2015 (9) TMI 126 - AT - Income Tax

Tribunal directs reassessment of disallowance under Section 14A

The Tribunal allowed the appeal of the assessee for statistical purposes, directing the Assessing Officer to re-examine the disallowance under Section 14A ... Disallowance u/s.14A read with Rule 8D - Held that:- It is true that CIT (A) had followed his own order for A. Ys. 2009-10 and 2010-11 for confirming the disallowance made by the AO u/s.14A read along with Rule 8D(2)(ii) and 8D(2)(iii). Assessee had moved in appeal before this Tribunal for A. Y. 2009-10. This Tribunal held as seen from the facts on record that the assessee has not deducted any expenses direct or indirect, while computing its income from dividend income which is exempt under section 10(34) of the Act. In this regard on a similar issue, a co-ordinate bench of this Tribunal in the case of Jindal Aluminium Ltd.(2015 (9) TMI 107 - ITAT BANGALORE), has held that it is necessary for the assessee to point out how each item of expense debited to its profit and loss account is wholly incurred for the purpose of earning income which is taxable and therefore remanded the matter for re-examination to the file of the Assessing Officer. In the case on hand too, similarly, we find that the position is that the assessee has merely taken the stand that it has not incurred any direct or indirect expenditure in earning its dividend income which is exempt under section 10(34) of the Act. We are therefore of the view that it would be in the interest of equity and justice if the assessee makes its claim in this regard before the Assessing Officer. The Assessing Officer will examine the claim of the assessee and thereafter decide the issue in accordance with law and as explained in the judicial decisions referred to (supra). Thus remit the issue regarding disallowance u/s.14A of the Act, back to the file of the AO - Decided in favour of assessee for statistical purposes. Issues Involved:1. Disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962.2. Satisfaction of the Assessing Officer regarding the correctness of the claim of the assessee.3. Application of Rule 8D for calculating disallowance.Detailed Analysis:1. Disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962:The primary issue in this case was the disallowance made by the Assessing Officer (AO) under Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962. The assessee, a printer and publisher, had filed its return declaring an income of Rs. 6,63,38,030/-. The AO, upon examining the balance sheet as of 31.03.2011, found that the assessee had investments in government securities, mutual funds, and shares worth Rs. 6,55,87,862/-. The assessee claimed a sum of Rs. 18,58,763/- as exempt under Sections 10(34) and 10(35) of the Act. However, the assessee did not make any disallowance of expenditure incurred in relation to the exempt income. The AO, relying on the judgments of the Hon'ble Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. v. DCIT (328 ITR 81) and the Hon'ble Apex Court in CIT v. Walfort Share & Stock Brokers (P) Ltd. (326 ITR 001), held that even if the assessee had not utilized any borrowed funds to make investments in tax-free shares, Section 14A had to be invoked. Consequently, a disallowance of Rs. 21,12,761/- under Rule 8D(2)(ii) for interest and Rs. 2,78,495/- under Rule 8D(2)(iii) for expenditure incurred was made, totaling Rs. 23,91,210/-.2. Satisfaction of the Assessing Officer regarding the correctness of the claim of the assessee:The assessee contended that it had not used borrowed funds for investing in shares and mutual funds, and all borrowed funds were used for business purposes. The investments were made out of the company's internal accruals. The assessee also argued that no portion of the expenses incurred was attributable to earning dividends as the dividends were received via few warrants, which required minimal effort to encash. Despite these arguments, the AO did not accept the assessee's claim that no expenditure was incurred for earning exempt income, asserting that investments in shares always had a notional cost attached. The AO's disallowance was confirmed by the CIT (A), who relied on his own order in the assessee's case for A.Ys. 2009-10 and 2010-11.3. Application of Rule 8D for calculating disallowance:The Tribunal noted that the CIT (A) had followed his order for A.Ys. 2009-10 and 2010-11 in confirming the disallowance made by the AO under Section 14A read with Rule 8D(2)(ii) and 8D(2)(iii). The assessee had appealed to the Tribunal for A.Y. 2009-10, and the Tribunal had remitted the issue back to the AO for reconsideration. The Tribunal referred to its previous order, which emphasized that the AO must determine the expenditure incurred in relation to exempt income if not satisfied with the assessee's claim, based on the accounts of the assessee. The Tribunal also highlighted the need for the assessee to demonstrate how each expense item was incurred for earning taxable income. Given that the value of the investments had changed during the relevant previous year, the Tribunal deemed it necessary for the AO to re-examine the matter. Consequently, the Tribunal set aside the orders of the lower authorities and remitted the issue back to the AO for fresh consideration, with directions similar to those given for A.Y. 2009-10.Conclusion:The Tribunal allowed the appeal of the assessee for statistical purposes, directing the AO to re-examine the disallowance under Section 14A of the Act, considering the relevant judicial decisions and the assessee's claims. The order was pronounced in the open court on 30.6.2015.