2016 (9) TMI 1270 - AT - Income Tax

Tribunal limits disallowance, stresses AO's satisfaction, cautions against mechanical Rule 8D application.

Raniganj Co-operative Bank Ltd. Versus D.C.I.T., Circle-2 and JCIT, Range-2, Asansol

The Tribunal partly allowed the appeal for AY 2008-09 by limiting the disallowance to a reasonable amount and fully allowed the appeal for AY 2009-10, ... Disallowance of expenditure u/s.14A - Held that:- In the present case the only investment that yielded tax exempt income was investiment in UTI mutual fund. As on 31.3.2007 the investment in UTI mutual fund was ₹ 56,33,712.76 Ps. which increased to ₹ 1,05,99,750/- as on 31.3.2008. Therefore during the previous year there was an increase in investment in UTI mutual fund of ₹ 49.66 Lacs. From the submissions made by the Assessee before CIT(A), it has been claimed by the Assessee that the availability of own funds of the Assessee was ₹ 68.19 lacs. This has not been rebutted on a proper basis by the CIT(A). Therefore it can safely be concluded that there was sufficient availability of own funds from and out which investments in UTI mutual funds were made by the Assessee and therefore disallowance of interest expenses by applying Rule 8D(2)(ii) of the rules of ₹ 2,95,677/- is deleted. Also of the view that the argument that interest income is more than the interest expenses debited in the profit and loss account and therefore no interest expenses can be disallowed, does not require any adjudication, in view of the above conclusion. As far as disallowance of other expenses u/r 8D(2)(iii) of the rules is concerned, shows expenditure on account of staff and office expenses. The claim of the Assessee that no other expenses were incurred to earn the tax free income cannot be accepted. There is no other basis on which the disallowance can be quantified. Having regard to the books of accounts of the Assessee, the disallowance as worked out above of ₹ 40,583.66 Ps., in my view would be just and appropriate, in the facts and circumstances of the present case. Thus accordingly, restrict the disallowance u/s.14A of the Act to a sum of ₹ 40,583.66 Ps. - Decided in favour of assessee in part. There can be no disallowance of expenses u/s.14A of the Act for AY 2009-10, as the Assessee has not earned any tax free income in the said AY. Issues Involved:1. Disallowance of expenditure under Section 14A of the Income Tax Act.2. Applicability of Rule 8D for calculating disallowance.3. Satisfaction of the Assessing Officer (AO) regarding the correctness of the assessee's claim.4. Nexus between borrowed funds and investments yielding tax-free income.5. Disallowance of expenses in the absence of exempt income.Issue-wise Detailed Analysis:1. Disallowance of Expenditure under Section 14A:The primary issue revolves around the disallowance of expenditure incurred in earning tax-exempt income under Section 14A of the Income Tax Act. The assessee, a Co-operative Bank, declared dividend income from UTI Mutual Fund as exempt and claimed no expenses were incurred to earn this income. The AO, however, disallowed Rs. 6,48,411/- under Section 14A, considering that no income can be earned without incurring any expenditure, especially where monetary funds are involved.2. Applicability of Rule 8D for Calculating Disallowance:The AO applied Rule 8D to compute the disallowance, which resulted in an amount higher than the exempt income itself. The CIT(A) upheld this disallowance, stating that disallowance under Section 14A can be made even if there is no exempt income, and if investments are made that can yield exempt income in the future, the related expenditure can also be disallowed. However, the Tribunal observed that applying Rule 8D mechanically can lead to absurd results, as in this case, where the disallowance exceeded the exempt income.3. Satisfaction of the AO Regarding the Correctness of the Assessee's Claim:The Tribunal emphasized that the AO must record satisfaction regarding the correctness of the assessee's claim that no expenditure was incurred in earning exempt income. This satisfaction must be based on the examination of the assessee's accounts. The Tribunal referred to the decision in DCIT Vs. REI Agro Ltd., where it was held that the AO must provide cogent reasons for rejecting the assessee's claim.4. Nexus Between Borrowed Funds and Investments Yielding Tax-Free Income:The assessee argued that it had sufficient own funds to cover the investments in UTI Mutual Funds, thereby negating any nexus between borrowed funds and the investments. The Tribunal found that the assessee's claim of having adequate own funds was not rebutted on a proper basis by the CIT(A). Therefore, the disallowance of interest expenses under Rule 8D(2)(ii) was deleted.5. Disallowance of Expenses in the Absence of Exempt Income:For AY 2009-10, the assessee did not earn any exempt dividend income. Despite this, the AO made a disallowance under Section 14A. The Tribunal referred to several High Court decisions, including those of the Allahabad High Court and the Gujarat High Court, which held that in the absence of exempt income, no disallowance under Section 14A can be made. Consequently, the Tribunal allowed the appeal for AY 2009-10, deleting the disallowance.Conclusion:The Tribunal partly allowed the appeal for AY 2008-09 by restricting the disallowance to a reasonable amount and allowed the appeal for AY 2009-10 in full, holding that no disallowance under Section 14A can be made in the absence of exempt income. The Tribunal emphasized the need for the AO to record satisfaction based on the examination of accounts and to avoid mechanical application of Rule 8D, which can lead to unreasonable results.