2024 (12) TMI 650 - HC - Income Tax

Assessee's computation of exempt income expenditure upheld; Rule 8D application rejected under Section 14A

Pr. Commissioner of Income Tax-7, Delhi Versus UK Paints India Pvt. Ltd.

The Delhi HC ruled in favor of the assessee regarding disallowance under Section 14A read with Rule 8D. The court held that neither the AO nor appellate ... Disallowance u/s 14A read with Rule 8D - expenses incurred towards earning the exempt income - HELD THAT:- Neither the AO nor any of the appellate authorities – CIT(A) or ITAT – had found that the Assessee’s computation of expenditure, which was allocable to earning exempt income, was erroneous or inadequate. None of the authorities had determined that the Assessee’s computation of expenditure attributable to the exempt income was erroneous or had faulted the same. In the aforesaid circumstances, it was not permissible for the AO to proceed to compute disallowance under Rule 8D of the Rules. It is well settled that recourse to Rule 8D of the Rules for computing the disallowance under Section 14A of the Act is available only if the Assessee’s computation of expenses attributable to earning exempt income, is found to be inadequate. In the present case, it is clear that the AO had not found fault with the Assessee’s computation of expenditure allocable to exempt income and, therefore, recourse to Rule 8D of the Rules for determining the expenditure incurred for earning exempt income, was not available. It is also relevant to highlight that the learned CIT(A) had also noted that the AO had not found the Assessee’s computation expenditure for earning exempt income as inadequate. Decided in favour of assessee. Issues:The controversy in the present appeal is confined to the claim of the respondent in regard to the quantum of disallowance under Section 14A of the Income Tax Act, 1961.Analysis:The Assessee filed its return of income for AY 2008-09, declaring a total income of Rs. 10,43,43,498, with exempt dividend income of Rs. 8,55,88,493. The Assessee attributed expenses of Rs. 7,50,000 towards earning the exempt income, justifying it by stating that the bulk of the dividend was from a passive investment not requiring significant expenses. The AO computed disallowance under Section 14A at Rs. 93,62,120, adjusting the Assessee's allocation, resulting in a net disallowance of Rs. 86,12,120. The Assessee contested this computation, claiming the correct amount was Rs. 44,00,176, but the AO disagreed.The CIT(A) found the Assessee's allocation not defective, faulted the AO for not recording adequate satisfaction before applying Rule 8D, and made an ad hoc disallowance of Rs. 20,00,000. The ITAT agreed that AO had not recorded dissatisfaction with the Assessee's computation, hence restricted the disallowance to Rs. 7,50,000 made by the Assessee. None of the authorities found fault with the Assessee's computation, making Rule 8D inapplicable. Legal precedents emphasize the need for AO's satisfaction before applying Rule 8D, which was absent in this case.The ITAT's decision was upheld, ruling in favor of the Assessee and against the Revenue. The judgment highlighted that Rule 8D is applicable only if the Assessee's computation is found inadequate, which was not the case here. The Court cited previous rulings to support the requirement for AO's satisfaction before resorting to Rule 8D. Consequently, the appeal was dismissed, affirming the ITAT's decision and answering the question of law in favor of the Assessee.This detailed analysis showcases the Assessee's successful challenge against the Revenue's appeal regarding the disallowance under Section 14A, emphasizing the importance of proper assessment and satisfaction before invoking specific rules for computation.