2021 (7) TMI 791 - AT - Income Tax

Tribunal upholds disallowance of exempt dividend income, emphasizes accurate expenditure computation.

Andhra Pradesh Gas Power Corporation Limited, Hyderabad Versus DCIT, Circle-1 (1), Hyderabad

The Tribunal upheld the disallowance of Rs. 17,89,428 under section 14A read with Rule 8D(2)(iii) due to investments in Mutual Funds earning exempt ... Disallowance u/s 14A read with Rule 8D(2)(iii) - HELD THAT:- The Provisions of section 14A(2) makes it clear that the assessee shall compute the expenditure incurred by it for making investment which earns exempt income and only if the AO is not satisfied with the correctness of the claim of the assessee he is authorised to invoke the provisions of Rule 8D of the IT Rules, 1962. In the case of the assessee such exercise is lacking. Factually it is also obvious that the assessee would have definitely incurred some expenditure towards investments made, which earns exempt income. In the interest of justice, we hereby remit the entire matter back to the file of the Ld. AO thereby providing an opportunity to the assessee to compute the actual expenditure incurred by it for making investment which earns exempt income. Needless to mention that any income/loss derived from any commercial/investment activity is not directly proportional to the expenditure incurred on such commercial/investment activity. We have remitted the matter back to the file of Ld.AO, We also hereby directed the assessee to promptly co-operate before the Ld. Revenue Authorities by furnishing the above stated statement of actual expenditure incurred by it for making investment which earns exempt income in order to expedite the proceedings of the Ld. Revenue Authorities failing which the Ld. Revenue Authorities shall be at liberty to pass appropriate order in accordance with law and merits based on the materials on record. Appeal of the assessee is allowed for statistical purposes. Issues:Disallowance of expenditure under section 14A read with Rule 8D(2)(iii) of the Act.Analysis:The appeal was filed against the order of the Ld. CIT(A) regarding the disallowance of Rs. 17,89,428 made by the Ld. AO under section 14A read with Rule 8D(2)(iii) of the Act for the A.Y. 2010-11. The assessee, a Limited company engaged in power generation, declared a total loss of Rs. 5,75,24,496 under the normal provisions for the year. The Ld. AO invoked section 14A r.w. Rule 8D and disallowed Rs. 24,35,222 due to investments in Mutual Funds earning exempt dividend income. On appeal, the Ld. CIT (A) partially confirmed the disallowance. The AR contended that no borrowed funds were used for investments, hence no disallowance should be made. The AR argued against the disallowance under Rule 8D(2)(ii) and (iii) citing the absence of borrowed funds and minimal time and effort involved in the investments. The Tribunal observed that as there were no borrowed funds, the disallowance under Rule 8D(2)(ii) was deleted. However, for the disallowance under Rule 8D(2)(iii), the Tribunal upheld the AO's decision as the Rule provides for a nominal disallowance based on the average value of investments. The AR's justification for minimal expenditure was not deemed sufficient, leading to the upholding of the disallowance of Rs. 17,89,428.The Tribunal noted that the provisions of section 14A(2) require the assessee to compute the expenditure for investments earning exempt income. If the AO is not satisfied with the claim, Rule 8D can be invoked. In this case, the Tribunal found a lack of exercise in computing the actual expenditure incurred by the assessee for making such investments. The Tribunal highlighted potential expenses like interest on funds used for investments and various direct and indirect expenses related to the investment process. Consequently, the matter was remitted back to the AO to allow the assessee to compute the actual expenditure incurred for investments generating exempt income. The Tribunal emphasized the importance of cooperation from the assessee to expedite the proceedings, warning of appropriate action if cooperation is lacking. The appeal was allowed for statistical purposes, and the decision was pronounced on June 15, 2021.