2025 (3) TMI 1219 - AT - Income Tax

Disallowance u/s 14A - suo moto disallowance made by assessee - assessee had not debited any expenses incurred in respect of dividend received from M/s Dabur India Limited which was 97% of the total dividend income received by the assessee - HELD THAT - As in this case the assessee has itself revised the disallowance u/s 14A made in its return of income in the revised computation of income filed by the assessee before the AO during the assessment proceedings as discussed by the AO. Therefore in the present case the assessee itself agrees that the suo moto disallowance made u/s 14A was not correct and therefore this itself is a sufficient ground to support the satisfaction recorded by him which justifies the satisfaction recorded by the AO for not accepting the suo moto disallowance made by the assessee in its return of income. Therefore the additional ground filed by the assessee is dismissed. Disallowance made u/s 14A r.w.r. 8D(2)(iii) can be made only in respect of the average monthly value of the investment of the shares/investments which yielded the dividend income - As per revised computation the assessee further stated that since it has already disallowed a sum in its original return of income and therefore further proposed disallowance u/s 14A of the Act was Rs. 25, 34, 784/- whereas as per the statement noted by AO in the assessment order (para -6.3) such disallowance comes to Rs. 23, 34, 064/-. Therefore the AO is directed to reconcile the same and make disallowance after necessary verification as per law restricting the disallowance @ 1% of the annual average of the monthly average opening and closing balance of the value of the investments in respect of the shares from which dividend income being exempt was earned. Disallowance of PMS expenses - On perusal of the order of the Assessing Officer and the CIT(A) the facts regarding the specific purpose for which PMS expenses amounting was utilized has not been examined by both the lower authorities before making the disallowance and its confirmation by the CIT(A). The assessee has also not explained the same before us and the utilization of the PMS expenses requires factual verification before its allowance or otherwise can be decided. Therefore this issue is set-aside to the file of the Assessing Officer to decide the matter de novo after giving reasonable opportunity of being heard to the assessee and in accordance with law. Ground no.1 of the appeal is partly allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this appeal were:

• Whether the disallowance of expenses related to exempt income under Section 14A of the Income Tax Act, 1961, as enhanced by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)], was justified.
• Whether the AO recorded the necessary satisfaction under Section 14A(2) of the Income Tax Act, 1961, before making the disallowance.
• Whether the Portfolio Management Services (PMS) charges should be disallowed as expenses related to exempt income.

ISSUE-WISE DETAILED ANALYSIS

Disallowance of Expenses Related to Exempt Income

• Relevant Legal Framework and Precedents: Section 14A of the Income Tax Act, 1961, provides for the disallowance of expenses incurred in relation to income that does not form part of the total income. Rule 8D of the Income Tax Rules, 1962, prescribes the method for determining such disallowance. The court considered precedents including the decision in Maxopp Investment Ltd. vs CIT and HT Media Ltd. vs PCIT.
• Court's Interpretation and Reasoning: The court noted that the AO had not accepted the assessee's self-disallowance of Rs. 9,75,502/- and instead computed a higher disallowance using Rule 8D, amounting to Rs. 3,65,51,284/-. The AO's rationale was that the assessee's major income was exempt, and substantial expenses were incurred, warranting a higher disallowance.
• Key Evidence and Findings: The AO found that the assessee had not deducted any expenses related to significant dividend income from M/s Dabur India Ltd., which constituted 97% of the total dividend income.
• Application of Law to Facts: The AO applied Rule 8D to calculate disallowance, considering the substantial investment in exempt income-yielding assets and the professional management of such investments.
• Treatment of Competing Arguments: The assessee argued that the AO did not record the necessary satisfaction under Section 14A(2), but the court found that the AO had indeed recorded satisfaction in the assessment order.
• Conclusions: The court upheld the disallowance made by the AO, noting that the AO had recorded adequate satisfaction, and the disallowance was consistent with Rule 8D.

Recording of Satisfaction under Section 14A(2)

• Relevant Legal Framework and Precedents: Section 14A(2) mandates that the AO must record satisfaction that the assessee's claim regarding expenses related to exempt income is incorrect before making a disallowance.
• Court's Interpretation and Reasoning: The court found that the AO had recorded satisfaction, as evidenced by the assessment order, where the AO detailed reasons for rejecting the assessee's self-assessment.
• Conclusions: The court dismissed the assessee's additional ground regarding the lack of satisfaction recorded by the AO.

Disallowance of Portfolio Management Services (PMS) Charges

• Relevant Legal Framework and Precedents: PMS charges are considered under Rule 8D for disallowance if they relate to managing investments yielding exempt income.
• Court's Interpretation and Reasoning: The court noted that the PMS charges were incurred for managing the entire investment portfolio, including exempt income-yielding investments.
• Key Evidence and Findings: The court found that the lower authorities had not examined the specific purpose of the PMS charges, necessitating a factual verification.
• Application of Law to Facts: The court remanded the issue back to the AO for a de novo examination of the PMS charges, allowing the assessee an opportunity to present evidence.
• Conclusions: The court set aside the disallowance of PMS charges and directed the AO to reconsider the matter after a factual verification.

SIGNIFICANT HOLDINGS

• Core Principles Established: The court reinforced the principle that the AO must record satisfaction under Section 14A(2) before making a disallowance and that PMS charges related to exempt income must be carefully examined for their specific purpose.
• Final Determinations on Each Issue: The court upheld the disallowance of expenses related to exempt income under Section 14A, dismissed the additional ground regarding satisfaction, and remanded the issue of PMS charges for further examination by the AO.

The appeal was partly allowed, with the court directing the AO to conduct a factual verification of the PMS charges and to restrict the disallowance in accordance with the law.