2022 (1) TMI 1095 - AT - Income Tax

Appeal allowed: Clear nexus required between expenses and exempt income under section 14A

The Tribunal allowed the appeal, emphasizing the importance of establishing a clear nexus between expenses and exempt income before disallowing them under ... Disallowance u/s 14A r.w.r. 8D - Assessee is suo moto made the disallowance - HELD THAT:- We noted from the assessment order that the AO has recorded the finding that the assessee has not incurred any expenditure in relation to income which does not form part of total income and this finding is totally absurd whereas the assessee has incurred expenditure. As regards interest expenses, once the AO is unable to prove the nexus of expenditure with the investment made in instruments giving raise to exempt income, the presumption will come into play and presumption is that the assessee might have invested out of interest free funds available with it in the instruments giving raise to exempt income. Hence, this issue is squarely covered in favour of the assessee by the decision of Hon'ble Bombay High Court in the case of HDFC Bank Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT] - Respectfully following the order of Hon'ble Bombay High Court, we allow this issue of assessee's appeal. Administrative expenses disallowed under Rule 8D(2)(iii) - We noted from the assessment order that the AO has not recorded any subjective satisfaction and the so called satisfaction recorded by the AO is on totally wrong presumption that the assessee has not attributed any expenditure to exempt income, whereas the assessee has disallowed a sum of ₹ 11,85,570/- towards exempt income. Once the AO has not recorded satisfaction as envisaged under Rule 8D(2) of the Rules, the issue is in favour of the assessee in view of the decision of Hon'ble Supreme Court in the case of Maxopp Investments Ltd.. [2018 (3) TMI 805 - SUPREME COURT]. Issue decided in favour of the assessee as the AO failed to record satisfaction for making disallowance under Rule 8D(2) of the Rules. Hence, we delete the disallowance and allow this issue of assessee's appeal. Issues:Disallowance of expenses relatable to exempt income under section 14A of the Income Tax Act, 1961 read with Rule 8D(2)(ii) & (iii) of the Income Tax Rules, 1962.Analysis:The judgment concerns an appeal by the assessee against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of expenses related to exempt income by invoking section 14A of the Income Tax Act. The assessee, a holding company, earned exempt income from dividend investments. The Assessing Officer (AO) disallowed interest and administrative expenses under Rule 8D(2)(ii) & (iii) of the Rules, totaling Rs. 1,10,62,350. The Commissioner upheld the AO's decision, directing verification of the assessee's prior disallowances. The Tribunal considered the nexus between expenses and exempt income, emphasizing the availability of interest-free funds exceeding investments. The Tribunal referenced the decision in CIT vs. HDFC Bank Ltd, emphasizing the presumption that investments are made from interest-free funds if nexus isn't proven.Regarding interest expenses, the Tribunal held that if the AO fails to establish the expenditure's connection with exempt income, the presumption applies that investments were made from interest-free funds. Citing the HDFC Bank Ltd case, the Tribunal ruled in favor of the assessee. Concerning administrative expenses, the Tribunal noted the AO's lack of recorded satisfaction as required by Rule 8D(2). Citing the Maxopp Investments Ltd case, the Tribunal emphasized the need for AO's satisfaction before disallowing expenses. As the AO failed to meet this requirement, the Tribunal deleted the disallowance, ruling in favor of the assessee.In conclusion, the Tribunal allowed the appeal, emphasizing the importance of establishing a clear nexus between expenses and exempt income before disallowing them under section 14A read with Rule 8D(2). The judgment highlights the significance of AO's satisfaction and adherence to legal provisions when making such disallowances.