2017 (1) TMI 1441 - AT - Income Tax

ITAT decision on disallowance under section 14A upheld, interest reduced, admin expenses modified

Delhi Towers Ltd. Versus DCIT Central Circle-20 New Delhi.

The ITAT upheld the disallowance under section 14A read with Rule 8D, emphasizing the AO's adherence to the prescribed methodology despite the lack of ... Addition u/s 14A r.w.r. 8D - calculation of disallowance - Held that:- In this instance facts before us, assessee has not made any disallowance in respect of expenditure, that may be attributable to the earning of exempt income. Admittedly assessee has earned dividend to an extent of ₹ 39,87,672/-, from the investments made. The methodology of calculation adopted by Ld. AO in the order, shows that all these elements were present in his mind, that he did not expressly record his satisfaction in these circumstances, would not per se justify in concluding that he was not satisfied to reject the AO’s conclusion. To insist that the AO should pay such lip service regardless of the substantial compliance with the provisions would, destroy the mandate of Section 14A. We dismiss the additional ground raised by assessee. In respect of the merits of the case it is observed that the assessee has submitted a calculation of disallowance under Section 14A read with rule 8D at page 4 of the paper book. As from the balance sheet and profit and loss accounts, it is observed that there is no fresh investment that has been made by the assessee during the year under consideration and that the dividend income has been earned from the old investments. We agre with the submission of Ld. AR that interest received on loans advanced is much more than the interest paid on the loans taken and that an amount of ₹ 4 crores advanced to Pearey Lal & Sons (E.P) Ltd., maybe a excluded, as the interest earned from the advance cannot be attributed to the dividend income earned by the assessee. We therefore do not agree with the Ld.CIT(A), in confirming the entire disallowance made by Ld.AO, and restrict the disallowance as computed by the assessee to an extent of ₹ 8,54,102/-. Issues:1. Disallowance under section 14A read with Rule 8D.2. Additional ground raised regarding satisfaction not being recorded by assessing officer.3. Disallowance of interest under section 14A read with Rule 8D.4. Disallowance of administrative expenses under section 14A read with Rule 8D(3).5. Appeal against Ld. CIT (A)'s order upholding additions made by Ld. AO.Issue 1: Disallowance under section 14A read with Rule 8D:The assessee challenged the disallowance under section 14A read with Rule 8D, claiming no net interest payment and no past disallowances. The ITAT emphasized the requirement for the AO to follow the methodology prescribed in Rule 8D for determining expenditure related to exempt income. The AO must calculate the disallowance if the assessee has not done so, as per Section 14A(1) and (2) read with Rule 8D(i). In this case, the AO's calculation showed consideration of relevant elements, even though explicit satisfaction was not recorded. The ITAT dismissed the appeal, highlighting the need for substantial compliance rather than mere formalities.Issue 2: Additional ground regarding satisfaction not recorded:The additional ground raised by the assessee focused on the assessing officer's failure to record satisfaction before disallowing expenses under section 14A. The ITAT admitted this legal issue, emphasizing the importance of the AO following the prescribed methodology under Rule 8D. While the AO did not explicitly record satisfaction, the ITAT concluded that substantial compliance with the provisions sufficed, rejecting the appeal on this ground.Issue 3: Disallowance of interest under section 14A read with Rule 8D:The assessee argued against the disallowance of interest under section 14A read with Rule 8D, highlighting that no fresh investments were made during the relevant year. The ITAT agreed with the assessee's submission that the interest received on loans exceeded the interest paid, and excluded a specific amount advanced to a party from the disallowance calculation. Consequently, the ITAT restricted the disallowance to a lesser amount than imposed by the Ld. CIT (A).Issue 4: Disallowance of administrative expenses under section 14A read with Rule 8D(3):The Ld. CIT (A) upheld the disallowance of administrative expenses under section 14A read with Rule 8D(3), leading to the assessee's appeal. The ITAT disagreed with the Ld. CIT (A) and restricted the disallowance to a lower amount based on the assessee's calculations and the absence of fresh investments during the relevant period.Issue 5: Appeal against Ld. CIT (A)'s order upholding additions made by Ld. AO:The assessee appealed against the Ld. CIT (A)'s decision to uphold the additions made by the Ld. AO. The ITAT partially allowed the appeal, emphasizing the need for a fair calculation of disallowances under section 14A read with Rule 8D, considering factors such as interest income and investments made. The ITAT modified the disallowance amount based on these considerations, resulting in a partial success for the assessee.This detailed analysis of the judgment provides insights into the legal issues raised, the arguments presented by the parties, and the ITAT's conclusions on each aspect of the case.