2016 (5) TMI 1292 - AT - Income Tax

Tribunal confirms deletion of disallowance under Section 14A

DCIT, Circle- 2, Jaipur Versus M/s. A.U. Financiers (India) Ltd.

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 42,22,857/- under Section 14A of the Income-tax Act. The Revenue's appeal was ... Disallowance u/s 14A - Held that:- The provisions of Section 14A of the Act read with rule 8D of Income-tax Rules, cannot be invoked in mechanical way by the AO. As per Section 14A(2), the AO is required to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act and in accordance with Rule 8D of Income-tax Rules, 1962 if the AO having regard to the accounts, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to such exempt income, he is empowered for making disallowance as per Rule 8D. In the case in hand, no finding is recorded by the AO in this regard. On the contrary, the ld. CIT(A) has given a finding after examining the accounts of the assessee. The AO has not brought on record any material to show that the assessee has incurred any expenditure in relation to the income which do not form part of the total income. Moreover, it is not in dispute that the assessee has earned exempt income of ₹ 27,006/- and expenditure amounting to ₹ 42,22,857/- in relation to this is disallowed The finding of the ld. CIT(A) is not rebutted by revenue by placing any contrary materials Issues Involved:1. Whether the CIT(A) erred in deleting the disallowance of Rs. 42,22,857/- made by the AO under Section 14A of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income-tax Act, 1961:- Facts and Background: The case was picked up for scrutiny assessment, and the assessment was made under Section 143(3) of the Income-tax Act, 1961. The Assessing Officer (AO) invoked the provisions of Rule 8D of the Income-tax Rules, 1962, and made a disallowance of Rs. 42,22,857/- under Section 14A of the Act. The assessee, aggrieved by this order, appealed before the CIT(A), who deleted the disallowance.- Revenue's Argument: The Departmental Representative (DR) argued that the CIT(A) was not justified in deleting the disallowance, asserting that the provisions of Rule 8D were rightly applied by the AO for the assessment year 2011-12.- Assessee's Argument: The assessee contended that it had sufficient interest-free funds for making investments and had not borrowed funds for this purpose. The assessee also highlighted that it had already disallowed Rs. 62,878/- towards administrative expenditure against the exempt income of Rs. 27,006/-. The assessee relied on several judicial precedents to support its claim.- AO's Observations: The AO observed that the assessee's investments were made out of share capital and surplus profit. However, based on past history, the AO made the disallowance as per Rule 8D, calculating the disallowance under clauses (ii) and (iii) of Rule 8D.- CIT(A)'s Findings: The CIT(A) noted that the assessee, an NBFC, was engaged in financing, with interest expenses incurred on loans taken for further financing. The investments were primarily in subsidiary companies, made out of surplus funds, and not for earning income. The CIT(A) found that the AO failed to establish any direct or indirect expenditure incurred for earning exempt income. The CIT(A) emphasized that the primary purpose of the investments was for business control, not income generation. The CIT(A) concluded that Section 14A's apportionment principle did not apply as no expenditure was incurred for earning exempt income.- Tribunal's Analysis: The Tribunal observed that the AO did not record satisfaction regarding the correctness of the assessee's claim of expenditure. The Tribunal noted that the assessee had demonstrated no borrowed funds were used for investments. The Tribunal emphasized that the AO should not mechanically invoke Section 14A read with Rule 8D without proper satisfaction. The Tribunal found that the CIT(A) had examined the accounts and given a reasoned finding, which the AO failed to rebut with contrary material.Conclusion:The Tribunal upheld the CIT(A)'s order, finding no reason to interfere. The appeal of the Revenue was dismissed, and the deletion of the disallowance of Rs. 42,22,857/- under Section 14A was confirmed. The Tribunal emphasized the need for the AO to record proper satisfaction before invoking Section 14A and applying Rule 8D. The decision was pronounced in the open court on 05/05/2016.