2022 (9) TMI 598 - AT - Income Tax

Tribunal upholds disallowance of expenses for earning exempt income under Income Tax Act

The Tribunal upheld the Assessing Officer's disallowance of Rs. 5,71,485 under Section 14A read with Rule 8D of the Income Tax Act for the assessment year ... Disallowance u/s 14A r.w.r 8D - condition precedent to embarking upon the determination of the amount of expenditure incurred in relation to exempt income - Scope of amended Rule 8D - HELD THAT:- We find that Ld. NFAC/Ld. CIT(A) while confirming the disallowance under section 14A ignored the amended Rule 8D whereas interest disallowance as existed prior to 01.06.2016 under Rule 8D(2)(ii) done away from by amending Rule 8D w.e.f.1st June, 2016. AO has made disallowance under Rule 8D(2)(ii) only and not under Rule 8D(2)(iii) (as does not exist on the statute book). Disallowance made by AO are strictly in accordance with the existing provision of Rule 8D2(ii). The figure of investment for earning exempt income as on 31.03.2016 and 31.03.2017 respectively, is not disputed by ld. AR for the assessee. Therefore, we do not find any reason to interfere with the disallowance worked out by Assessing Officer. Whether no satisfaction was recorded by AO before invoking the formula of Rule 8D for making disallowance under section 14A? - We are not convinced with the submission made by assessee as the Assessing Officer has duly recorded his satisfaction about the correctness of claim of assessee and held that exempt income cannot be earned without making any expenses. We find that the submission made by assessee that assessee is making more emphasis on the duty of the Assessing Officer rather to show or offer a suo motu reasonable indirect expense incurred for earning exempt income. We find that the assessee has not even offered a token amount for suo motu disallowance except contending that no expenditure was incurred for earning exempt income. The exempt income consists of dividend income, interest from tax free bonds and long-term capital gains - We find that the assessee has only tried to explain that no expense was incurred qua interest from tax free bonds and dividend income. However, nowhere explained as to how the long-term capital gains was earned. Therefore, we do not find any reason to deviate from the disallowance worked out by Assessing Officer. Decided against assessee. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act in accordance with Rule 8D of the Income Tax Rules.Analysis of the Judgment:1. Disallowance under Section 14A:Facts of the Case:The assessee, a doctor by profession, filed a return of income for the assessment year 2017-18 declaring an income of Rs. 2.751 crores. During scrutiny, the Assessing Officer (AO) noted that the assessee had shown exempt income of Rs. 39,26,433/- from dividends, interest from tax-free bonds, and long-term capital gains. The AO found that the opening and closing investments yielding exempt income were Rs. 4.922 crores and Rs. 6.506 crores, respectively. The assessee was asked to furnish the working of suo motu disallowances as per Section 14A read with Rule 8D. The assessee claimed no expenditure was incurred to earn the exempt income.Assessment Order:The AO did not accept the assessee's claim, stating that income cannot be generated without incurring any expenditure. The AO invoked Rule 8D(2)(ii) and computed the disallowance at 1% of the average value of the investment, amounting to Rs. 5,71,485/-, and added it to the assessee's income.Appeal to CIT(A) / NFAC:The assessee appealed against the disallowance, reiterating that no expenditure was incurred to earn the exempt income and that the investments were made from own funds without any leverage cost. The assessee argued that the AO had not recorded his dissatisfaction with the correctness of the claim before proceeding to compute the disallowance as per Rule 8D.NFAC/CIT(A) Order:The NFAC upheld the AO's decision, noting that the AO had recorded his satisfaction regarding the correctness of the assessee's claim. The NFAC referred to the Supreme Court decision in Maxopp Investment Ltd. vs. CIT and the Delhi High Court decision in Indiabulls Financial Services Ltd., which emphasized the AO's power to compute disallowance as per Rule 8D when not satisfied with the assessee's claim.Tribunal's Analysis:The Tribunal considered the submissions from both parties and reviewed the orders of the lower authorities. The Tribunal noted that the AO had recorded his dissatisfaction with the correctness of the assessee's claim and followed the mandate of Rule 8D. The Tribunal found that the disallowance made by the AO was in accordance with the existing provisions of Rule 8D(2)(ii) and noted that the assessee did not dispute the figures of the average value of investment.Conclusion:The Tribunal rejected the assessee's argument that no expenditure was incurred to earn the exempt income and upheld the AO's disallowance of Rs. 5,71,485/-. The Tribunal emphasized that the AO had recorded his dissatisfaction and that the disallowance was computed correctly as per Rule 8D(2)(ii). The appeal of the assessee was dismissed.Final Order:The appeal of the assessee was dismissed, and the disallowance under Section 14A read with Rule 8D was upheld. The order was pronounced in the open court on 09/09/2022.