2025 (7) TMI 1054 - AT - Income Tax

Section 14A disallowance upheld despite no direct dividend expenses claim due to investment movements and administrative costs

M/s Sky AMA Infra Private Limited Versus DCIT Central Circle-2 Ludhiana

The ITAT Chandigarh upheld the AO's disallowance under section 14A despite the assessee's claim that no expenses were incurred to earn dividend income. ... Disallowance u/s 14A - assessee did not offer any disallowance u/s 14A on the plea that no expense was incurred to earn the dividend income - rejecting the same, AO computed indirect expense disallowance u/r 8D(2)(ii) @1% of monthly average of opening and closing investments which resulted into disallowance u/s 14A - HELD THAT:- There is movement in investment made by the assessee in its holding company. The assessee has incurred employment benefit expenses as well as other expenses which are of administrative in nature. The assessee has not maintained separate accounts with respect to such investment portfolio. It is unconceivable that no effort was made by the assessee to maintain its investment portfolio and therefore, in the absence of any demonstrative evidences to support this plea, it could not be accepted that the assessee did not incur any expenditure on maintaining the investment portfolio. The Rule 8D applies exactly in a situation like this. This rule provides a mechanism for computation of disallowance where the demarcation of expenses is not available. AO has applied Rule 8D and computed the indirect expense disallowance as per this rule only. Therefore, no fault could be found in the working of Ld. AO. Consequently, the impugned disallowance made while computing income under normal provisions stand confirmed. MAT adjustment u/s 115JB - Adjustment is not justified as per the decision of Vireet Investments Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI]. Therefore, this disallowance is deleted and not to be added back while computing ‘Book Profits’ u/s 115JB. AO is directed to re-compute the income of the assessee accordingly. The ITAT Chandigarh addressed the assessee's appeal for AY 2018-19 challenging the confirmation of disallowance under section 14A for Rs. 79.21 Lacs related to exempt dividend income of Rs. 863.10 Lacs from investments in M/s Fastway Transmissions Pvt. Ltd. The assessee contended no expenditure was incurred to earn the dividend income; however, the AO applied Rule 8D(2)(ii) to compute indirect expense disallowance at 1% of the average investment, upheld by the CIT(A).The Tribunal observed that the assessee's financials showed significant movement in investments and administrative expenses incurred without maintaining separate accounts for the investment portfolio. Given the absence of demonstrative evidence negating expenses, the application of Rule 8D was appropriate to compute disallowance under section 14A. Accordingly, the disallowance under normal provisions was confirmed: 'no fault could be found in the working of Ld. AO.'Regarding the addition of this disallowance to 'Book Profits' under section 115JB (MAT), the Tribunal relied on the Special Bench decision in Vireet Investments Pvt. Ltd. (82 Taxmann.com 415) to hold such adjustment as unjustified and deleted it. The AO was directed to recompute income for MAT purposes excluding this disallowance.In sum, the appeal was partly allowed: the section 14A disallowance stands confirmed for normal income tax computation but is deleted for MAT computation under section 115JB.