2018 (12) TMI 911 - AT - Income Tax

ITAT confirms disallowance under Section 14A of Income Tax Act, 1961

The ITAT upheld the disallowance of Rs. 5,26,256/- under Section 14A of the Income Tax Act, 1961 read with Rule 8D, emphasizing the lack of debited ... Disallowance u/s 14A - investment made in securities when no direct or indirect expenditure in relation to investment in securities has been claimed or debited - Held that:- Eligible reasons to arrive at the satisfaction for disallowance u/s 14A of the Act, r/w Rule 8D of the Rules, that there are expenses relatable to the earning of exempt income by the assessee. Since, the assessee has invested its money for such investment of shares, which is capable to generate income which does not or shall not form part of total income of the assessee and indirect cost in the form of administrative expenditures etc. is involved in this process. There is direct and proximate nexus between the exempted income, which the investments shall genearate and the expenditures directly or indirectly involved in earning the said income…. In view of these facts and circumstances, the requirements under Rule 8D(1) of I.T. Rules read with Section 14A(2) and Section 14A(3) are fulfilled and accordingly disallowance made by the AO in accordance with under Rule 8D(2) of I.T. Rules, 1962 read with Section 14A of I.T. Act, is held to be consistent with law under these facts and circumstances -disallowance made by the AO under Rule 8D of I.T. Rules read with Section 14A of I.T. Act, and confirmed by the Ld. CIT(A), are hereby upheld.- decided against assessee. Issues Involved:1. Disallowance of Rs. 5,26,256/- under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.2. Verification of disallowance of audit fees payable of Rs. 2,27,529/- and Rs. 2,23,357/-.Issue-wise Detailed Analysis:1. Disallowance under Section 14A:The primary issue was the disallowance of Rs. 5,26,256/- under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. The Assessing Officer (AO) noted that the assessee had earned exempt income in the form of dividend and Long Term Capital Gain (LTCG) and had not debited any expenses to the Profit & Loss (P&L) account for earning this exempt income. The AO invoked Section 14A to disallow direct and indirect expenditure related to this exempt income, emphasizing that managing a large investment portfolio entails various administrative expenses. The AO calculated the disallowance as per Rule 8D, determining an amount of Rs. 5,26,256/-.The assessee appealed against this disallowance, arguing that no direct or indirect expenditure was claimed in relation to the exempt income and that similar disallowances had been deleted by the ITAT in previous years (A.Y. 2009-10 and A.Y. 2010-11). The CIT(A) upheld the AO's disallowance, distinguishing the facts of the current year from those of the previous years and relying on the Hon’ble Delhi High Court’s decision in the case of Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Delhi).In the ITAT proceedings, the assessee reiterated reliance on the ITAT’s previous orders and the decision in Justice Sam P. Bharucha vs. Additional CIT (2012) 53 SOT 192 (Mumbai). However, the ITAT noted that the CIT(A) had made a strong case for distinguishing the facts of the current year from the previous years and upheld the disallowance. The ITAT emphasized that the AO had recorded satisfaction regarding the correctness of the claim of the assessee and had followed the prescribed method under Rule 8D. The ITAT also noted that the assessee did not maintain separate books of accounts for personal and exempt income, and no suo-moto disallowance was made by the assessee in the return of income.The ITAT upheld the disallowance, referencing the Hon’ble Supreme Court’s decisions in CIT vs. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC) and Maxopp Investment Ltd. Vs. CIT 402 ITR 640 (SC), and dismissed the 1st Ground of appeal, including all sub-grounds.2. Verification of Audit Fees Payable:The second issue involved the verification of disallowance of audit fees payable of Rs. 2,27,529/- and Rs. 2,23,357/-. The assessee claimed that these amounts were already disallowed in the computation of income under Section 40(a)(ia) of the Income Tax Act, 1961 for A.Y. 2011-12 and that all supporting documents had been submitted during the assessment and appellate proceedings.However, during the ITAT hearing, the Ld. Counsel for the assessee did not press these grounds of appeal. Consequently, the ITAT dismissed the 2nd Ground of appeal, including sub-grounds 2. a) and 2. b), as not pressed.Conclusion:The ITAT dismissed the appeal of the assessee, upholding the disallowance under Section 14A read with Rule 8D and dismissing the grounds related to the verification of audit fees payable as not pressed. The order was pronounced in the open court on 7/12/2018.