2013 (9) TMI 156 - AT - Income Tax

Assessee succeeds against s.14A disallowance under r.8D; only investments yielding exempt income count for disallowance

REI AGRO LTD, KOLKATA Versus DCIT CENTRAL CIRCLE-XXVII, KOL

ITAT Kolkata allowed the assessee's challenge to s.14A disallowance under r.8D, upholding the CIT's partial relief and following prior authority. The AO ... Disallowance u/s 14A - proportionate management and administrative expenses under Rule 8D(2)(iii) - CIT allowed partial relief - Held that:- A perusal of the provisions of section 14A, more specifically sub-section (2), shows that if the AO is not satisfied with the correctness of the claim of the assessee, then the AO shall determine the amount of expenditure incurred in relation to such income, which does not form part of total income under the Act. For this the method is prescribed in rule 8D. The provision of section 14A, sub-section (3) specifies the provision of 14A(2) would also apply where the assessee makes a claim that there is no expenditure incurred. This is because if the assessee does not make a disallowance under section 14A in its computation of total income, when filing the return, then if subsection (3) was not available, the AO might not be able to make a disallowance under section 14A. Thus, where the assessee makes a claim that only a particular amount is to be disallowed under section 14A or where the assessee does not make a disallowance under section 14A, if the AO proposes to invoke the section 14A, he is to record a satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It is to be done with regard to accounts of the assessee - Following decision of Balarampur Chini Mills Ltd. [2011 (7) TMI 1150 - ITAT KOLKATA] - Decided in favour of assessee. If an assessee has invested in shares, which could get dividend or there is investment which generates dividend income or exempt income as also investment which does not generate exempt income, it is only such investments in respect of which the dividend income or exempted income has been earned which can be considered when computing the disallowance under section 14A read with rule 8D - if there is any interest expenditure, which is directly relatable to any particular income or receipt, such interest expenditure is not to be considered under rule 8D(2)(ii). In the assessee’s case here the interest has been paid by the assessee on the loans taken from the banks for its business purpose. There is no allegation from the banks nor the AO that the loan funds have been diverted for making the investment in shares or for non-business purposes. Further rule 8D(2)(ii) clearly is worded in the negative with the words “not directly attributable”. Thus for bringing any interest expenditure, claimed by the assessee, under the ambit of rule 8D(2)(ii) it will have to be shown by the AO that the said interest is not directly attributable to any particular income or receipt - Decided in favour of assessee. Issues Involved:1. Disallowance of proportionate management and administrative expenses under Rule 8D(2)(iii) of the Income Tax Rules.2. Disallowance of interest under Section 14A read with Rule 8D of the Income Tax Rules.3. Satisfaction requirement under Section 14A(2) for disallowance.Detailed Analysis:1. Disallowance of Proportionate Management and Administrative Expenses:The assessee contested the CIT(A)'s decision to sustain a disallowance of Rs. 26,09,386/- under Rule 8D(2)(iii) of the Income Tax Rules, arguing that the orders were 'unwarranted, arbitrary, without proper reasons, invalid and bad in law.' The tribunal noted that Rule 8D(2)(iii) requires a disallowance of an amount equal to 1/2 % of the average value of investments that generate exempt income. The tribunal clarified that not all investments should be considered; only those that generate exempt income should be included in the computation. Consequently, the tribunal remanded the issue back to the AO for recomputation in line with these directions.2. Disallowance of Interest Under Section 14A Read with Rule 8D:The Revenue challenged the CIT(A)'s deletion of a Rs. 3,77,27,610/- disallowance made under Section 14A read with Rule 8D, arguing that the investment in shares was made out of interest-bearing funds. The tribunal examined the provisions of Section 14A(2) and Rule 8D, which require the AO to record satisfaction if the assessee's claim that no expenditure was incurred to earn exempt income is incorrect. The tribunal found no such satisfaction recorded by the AO in this case. Furthermore, it was noted that the assessee had substantial own funds and the loans taken were for business purposes, not for investment in shares. The tribunal upheld the CIT(A)'s decision, confirming that no disallowance under Section 14A read with Rule 8D(ii) could be made.3. Satisfaction Requirement Under Section 14A(2):The tribunal emphasized that under Section 14A(2), the AO must record satisfaction about the correctness of the assessee's claim regarding the expenditure incurred to earn exempt income. This satisfaction must be based on the assessee's accounts and cannot be a mere formality. In this case, the AO failed to record such satisfaction, rendering the disallowance under Section 14A invalid. The tribunal cited the Coordinate Bench's decision in Balarampur Chini Mills Ltd., which held that no disallowance under Section 14A can be made without such recorded satisfaction.Conclusion:The tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal for statistical purposes. The AO was directed to recompute the disallowance under Rule 8D(2)(iii) in line with the tribunal's directions, ensuring that only investments generating exempt income are considered. No disallowance under Rule 8D(2)(i) and (ii) was permitted due to the lack of recorded satisfaction by the AO.