2022 (6) TMI 289 - AT - Income Tax

Tribunal confirms addition under section 14A for AY 2015-16

The Tribunal upheld the CIT(A)'s confirmation of the addition under section 14A read with Rule 8D for the assessment year 2015-16. The Tribunal found the ... Disallowance under section 14A - Application of Rule 8D(2)(iii) - Assessing Officer's power to determine expenditure where no claim is accepted - Validity of assessee's suo-motu percentage disallowance - No requirement that investments be made in the year of receipt of exempt incomeDisallowance under section 14A - Application of Rule 8D(2)(iii) - Validity of assessee's suo-motu percentage disallowance - Assessing Officer's power to determine expenditure where no claim is accepted - No requirement that investments be made in the year of receipt of exempt income - Whether the Commissioner (Appeals) was justified in confirming the disallowance made by the Assessing Officer under Rule 8D(2)(iii) read with section 14A for A.Y. 2015-16 - HELD THAT: - The Tribunal examined financial statements and accepted that the exempt dividend income for the year arose from investments made in earlier years and that no fresh investments were made in the year under consideration. The assessee had itself made a suo-motu disallowance at 5% of the exempt income, which the AO did not accept and instead invoked Rule 8D(2)(iii) to compute disallowance on the basis of 0.5% of average investments, resulting in a larger disallowance. The Bench observed that the AO is empowered under sub-section (2) and, where applicable, sub-section (3) of section 14 to determine the expenditure in accordance with the method in Rule 8D if the claim of expenditure is not accepted. The Tribunal distinguished an earlier coordinate-bench decision in the assessee's own case for A.Y. 2012-13 which had deleted disallowance under Rule 8D(2)(ii) on the specific finding that borrowings were not used for investments; that decision did not apply to the present facts because the AO here invoked Rule 8D(2)(iii) and the investments (though made in earlier years) gave rise to exempt income in the year under consideration. The Court further noted there is no statutory prohibition against making disallowance in respect of exempt income earned on earlier investments. Applying these principles, the Tribunal found no infirmity in the AO's application of Rule 8D(2)(iii) and in the CIT(A)'s confirmation of that disallowance, and therefore rejected the assessee's contention that its suo-motu 5% disallowance should have been accepted. [Paras 5, 6, 7]The confirmation of the AO's disallowance under Rule 8D(2)(iii) read with section 14A was upheld and the grounds raised by the assessee were dismissed.Final Conclusion: Appeal dismissed; Tribunal upholds the AO's disallowance under Rule 8D(2)(iii) read with section 14A for A.Y. 2015-16 and affirms the CIT(A)'s order. Issues:Confirmation of addition made under section 14A r.w. Rule 8D by the CIT(A) for assessment year 2015-16.Issue Analysis:1. Addition under section 14A r.w. Rule 8D:The appeal raised by the assessee challenges the addition made by the AO under section 14A of the Act, which was confirmed by the CIT(A). The assessee argued that no investments were made in the relevant year, and the disallowance made by the AO under Rule 8D(2)(iii) is not justified. The assessee referred to a previous Tribunal order in its own case for A.Y. 2012-13, where a similar disallowance was deleted based on the source of funds for investments. However, in the present case, the disallowance was made under Rule 8D(2)(iii) only. The Tribunal noted that the investments were not made in the year under consideration, and the disallowance was based on 0.5% of average investments. The AO did not accept the assessee's self-disallowance at 5% of exempt income, invoking Rule 8D(2)(iii) resulting in a higher disallowance. The Tribunal held that the AO's decision to apply Rule 8D(2)(iii) was justified, as the method adopted by the assessee had no basis. The disallowance made under Rule 8D(2)(iii) for the exempt income earned from investments made in earlier years was deemed appropriate, and the CIT(A)'s confirmation of the addition was upheld. The Tribunal found no error in the CIT(A)'s order and dismissed the appeal, affirming the addition made under section 14A r.w. Rule 8D for the assessment year 2015-16.This comprehensive analysis covers the key issue of confirmation of addition under section 14A r.w. Rule 8D for the assessment year 2015-16, detailing the arguments presented, the Tribunal's assessment, and the final decision reached.