2020 (2) TMI 1749 - AT - Income Tax

Disallowance under s.14A read with Rule 8D limited to amount of exempt income; amounts fixed for AY 2012-13 and 2013-14

ITAT, Pune (AT) held that disallowance under s.14A read with Rule 8D must be restricted to the amount of exempt income. Relying on precedents of the SC ... Disallowance u/s 14A r.w. Rule 8D - expenditure incurred on earning exempt income - HELD THAT:- disallowance u/s 14A worked out by AO is much more than the exempt income earned by the assessee. We find that in the case of PCIT Vs. State Bank of Patiala [2018 (4) TMI 23 - PUNJAB & HARYANA HIGH COURT] has held that the amount of disallowance u/s 14A of the Act has to be restricted to the amount of exempt income only and not at a higher figure. Also confirmed by SC [2018 (11) TMI 1565 - SC ORDER] Also in Caraf Builders & Construction (P) Ltd. [2018 (12) TMI 410 - DELHI HIGH COURT] after considering the decisions of Maxopp Investment Ltd.[2018 (3) TMI 805 - SUPREME COURT], Cheminvest [2015 (9) TMI 238 - DELHI HIGH COURT] and other decisions has held that disallowance u/s 14A cannot exceed exempt income of the relevant year. In the present case, since assessee has earned exempt income of 62,111/- in A.Y. 2012-13 and Rs. 1,66,283/- in A.Y. 2013-14, we relying on the aforesaid decisions, direct the disallowance u/s 14A r.w. Rule 8D be restricted only to the exempt income earned by assessee. We thus direct accordingly. Thus, the grounds of the assessee are partly allowed in both the appeals. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D is exigible where the assessee has earned exempt income but has not attributed expenditure to such exempt income. 2. Whether the quantum of disallowance under section 14A read with Rule 8D can exceed the amount of exempt income earned in the relevant year. 3. Whether any procedural infirmity in making the section 14A disallowance vitiates the assessment where the methodology of Rule 8D has been applied by the assessing officer. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 14A read with Rule 8D where exempt income exists but no expenditure attributable to it was claimed Legal framework: Section 14A disallows expenditure incurred in relation to income which does not form part of total income. Rule 8D prescribes a mechanism to compute expenditure attributable to exempt income where such attribution is not made by the assessee. Precedent treatment: The Court refers to higher court pronouncements that accept the applicability of Rule 8D as a mechanical/administrative method to compute disallowance where AO finds investments yielding exempt income and no or insufficient attribution of expenses by the assessee. Interpretation and reasoning: The Tribunal accepted the assessing officer's use of Rule 8D to compute the disallowance because the assessee had investments yielding exempt income and had not attributed expenses to such income. The Tribunal proceeded on the basis that Rule 8D provides the prescribed methodology to quantify disallowance in such circumstances. Ratio vs. Obiter: Ratio - Rule 8D is an appropriate statutory tool for AO to compute disallowance under section 14A when the assessee has exempt income and has not attributed expenditure to it. Conclusion: Section 14A disallowance can be computed by AO using Rule 8D where exempt income exists and the assessee has not allocated expenditure to that income; the Tribunal did not disturb AO's exercise of applying Rule 8D on this factual foundation. Issue 2 - Whether disallowance under section 14A read with Rule 8D can exceed the exempt income of the year Legal framework: Section 14A disallows expenditure related to income not includible in total income; the determination of quantum by AO may be guided by Rule 8D when direct attribution is absent. Precedent treatment: The Tribunal relied on a line of judicial decisions from higher courts which have considered the interplay between section 14A, Rule 8D and the quantum of disallowance; these authorities have held that disallowance must be reasonable and, in certain decisions, restricted to the amount of exempt income where Rule 8D yields a disproportionate figure. Interpretation and reasoning: On the facts, the AO computed disallowances of a magnitude substantially higher than the exempt income for the relevant years. The Tribunal examined higher court rulings and found that where Rule 8D computation produces a disallowance exceeding exempt income, disallowance should be restricted to the exempt income amount. The Tribunal treated the excess as not sustainable in law, directing that the section 14A disallowance be limited to the exempt income actually earned in each year. Ratio vs. Obiter: Ratio - Where application of Rule 8D produces a disallowance greater than the exempt income, the permissible disallowance should be restricted to the amount of exempt income for the relevant year. (This limitation forms the operative holding applied by the Tribunal.) Conclusion: The Tribunal directed that the disallowance under section 14A read with Rule 8D be restricted to the exempt income (Rs. 62,111 for one year; Rs. 1,66,283 for the other), thereby reducing the AO's computed disallowances to the level of exempt income. Issue 3 - Procedural compliance in making section 14A disallowance Legal framework: Assessments under section 14A and computations under Rule 8D must follow statutory procedure; procedural objections may involve requirements of notice, opportunity to respond, and adherence to prescribed computation method. Precedent treatment: The Tribunal noted earlier judicial consideration of procedural challenges but did not find authority requiring exclusion of a Rule 8D computation solely on procedural grounds where the AO applied the Rule and the assessee had an opportunity in appellate proceedings. Interpretation and reasoning: The assessee raised a ground alleging non-following of due process. The Tribunal considered that the AO applied Rule 8D in the assessment proceedings and that the matter was subject to appellate scrutiny. No specific procedural lapse was found in the record sufficient to nullify the disallowance; instead, the Tribunal addressed the substantive quantum issue and modified the disallowance accordingly. Ratio vs. Obiter: Obiter - The Tribunal's decision to restrict the disallowance on substantive grounds implicitly indicates that mere procedural objections were not decisive in the absence of a demonstrated procedural breach affecting the outcome. Conclusion: No procedural infirmity was held to mandate removal of the disallowance; the Tribunal adjusted the quantum as per legal constraints rather than quashing the disallowance on procedural grounds. Cross-references and Integrated Conclusion Where an assessee earns exempt income and has not attributed expenses to it, the AO may compute disallowance under section 14A by applying Rule 8D (Issue 1). However, consistent higher court considerations require that such computed disallowance not exceed the amount of exempt income in the year; where Rule 8D yields a figure greater than the exempt income, the disallowance must be restricted to the exempt income (Issue 2). Procedural objections do not independently invalidate a Rule 8D computation absent a shown prejudice or statutory breach; the Tribunal therefore adjusted the quantum rather than setting aside the disallowance for procedural reasons (Issue 3).