2022 (12) TMI 552 - AT - Income Tax

Disallowance u/s 14A read with rule 8D - assessee has made suo-moto disallowance which includes disallowances of 5% salary expenses paid to 3 employee - HELD THAT - Percentage of exempted income in relation to the gross total income of the assessee stands at 1.73 % approx - the exempted income in relation to gross total income stands only at 1.73% whereas the proportion of the administrative expenses as calculator by the AO against the exempted income is much greater than the proportion of the income discussed above. Thus, in such facts and circumstances the disallowance cannot be made under the provisions of rule 8D(2) of the income tax rule which will provide absurd result. The basis adopted by the assessee is certainly not proper. It is for the reason that though there was no change in the investment in equity shares but there were transactions in the mutual funds. Admittedly, for the sale, purchase of the mutual funds, there must have been called board meetings, involvement of the supporting staff and likewise certain expenses in the form of stationary, refreshment, building repairs, Misc. expenses etc. must have been incurred by the assessee. However, the assessee has nowhere made any disallowance of such expenses. AO rightly disagreed with the correctness of the claim made by the assessee. But the question arises, if the AO is not satisfied with the correctness of the claim made by the assessee, can he resort to the provisions of rule 8D(2) of income tax rule. The answer stands in affirmative but subject to one caveat, he has to refer the books of accounts of the assessee. But in the given case the AO has certainly pointed out the defects in the claim made by the assessee for the expenses against the exempted income, but he did not consider the accounts of the assessee and directly jumped to the provisions of rule 8D of Income Tax Rule for the purpose of the disallowance which have given absurd amount of disallowance of the administrative expenses as discussed above. Accordingly, we are not convinced with the approach of the AO to make the disallowance as per the provisions of rule 8D of income tax rules in the given facts and circumstances. Administrative expenses as discussed above cannot be allowed to the assessee as deduction in entirety against the taxable income. In our considered view, some part of such expenses should be allocated to the exempted income of the assessee. As we note that there was no infirmity pointed out by the revenue with respect to the basis of the disallowance of the salary expenses of Rs. 17,82,826/- being to the tune of 5% of the salary paid to 3 employees as discussed above, we are of the view that the justice will be served to the revenue and the assessee if 5% disallowances is made of the expenses as discussed above.Appeal of the assessee is partly allowed whereas the appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules.
2. Disallowance of business development expenses.

Issue-Wise Detailed Analysis:

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

The primary issue raised by the assessee was the disallowance of Rs. 4,72,83,868/- made by the AO under Section 14A read with Rule 8D. The AO found that the assessee had made substantial investments yielding exempt income but had only disallowed a small portion of expenses suo-motu. The AO invoked Rule 8D(2) to calculate the disallowance, which resulted in a higher amount. The assessee contended that it had sufficient own funds to cover the investments and that the expenses were incurred in the ordinary course of business. The CIT(A) partially accepted the assessee's appeal, deleting the interest expenses disallowance but directing the AO to re-compute the administrative expenses disallowance.

The Tribunal noted that the assessee's own funds exceeded its investments, referencing the Supreme Court's judgment in CIT vs. Reliance Industries Ltd, which supports the presumption that investments were made from interest-free funds. Consequently, no disallowance of interest expenses was warranted. However, regarding administrative expenses, the Tribunal observed that the AO had not properly considered the assessee's accounts before applying Rule 8D(2). The Tribunal found the AO's approach resulted in an unreasonable disallowance and decided that a 5% disallowance of certain administrative expenses was appropriate. Thus, the appeal of the assessee was partly allowed, and the appeal of the Revenue was dismissed.

2. Disallowance of Business Development Expenses:

The Revenue challenged the CIT(A)'s deletion of the disallowance of Rs. 3,97,72,249/- claimed as business development expenses by the assessee. The AO had treated these expenses as capital expenditure, but the CIT(A) relied on previous ITAT orders favoring the assessee, which classified such expenses as revenue in nature. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue had not presented any new material to challenge the previous rulings. The Tribunal referenced its consistent stance in earlier years and dismissed the Revenue's appeal.

Conclusion:

In summary, the Tribunal partly allowed the assessee's appeal concerning the disallowance under Section 14A read with Rule 8D, directing a reasonable allocation of administrative expenses. The Tribunal dismissed the Revenue's appeal regarding both the re-computation of disallowance under Section 14A and the classification of business development expenses, upholding the CIT(A)'s decisions. The combined result was that the assessee's appeal was partly allowed, and the Revenue's appeal was dismissed.