2014 (11) TMI 172 - AT - Income Tax

Tribunal remands case for correct expenditure calculation under Section 14A

The Tribunal allowed the Revenue's appeal and remanded the case to the Assessing Officer for recalculating the disallowance of expenditure under Section ... Disallowance u/s 14A - Investment in assets related to exempted income under Rule 8D(2)(ii) and (iii) – Held that:- The assessee has earned the dividend income for which it has claimed expenditures - the quantum of expenditures does not commensurate with the exempted income claimed by the assessee - the AO has every reason to doubt the correctness of the expenditures claimed by the assessee for earning the exempted income - the AO has to re-compute the expenditures relating to the dividend income which does not form part of total income under this Act and for computing the expenditures, the AO has no other option but to adopt the formula laid down under rule 8D of the Rules and he did the same – the AO has not determined the amount of expenditures directly related to the income which does not form part of the total income of the assessee as per sub-rule (2) (i) of rule 8D - the order of the CIT(A) restricting the disallowance cannot be upheld – thus, the order of the CIT(A) is to be set aside and the matter is remitted back to the AO for re-verification of the calculation of disallowance of expenditures as per rule 8D – Decided in favour of revenue. Issues Involved:1. Disallowance of expenditure under Section 14A of the Income-tax Act, 1961.2. Application of Rule 8D of the Income-tax Rules for computing disallowance.Issue-wise Detailed Analysis:1. Disallowance of expenditure under Section 14A of the Income-tax Act, 1961:The primary issue in this case is the disallowance of expenditure related to earning exempt income, specifically dividend income, under Section 14A of the Income-tax Act, 1961. The assessee claimed a dividend income of Rs. 17,68,735/- as exempt and reported total expenses of Rs. 16,544/-. The Assessing Officer (AO) was not convinced with the assessee's claim and invoked Section 14A, leading to a disallowance of Rs. 20,48,236/-. The AO's rationale was that the assessee had made significant investments in assets generating exempt income, and thus, the related expenses should be disallowed.2. Application of Rule 8D of the Income-tax Rules for computing disallowance:The AO applied Rule 8D to compute the disallowance, which involves a specific formula for determining the amount of expenditure related to exempt income. The AO calculated the disallowance as follows:- Under Rule 8D(2)(ii), the AO computed the interest expenditure proportionate to the average value of investments, resulting in a disallowance of Rs. 18,73,257/-.- Under Rule 8D(2)(iii), the AO disallowed 0.5% of the average value of investments, amounting to Rs. 1,74,979/-.Thus, the total disallowance under Section 14A read with Rule 8D was Rs. 20,48,236/-.The Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance to Rs. 16,544/-, the amount claimed by the assessee, reasoning that the total expenditure reported in the Profit & Loss Account was only Rs. 16,544/-. The CIT(A) found that no further disallowance under Section 14A was required beyond this amount.Tribunal's Decision:The Tribunal examined the provisions of Section 14A and Rule 8D. It noted that if the AO is not satisfied with the correctness of the assessee's claim regarding expenditure related to exempt income, the AO must compute the disallowance using the method prescribed in Rule 8D. The Tribunal found that the AO had reasons to doubt the assessee's claim since the reported expenditure did not commensurate with the exempt income earned. However, the Tribunal identified errors in the AO's calculation under Rule 8D, specifically:- The AO did not determine the amount of expenditure directly related to the exempt income as required by Rule 8D(2)(i).- The AO incorrectly calculated the average value of investments by taking the average of investments as on 31.03.2008 and 31.03.2009, instead of the average of total assets as per the balance sheet.The Tribunal disagreed with the CIT(A)'s decision to restrict the disallowance to Rs. 16,544/- without a detailed rationale. Consequently, the Tribunal set aside the CIT(A)'s order and remanded the matter back to the AO for recalculating the disallowance as per Rule 8D, ensuring the correct application of the prescribed method.Conclusion:The Tribunal allowed the Revenue's appeal for statistical purposes, directing the AO to re-verify and correctly compute the disallowance of expenditure under Section 14A read with Rule 8D. The Tribunal emphasized the necessity of following the prescribed method in Rule 8D when the AO disputes the correctness of the assessee's claim regarding expenditure related to exempt income.