2016 (3) TMI 50 - AT - Income Tax

Tribunal upholds Revenue's decision on disallowance under Section 14A for tax-exempt income.

Asha Lalit Kanodia Datamatics Staffing Services Versus Addl. CIT, Range – 12 (2), Mumbai

The appellate tribunal upheld the Revenue's decision, dismissing the assessee's appeal against the disallowance u/s. 14A for tax-exempt income. The ... Disallowance u/s. 14A toward indirect administrative expenditure - Held that:- A meeting of the ‘assessee’ with his investment consultant or broker in relation to a IPO or any other emerging investment option is to be conducted (say). This would require visit by the consultant to the assessee’s premises or vice versa. This explains the appropriation of the expenditure claimed on telephone, electricity, conveyance, etc. The job may itself be assigned - wholly or partly, to some staff, even as a part of his duties, so that the staff cost may also be involved. Even ignoring staff and advertisement cost, leaves a balance expenditure at ₹ 184 lacs. It may be argued that the expenditure incurred and claimed is as per the books of the assessee’s business. The argument is to no moment. Firstly, the assessee holds investment (Rs.140.59 lacs) including tax-free investments, in its business. Two, and more importantly, the assessee is one entity, undertaking both, business – yielding taxable income, and investments – yielding both taxable and tax-free incomes. The manner or the account from which common expenditure, i.e., which could be ascribed to both sets of activities, is incurred or routed, is immaterial, being borne by and claimed by the assessee. Suo motu disallowance by the assessee or its’ claim of no expenditure having been incurred to earn tax exempt income is to be found non-satisfactory by the A.O. before resort to computation (of disallowance) under rule 8D(2) could be made. This, as afore-stated, is the statutory prescription, on which therefore there is no quarrel. Then, it is further stated that sufficiency of interest-free funds would operate to the non invocation of the disallowance u/s. 14A/rw Rule 8D(2). No disallowance on account of interest obtains in the instant case. In fact, the finding of sufficient funds could only be with regard to the assessee’s accounts, with reference to which, as explained, the satisfaction or dissatisfaction of the assessee’s claim is to be made.Under the circumstances and, in view of the foregoing, we find little merit in the assessee’s case and, accordingly, uphold that of the Revenue - Decided against assessee Issues involved:1. Validity of disallowance u/s. 14A for tax-exempt income2. Interpretation of Section 14A of the Income Tax Act, 19613. Onus of proving expenditure incurred by the assessee4. Application of Rule 8D for estimation of expenditure5. Nexus between expenditure and related activity for disallowanceIssue 1: Validity of disallowance u/s. 14A for tax-exempt income:The dispute revolves around the disallowance u/s. 14A amounting to Rs. 4,90,371 in respect of the assessee's tax-exempt income, including dividends and long-term capital gains. The assessee contests the disallowance, claiming no expenditure was incurred. The Assessing Officer and CIT(A) upheld the disallowance under rule 8D(2)(iii) for indirect administrative expenditure.Issue 2: Interpretation of Section 14A of the Income Tax Act, 1961:Section 14A prohibits deduction for expenditure related to income not forming part of the total income. The onus is on the assessee to prove the correctness of their claim regarding expenditure incurred. The A.O. must examine the claim and record dissatisfaction if not satisfied, before applying rule 8D for estimating the expenditure.Issue 3: Onus of proving expenditure incurred by the assessee:The assessee maintained two sets of accounts, one for personal transactions and another for the business. The A.O. cannot mechanically apply rule 8D without verifying the correctness of the claim. The accounts of the assessee play a crucial role in determining the existence of expenditure related to tax-exempt income.Issue 4: Application of Rule 8D for estimation of expenditure:Rule 8D mandates the estimation of expenditure related to tax-exempt income. Once the A.O. is dissatisfied with the assessee's claim, the rule must be applied for computation. The A.O. cannot exercise discretion once rule 8D is triggered, emphasizing the statutory nature of the disallowance.Issue 5: Nexus between expenditure and related activity for disallowance:The judgment emphasizes the necessity of a nexus between expenditure claimed and the activity generating tax-exempt income. The assessee's claim of no expenditure incurred must be substantiated with evidence from their accounts. The tribunal's decisions and legal precedents further clarify the requirement for a valid claim and the application of rule 8D.In conclusion, the appellate tribunal upheld the Revenue's decision, dismissing the assessee's appeal against the disallowance u/s. 14A for tax-exempt income. The judgment highlights the importance of substantiating expenditure claims, interpreting Section 14A, and applying rule 8D for estimating disallowances related to tax-exempt income.