2016 (11) TMI 1527 - AT - Income Tax

Tribunal overturns disallowance under section 14A, citing Rule 8D; own capital exceeds mutual fund investment

M/s. Academy for Computer Training (Guj) Pvt. Ltd. Versus Dy. CIT Circle-1 Ahmedabad

The Tribunal allowed the appellant's appeal, ruling that the disallowance under section 14A based on Rule 8D computation was not justified. The Tribunal ... Disallowance made u/s 14A by applying Rule 8D on mutual funds investment - Held that:- We take cognizance of the argument on behalf of the assessee that mutual funds investment bears different traits and is a different species of investment. The mutual funds are supervised by the experts in the field and management charges for such supervision is recovered from the clients. This being so, an investor in the mutual fund separately pays administrative and managerial expenses unlike a case where assessee chooses to make investment in shares directly. In the case of a mutual funds, administrative and managerial expenses are factored in the investments itself. In such a scenario, the explanation offered by the assessee of no expenditure incurred appears to be in congruity with the market practice. Accordingly, we do not find it a fit case for resorting to double disallowance of the similar expenditure in the garb of Rule 8D(iii) of the IT Rules. A bare reading of section 14A suggests that its applicability is not automatic. It is hedged by conditions prescribed therein. Section 14A inheres in it the concept of reasonableness. The formidable amount of expenditure as computed by the AO cannot be said to be attributable to tax-free income by applying a straight jacket formula as per Rule 8D(2)(iii) of the IT Rules in the given facts. Thus, we find considerable merit in the plea of the assessee. Hence, we are disposed to adjudicate the issue in favour of the assessee. Issues:Disallowance under section 14A of the Income Tax Act, 1961 based on Rule 8D computation.Analysis:The appeal was against the addition of &8377; 9,75,698/- due to disallowance under section 14A of the Income Tax Act, 1961, using Rule 8D. The Assessing Officer observed that the assessee earned exempt dividend income of &8377; 2,10,000/- from mutual funds. The AO noted the investment in mutual funds and claimed interest expenditure of &8377; 13,050/-, leading to a disallowance under section 14A. The AO applied Rule 8D and disallowed &8377; 27,857/- under Rule 8D(2)(ii) and &8377; 1,36,166/- under Rule 8D(2)(iii), totaling &8377; 1,64,063/-. The CIT(A) upheld this disallowance.The appellant contended that the disallowance was not justified as the own capital with reserves exceeded the corresponding investment in mutual funds. The Tribunal agreed, citing judicial precedents, and held that proportionate disallowance under Rule 8D(2)(ii) was unwarranted in such a scenario. Regarding the disallowance under Rule 8D(2)(iii), the appellant argued that the dividend income arose solely from one-time investments in mutual funds managed by experts who recover administrative expenses. The Tribunal found this argument valid, emphasizing that mutual fund investments differ from direct share investments, as administrative costs are included in mutual fund investments. The Tribunal noted that section 14A requires reasonableness and ruled in favor of the appellant, vacating the CIT(A)'s disallowance under section 14A.In conclusion, the Tribunal allowed the appellant's appeal, finding no justification for the disallowance under section 14A based on Rule 8D computation.