2017 (10) TMI 177 - HC - Income Tax

High Court affirms Tribunal's decision on Section 14A disallowance limit.

Pr. Commissioner of Income Tax-3 Versus M/s. Reliance Capital Asset Management Ltd.,

The High Court upheld the Tribunal's decision to restrict the disallowance under Section 14A of the Income Tax Act to Rs. 3,50,000 for Assessment Years ... Disallowance under Section 14A - calculation of disallowance figures - Tribunal did not accept the figure of disallowance worked out by the assessee - Held that:- Although the Tribunal, in one line or sentence in para 8, says that the disallowance to be made under Rule 8D is determined at ₹ 3,50,000/­, we are not in agreement with Mr. Suresh Kumar that the Tribunal has accepted the applicability of this Rule/sub-­rule/clause. This one sentence or one line cannot be read in isolation and out of context. Once the formula prescribed in Rule 8D(2)(iii) of the Rules could not have been applied is the essential conclusion, then, merely because the Tribunal did not accept the working of disallowance by the assessee in its entirety, does not mean that the appeal raises a substantial question of law. We do not think that the Tribunal's exercise can be termed as totally erroneous or illegal. It is neither perverse. The Tribunal's order cannot be said to be vitiated by an error of law apparent on the face of the record. We do not think that the working by the Tribunal or the determination of the disallowance at ₹ 3,50,000/­ does not meet the ends of justice. It is restricted bearing in mind the facts and peculiar to the assessee's case. Partly the assessee's arguments have been accepted and the appeal allowed by setting aside the order of the Assessing Officer and that of the Commissioner of Income Tax (Appeals). We do not think that the question proposed by Mr. Suresh Kumar is a substantial question of law. Issues Involved:1. Disallowance of software expense for Assessment Year 2007-08.2. Disallowance under Section 14A of the Income Tax Act, 1961 for Assessment Years 2007-08 and 2008-09.Detailed Analysis:1. Disallowance of Software Expense for Assessment Year 2007-08:The assessee raised the issue of disallowance of software expense in its appeal for the Assessment Year 2007-08. However, the primary focus of the judgment revolves around the disallowance under Section 14A of the Income Tax Act, 1961.2. Disallowance under Section 14A of the Income Tax Act, 1961:Background:The Revenue questioned the order passed by the Income Tax Appellate Tribunal (ITAT), which restricted the disallowance under Section 14A to Rs. 3,50,000 as against Rs. 1,46,78,090 made by the Assessing Officer (AO) for the Assessment Year 2008-09.Revenue's Argument:The Revenue argued that the ITAT was not justified in restricting the disallowance without appreciating that for invoking disallowance under Section 14A, it is immaterial whether the assessee earned exempt income during the financial year, as per CBDT circular No.5/2014 dated 11.02.2014.Assessing Officer's Findings:The AO noted that the assessee, an Asset Manager of Reliance Mutual Fund, received dividends and claimed both dividend income and long-term capital gains as exempt. The AO disallowed part of indirect expenses calculated at 0.5% of the average value of investments, amounting to Rs. 1,46,78,090, as per Rule 8D of the Income Tax Rules, 1962.Commissioner of Income Tax (Appeals) Decision:The Commissioner restricted the disallowance to Rs. 1,25,66,793, finding the AO's calculation unreasonable and excessive. Both sides appealed to the ITAT.Tribunal's Findings:The ITAT found that the investments made by the assessee were mainly in various schemes of Reliance Mutual Fund and other group concerns, usually out of business policy. The Tribunal restricted the disallowance to Rs. 3,50,000, modifying the Commissioner's order.Revenue's Contention:The Revenue contended that the AO was correct in invoking Rule 8D(2)(iii) and that the Tribunal's decision was erroneous both on facts and law. The AO's understanding was that once Section 14A is attracted, disallowance should be as per Rule 8D.Assessee's Argument:The assessee argued that the AO did not specifically reject the working of expenses and provided no reason for doing so. The Commissioner partially corrected this by agreeing with the assessee's working to some extent but still committed a mistake, which the Tribunal sought to correct.High Court's Analysis:The High Court examined the relevant provisions of Section 14A and Rule 8D. It found that the AO did not specifically record dissatisfaction with the assessee's claim before applying Rule 8D. The Tribunal's conclusion that the formula prescribed in Rule 8D(2)(iii) could not be applied in the peculiar facts and circumstances of the case was upheld. The Tribunal's determination of disallowance at Rs. 3,50,000 was found to be reasonable and not perverse.Conclusion:The High Court dismissed the Revenue's appeal, finding no substantial question of law. The Tribunal's order was upheld, and the disallowance under Section 14A was restricted to Rs. 3,50,000.Summary:The judgment primarily dealt with the disallowance under Section 14A of the Income Tax Act for Assessment Years 2007-08 and 2008-09. The High Court upheld the Tribunal's decision to restrict the disallowance to Rs. 3,50,000, finding that the AO did not properly justify the higher disallowance as per Rule 8D. The Tribunal's approach was deemed reasonable and not in error of law. The Revenue's appeal was dismissed.