2020 (7) TMI 662 - AT - Income Tax

Tribunal overturns disallowance under Income Tax Act; directs verification of deduction eligibility, citing AO's procedural failure.

The Tribunal allowed the appeal, directing the deletion of the disallowance under Section 14A of the Income Tax Act due to the AO's failure to express ... Disallowance u/s 14A - Suo moto disallowance by assessee - HELD THAT:- It is undisputed fact on record that the assessee has made no investment in the “Equity Oriented Mutual Fund”. Even otherwise, under the SEBI Guidelines, mutual funds charge “fund management charges” out of the income earned by the fund, which are deducted and net income is made available for the distribution of the unit holders. Even tax auditor in its tax audit report quantified the disallowance u/s 14A of the Act at ₹ 4,86,374/-. Apart from this, the assessee has suo motu reasonably apportioned the salary part of the employee and Finance Director looking after investment made for earning dividend income. As perused the order passed by the coordinate Bench of the Tribunal in assessee’s own case for AYs 2009-10 & 2010-11, having identical facts deleting similar addition made by the AO/CIT(A), which order has been affirmed by the Hon’ble Delhi High Court [2017 (12) TMI 1768 - DELHI HIGH COURT ] Since there is no change in the suo motu disallowance by the assessee as has been made in AYs 2010-11 & 2011-12, which has been confirmed by the Hon’ble Delhi High Court, making disallowance by the AO without recording satisfaction mandatory u/s 14A(2), is not sustainable. - Decided in favour of assessee. Deduction u/s 80IA - Claim rejected as no books of account were maintained nor requirement of audit as contained u/s 80IA (7) was fulfilled in the present case - HELD THAT:- Keeping in view the fact that the identical issue has already been decided by the coordinate Bench of the Tribunal in assessee’s own case for AY 2010-11 [2018 (8) TMI 979 - ITAT DELHI] - Grounds No.2 to 2.3 raised by the assessee are remitted back to the AO to verify the claim of the assessee made on the basis of the audited accounts and accordingly grant the deduction u/s 80IA in accordance with law. Appeal of the assessee is allowed for statistical purposes. Issues Involved:1. Disallowance of expenses under Section 14A of the Income Tax Act, 1961.2. Disallowance of deduction under Section 80IA of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance of Expenses under Section 14A:The appellant contested the disallowance of Rs. 1,14,00,524/- by the Assessing Officer (AO) under Section 14A read with Rule 8D, against the suo moto disallowed amount of Rs. 4,86,374/- for earning exempt dividend income of Rs. 15,44,59,467/- from investments in mutual funds.1.1. Confirmation by CIT(A):The CIT(A) upheld the AO's disallowance by following directions from the Dispute Resolution Panel for previous assessment years 2010-11 and 2011-12.1.2. Investment Activity:The CIT(A) and AO held that investment activities involved significant input from senior management, thus incurring costs.1.3. Allocation of Composite Funds:The authorities deemed it necessary to allocate the appropriate cost of composite funds towards earning exempt income.1.4. Nexus with Dividend Income:The authorities failed to appreciate that only expenses with a direct and proximate nexus to earning dividend income should be disallowed under Section 14A.1.5. Actual Expenses Incurred:The appellant argued that only Rs. 4,86,374/- was incurred for earning the dividend income, which was not considered by the authorities.1.6. Onus of Proof:The CIT(A) did not acknowledge that the onus to prove the expenditure incurred for taxable business operations, rather than exempt income, lies with the revenue.1.7. Recording Satisfaction:The authorities did not record satisfaction about the correctness of the appellant's claim regarding the expenditure incurred, which is mandatory under Section 14A(2).1.8 & 1.9. Erroneous Computation:The appellant pointed out errors in the AO's computation of disallowable expenses under Rule 8D, which were not addressed by the CIT(A).1.10. Net of Administrative Charges:The authorities failed to appreciate that the appellant recorded dividend income net of administrative charges levied by mutual funds.Tribunal's Findings:The Tribunal noted that the AO did not record specific dissatisfaction with the appellant's disallowance calculation. The Tribunal referenced the Delhi High Court's ruling in Maxopp Investment Ltd. vs. CIT, which requires the AO to be dissatisfied with the assessee's claim to invoke Section 14A read with Rule 8D. The Tribunal also highlighted the Supreme Court's ruling in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT, emphasizing the necessity of the AO's satisfaction with the assessee's accounts before applying Rule 8D. Given the appellant's substantial interest-free surplus funds and the nature of the investment in debt mutual funds, the Tribunal found the AO's disallowance unsustainable and ordered its deletion.2. Disallowance of Deduction under Section 80IA:The AO disallowed the appellant's deduction claim of Rs. 21,57,22,785/- under Section 80IA, which the CIT(A) confirmed, citing non-maintenance of books of accounts and non-fulfillment of audit requirements under Section 80IA(7).2.1. Maintenance of Records:The CIT(A) erroneously held that no books of accounts were maintained, despite the appellant presenting proper records during assessment proceedings.2.2. Audit Report:The CIT(A) incorrectly concluded that the Chartered Accountant did not audit the accounts of the undertaking, contrary to legal requirements.2.3. Auditor's Responsibility:The CIT(A) arbitrarily held that the auditor did not take responsibility for the correctness of the appellant's claim due to the absence of notes to accounts or remarks regarding maintenance of accounts and revenue recognition.Tribunal's Findings:The Tribunal noted that this was not the first year of the appellant claiming deduction under Section 80IA, and the AO had previously allowed such deductions. The Tribunal referenced its earlier order for AY 2010-11, where it directed the AO to verify the claim based on audited accounts. The Tribunal found the appellant's submission of audited accounts and the Chartered Accountant's report sufficient for claiming the deduction. The Tribunal remitted the issue back to the AO to verify the claim based on audited accounts and grant the deduction accordingly.Conclusion:The Tribunal allowed the appeal for statistical purposes, directing the deletion of the disallowance under Section 14A and remitting the issue of deduction under Section 80IA back to the AO for verification and appropriate action. The order was pronounced on July 27, 2020.