2024 (9) TMI 1329 - AT - Income Tax

Disallowance made of expenses incurred in relation to earning exempt income u/s 14A - expense suo moto disallowed by the assessee u/s 14A pertaining to the earning of exempt income was Nil - persistent plea of the assessee against any disallowance of expenses to be made u/s 14A of the Act was that it had sufficient interest free own funds for the purposes of making this investment - HELD THAT - No change in facts and circumstances from the preceding year having been pointed out to warrant NIL disallowance of expenses in the impugned year, except for stating that it had sufficient own funds for making the investments. But this fact was present in the preceding year also when also there were sufficient own funds available with the assessee for making investments yet it had suo moto made a disallowance of Rs. 31 lacs u/s 14A of the Act. Further, we agree with the AO that the possibility of incurrence of NIL administrative expenses was not feasible considering the huge quantum of investments made by the assessee earning exempt income to the tune of approx. 25.65 Crs nor do we find it was explained by the assessee with cogent reasons. AO, we hold, was correct in being not satisfied with the claim of the assessee of NIL expense being incurred for earning exempt income. The invocation of Rule 8D of the Rules, as a consequence, we hold, has been rightly held by the Ld. CIT(A) to be in accordance with law as per section 14A(2)/(3) of the Act. The order of the Ld. CIT(A) confirming the disallowance made u/s 14A is accordingly upheld. - Decided against assessee. Disallowance of deduction claimed u/s 80IA - reduction of profits of the eligible unit by allocating certain Head Office/Common expenses to the eligible unit - HELD THAT - No merit in the disallowance made by allocating the common expenses to the eligible unit and thus reducing the deduction claimed u/s 80IA of the Act to Rs. 1,07,897/-. Firstly, it is a fact on record that the quantum of operation of the eligible unit was miniscule as compared to the ineligible unit, with the ineligible unit accounting for almost the entire turnover of the assessee to the tune of 99.733% and the eligible unit s turnover being only 0.2676%. The entire exercise of allocation of expenses, therefore, is a waste exercise by which only 0.26% of the alleged common expenses have been allocated to the eligible unit amounting to Rs. 1,07,897/- , out of total of such expenses to the tune of Rs. 4 crores approximately. On the principle of materiality itself, this entire exercise of allocating expenses to the eligible unit, therefore, fails. Even otherwise, we have noted that the ITAT in the case of the assessee in AY 2008-09 found identical allocation of expenses to the eligible unit of the assessee claiming exemption of its income u/s 10B of the Act on account of audit fees, managerial remuneration etc. to be inappropriate finding these expenses to have no bearing on the earning of income. Therefore, considering the materiality of the entire exercise and taking note of the decision of the ITAT in the case of assessee in AY 2008-09, we hold that the disallowance made by allocating commission expenses to the eligible unit of the assessee claiming deduction u/s 80IA is not sustainable. The disallowance so made is, therefore, directed to be deleted. Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of expenses incurred in relation to earning exempt income under Section 14A of the Income-tax Act, 1961.
2. Disallowance of deduction claimed under Section 80IA of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of expenses incurred in relation to earning exempt income under Section 14A of the Income-tax Act, 1961:

The primary issue raised by the assessee was the disallowance of expenses amounting to Rs. 23,00,575/- under Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962. The assessee argued that it had sufficient interest-free funds and had not incurred any expenditure to earn the exempt income. The investments were made from interest-free funds, and therefore, no disallowance was justified.

The Tribunal noted that the assessee had substantial investments yielding exempt income, amounting to Rs. 25.65 crores at the end of the year. The assessee earned exempt income in the form of dividends and long-term capital gains. Despite this, the assessee claimed NIL expenses under Section 14A. The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) (CIT(A)) were not convinced with the assessee's claim and invoked Rule 8D, resulting in a disallowance of Rs. 23,00,575/-.

The CIT(A) upheld the AO's decision, stating that the provisions of law are clear that if the AO is not satisfied with the assessee's claim of NIL expenditure, Rule 8D must be applied to determine the disallowance. The Tribunal found no infirmity in the CIT(A)'s order, noting that the assessee had not provided a plausible explanation for the NIL disallowance despite having made a suo moto disallowance in the preceding year. The Tribunal upheld the disallowance of Rs. 23,00,575/- under Section 14A.

2. Disallowance of deduction claimed under Section 80IA of the Income-tax Act, 1961:

The second issue pertained to the disallowance of Rs. 1,07,897/- from the deduction claimed under Section 80IA. The AO allocated certain head office/common expenses to the eligible unit in proportion to its turnover. The expenses included Director's Remuneration, Bank Charges, Auditor's Remuneration, and Audit Fees. The AO allocated these expenses based on the turnover ratio, resulting in a disallowance of Rs. 1,07,897/-.

The assessee contended that similar allocations in previous years had been found inappropriate by the ITAT, and the disallowance was deleted. The Tribunal noted that the eligible unit's turnover was minuscule compared to the ineligible unit, making the allocation exercise immaterial. The Tribunal also referred to its earlier decision, where it found no logic in allocating such expenses to the eligible unit.

The Tribunal held that the disallowance of Rs. 1,07,897/- by allocating common expenses to the eligible unit was not sustainable. The Tribunal directed the deletion of the disallowance, allowing Ground No. 3 raised by the assessee.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal upheld the disallowance under Section 14A but deleted the disallowance under Section 80IA. The order was pronounced in the open Court on 10.05.2024 at Ahmedabad.