16.

This comprehensive analysis covers the key issue of confirmation of addition under section 14A r.w. Rule 8D for the assessment year 2015-16, detailing the arguments presented, the Tribunal's assessment, and the final decision reached.