2012 (3) TMI 118 - AT - Income Tax

Disallowance under s.14A read with Rule 8D unsustainable where authorities failed to examine assessee's no-expenditure claim

ITAT (Delhi) allowed the appeal, holding that disallowance under s.14A read with Rule 8D cannot be mechanically made where the assessee contends no ... Disallowance u/s 14A read with Rule 8D - Expenditure in relation to exempt Income - Old Investments - interest Income NIL - principles of interpretation of law - whether in absence of income which is not includible in the total income, the provision contained in section 14A can be invoked - Held That:- The factual position in this case is that no such income is statedly earned in this year although interest on NSCs has accrued as per the terms and conditions. Other investments may not have yielded income in this year but are capable of yielding the income. The narrow interpretation would be that only when such income is actually earned, the expenditure can be disallowed. The wider meaning would be that even if no income is earned in a particular year but the investments are capable of earning the income, the expenditure relatable to holding of the investments becomes disallowable. In this connection, we may examine a reverse provision contained in section 57(iii), which allows the deduction of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly or exclusively for the purpose of making or earning such income from income chargeable under the head “income from other sources”. There are a number of decisions which hold that the earning of the income in a particular year is not sine qua non of allowing expenditure. Thus, the income may be nil, yet the expenditure incurred in pursuit of earning such income is deductible. We are of the view that similar proposition will apply while interpreting the aforesaid provision contained in section 14A(1). Therefore, we are not in agreement with the ld. counsel in respect of first line of argument. We are of the view that the AO should have considered the claim of the assessee that no expenditure has been incurred in relation to earning the exempt income. If the claim was not found to be in consonance with the facts on record, it could have been rejected and disallowance could have been made as per Rule 8D. However, we find that the AO has not considered the claim of the assessee at all and he has straightway embarked upon computing disallowance under Rule 8D. The ld. CIT(Appeals) made an assumption that whenever exempt income is earned there will be some expenditure incurred in relation thereto. Such presumption cannot form the basis for making disallowance under Rule 8D. As mentioned in the case of Godrej & Boyce Manufacturing Co. Ltd. [2010 (8) TMI 77 - BOMBAY HIGH COURT], a reasonable disallowance can be made only after considering all the facts. The decision of Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. [2011 (11) TMI 267 - DELHI HIGH COURT] also says the same thing when it is mentioned that the claim of the assessee has to be examined in the first place in terms of its correctness. This has not been done by any of the lower authorities. We may also mention that the decision in the case of Jindal Photo Ltd. [2011 (9) TMI 239 - ITAT, NEW DELHI] also arrived at the same conclusion when it is held that the AO has to record his satisfaction about correctness or otherwise of the computation made by the AO, which mutatis mutandis means that if the contention is that no expenditure has been incurred, it has to be rebutted. The lower authorities have not followed the provision contained in section 14A(1) of the Act. Therefore, the disallowance cannot be upheld. It is ordered accordingly. In the result, the appeal is allowed. Issues:1. Disallowance under section 14A of the Income-tax Act.2. Interpretation of the term 'expenditure incurred by the assessee in relation to income.'3. Application of Rule 8D for disallowance of expenditure.4. Failure of lower authorities to consider the claim of the assessee.Issue 1: Disallowance under section 14A of the Income-tax Act:The assessee-company filed its return declaring income, including investments where income was not includible. The AO disallowed expenditure under section 14A, upheld by the CIT(Appeals) citing the necessity to allocate expenditure related to non-includible income. The Tribunal referred to precedents supporting Rule 8D's application for disallowance and upheld the AO's decision.Issue 2: Interpretation of the term 'expenditure incurred by the assessee in relation to income':The Tribunal deliberated whether the provision in section 14A could be invoked in the absence of earned income not forming part of the total income. It analyzed the narrow vs. wide interpretation of 'income' and concluded that expenditure can be disallowed even if no income is earned in a year but investments are capable of yielding income.Issue 3: Application of Rule 8D for disallowance of expenditure:The Tribunal examined the necessity of evidence to show actual expenditure incurred in relation to earning non-includible income. It referenced cases emphasizing the AO's obligation to verify the correctness of the claim of no expenditure by the assessee before applying Rule 8D. It criticized the lower authorities for not considering the claim and directly computing disallowance under Rule 8D, ultimately ruling against upholding the disallowance.Issue 4: Failure of lower authorities to consider the claim of the assessee:The Tribunal highlighted the failure of the lower authorities to examine the claim of no expenditure by the assessee before applying Rule 8D. It emphasized the importance of assessing the correctness of the claim before making disallowances, as mandated by section 14A(1). Due to the small amount involved and the authorities' non-compliance with the law, the disallowance was not upheld, and the appeal was allowed.This detailed analysis of the judgment addresses the issues related to the disallowance under section 14A of the Income-tax Act, the interpretation of the term 'expenditure incurred by the assessee in relation to income,' the application of Rule 8D for disallowance of expenditure, and the failure of lower authorities to consider the claim of the assessee adequately.