2014 (1) TMI 899 - AT - Income Tax

Tribunal Upholds Disallowance and Rule-8D Application for Art Dealer's Exempt Income

The Tribunal upheld the disallowance under section 14A and application of Rule-8D for computation of disallowance in the case concerning an art ... Disallowance u/s 14A of the Act – Assessee being individual must be considered accordingly – Application of Rule 8D – Held that:- The provisions of section 14A r w Rule 8D has application to the AY 2008-09 - the assessee made investment in shares and earned exempt income out of it - the assessee has not maintained separate accounts for his investment activities - The expenditure accounts are commonly maintained - The inclusion of disallowable expenditure u/s 14A of the Act in such common accounts is certainly a possibility – Thus, there is great amount of possibility that some of the expenditure incurred and debited to P & L account of Pundole Exports must relate to the exempt income of the assessee - the disallowance made by the AO is reasonable and in accordance with the provisions of section 14A of the Act read with Rule-8D of the Act – the claim of the assessee ie no expenditure is incurred and assessee, has not been demonstrated conclusively and logically - the onus is on the assessee to demonstrate when a claim of exemption and deduction of income or expenditure is made - Thus, the assessee has not discharged his onus satisfactorily - the order of the CIT(A) upheld – Decided against Assessee. Issues:1. Disallowance under section 14A2. Application of Rule-8D for disallowance3. Liability under section 234D and 234CIssue 1: Disallowance under section 14AThe appeal filed against the order of CIT (A) for the assessment year 2008-2009 raised grounds related to disallowance under section 14A. The assessee, an art dealer/service provider, declared total income of Rs. 3,75,59,508/- and earned dividend income of Rs. 32,78,351/-. The AO disallowed Rs. 1,78,460/- under section 14A using Rule 8D due to investments in shares. The assessee contended no expenditure was incurred for earning the dividend income. CIT (A) upheld the disallowance citing the need for Rule-8D application and lack of separate accounts showing expenditure related to exempt income. The Tribunal agreed with CIT (A) that the disallowance was justified as there was a possibility of indirectly related expenditure for earning exempt income.Issue 2: Application of Rule-8D for disallowanceThe Tribunal noted that Rule-8D applies from AY 2008-2009 and requires apportionment of expenditure between taxable and non-taxable income. The AO rightly computed disallowance under Rule-8D as there was a possibility of some expenditure indirectly related to earning exempt income. The Tribunal found the disallowance reasonable and in accordance with section 14A. The assessee failed to demonstrate conclusively that no expenditure was incurred, shifting the onus to the assessee to prove exemption claims.Issue 3: Liability under section 234D and 234CThe assessee's appeal also raised concerns about interest levied under sections 234D and 234C. The Tribunal dismissed grounds 4 and 5 as not pressed, indicating the appellant's denial of liability for the interest levied. However, the Tribunal did not provide detailed analysis or discussion on these specific grounds in the judgment.In conclusion, the Tribunal dismissed the appeal of the assessee, upholding the disallowance under section 14A and the application of Rule-8D for computation of disallowance. The judgment emphasized the need for maintaining separate accounts for expenditure related to exempt income and the onus on the assessee to substantiate claims of no expenditure incurred.