Court/Forum: ITAT
Bench: Shri Joginder Singh, Judicial Member and Shri Rajendra, Accountant Member
Order Date: 2015-01-01
Year: 2015
Outcome: Assessee
Sections: Section 14A, Rule 8D
Disallowance under Section 14A r.w. Rule 8D cannot exceed the exempt income received.
The ITAT allowed the appeal of the assessee, concluding that the disallowance of Rs. 14,58,412 under Section 14A r.w. Rule 8D was not justified as the assessee did not incur any expenditure for earning exempt income.
Assessee
The central legal question was whether the Assessing Officer could disallow expenses under Section 14A when the assessee did not incur any costs related to earning exempt income.
The assessee, a limited company, declared an income of Rs. 74,40,000 and received dividend income of Rs. 1,82,262. The AO disallowed Rs. 14,58,412 under Section 14A r.w. Rule 8D, claiming that various expenses were related to exempt income.
The assessee argued that no expenditure was incurred for earning exempt income and that investments were made from own funds, not borrowed funds.
The Revenue contended that the disallowance was justified as per the provisions of Section 14A r.w. Rule 8D.
Section 14A pertains to disallowance of expenses incurred in relation to exempt income, and Rule 8D provides the method for calculating such disallowance.
The ITAT held that since the assessee did not utilize borrowed funds for investments and the dividend income was directly credited to the bank account, the disallowance made by the AO was excessive and not in accordance with the provisions of the law.
Practitioners should note that disallowance under Section 14A must be substantiated with evidence of incurred expenses, and cannot exceed the actual exempt income received.
आयकर आयकरआयकर आयकर अपीलीय अपीलीयअपीलीय अपीलीय अिधकरण अिधकरणअिधकरण अिधकरण,
मुंबई मुंबई मुंबई मुंबई ड,
यायपीठ यायपीठयायपीठ यायपीठ, ,, , मुंबई मुंबईमुंबई मुंबई
ौी जोिग瀈दर 琐सह, 瀈याियक सद瀡य एवं एवंएवं एवं ौी राजेि, लेखा सदःय के सम"
आयकर अपील सं. / ITA No.5592/MUM/2012 िनधा$रण िनधा$रणिनधा$रण िनधा$रण वष$ वष$वष$ वष$ /Assessment Year: 2009-10 M/s Daga Global Chemicals Pvt. Ltd.(Formerly Known as Daga Global Chemicals Ltd.), 101, Mahek Plaza, Off L.T. Road, Maharashtra, Nagar Lane, Borivali(W), Mumbai-400092 Vs.
Asst. Commissioner Income Tax-9(1), Room No.223, Aaykar Bhavan, Marine Lines, Mumbai-400020 (िनधा$&रती /Assessee) (ू)यथ+ /Respondent)
िनधा$&रती क, क,क, क, ओर ओरओर ओर से सेसे से /Revenue by : Dr. K.Shivaram & Shri Rahul Hakani ू)यथ+ क, क,क, क, ओर ओरओर ओर से सेसे से /Revenue by Shri Akhilendra Yadav
सुनवाई क, तारख / Date of Hearing : 01/01/2015 घोषणा क, तारख / Date of Pronouncement : 01/01/2015
The assessee is aggrieved by the impugned order dated 02/07/2012 of the ld. First Appellate Authority, Mumbai. The assessee has raised the following grounds:
2 M/s Daga Global Chemicals Pvt. Ltd, .
1.The ld. Commissioner of Income tax (Appeals) erred in confirming disallowance of Rs.14,58,112/- u/s 14A r.w. Rule 8D without appreciating that no expenditure directly or indirectly was incurred during this year for earning exempt income and investments in shares were made in earlier years out of own fund and not out of borrowed found and hence disallowance u/s.14A r.w. Rule 8D may be deleted.
2. The learned CIT(A) failed to appreciate that dividend income is directly credited to Bank Account and appellant does not have to incur any expenditure for earning exempt income and hence disallowance u/s. 14A r.w. Rule 8D may be deleted.
3. The learned CIT(A) failed to appreciate that interest expenditure of Rs.2,35,49,746/- has no nexus with earning of exempt income as the investments on which exempt income is earned is out of own funds and hence disallowance u/s14A r.w. Rule8D may be deleted.
4. The learned CIT(A) erred in holding that A.O. duly recorded satisfaction before invoking section 14A r.w. Rule 8D without appreciating the fact that assessee had shown bifurcation of Financial expenses to A.O. to show that interest expense was not incurred for investment in shares or for earning exempt dividend income and A.O. did not reject the same and still A.O. applied Rule 8D in an automatic fashion and hence, no satisfaction was recorded by A.O. as required u/s 14A before invoking Rule 8D.
3 M/s Daga Global Chemicals Pvt. Ltd, .
5. The learned CIT(A) failed to appreciate that disallowance u/s 14A read with Rule 8D cannot exceed exempt income.
6. Without prejudice to above, dividend received during this year is only Rs.1,82,262/- and demat charges are Rs.1,485/-, hence the disallowance may be restricted to maximum Rs.1,485/-.
2. At the time of hearing, Dr. K.Shivaram alongwith Shri Rahul Hakani, ld. counsels for the assessee advanced their arguments which are identical to the ground raised by submitting that no expenditure directly or indirectly was incurred by the assessee for earning exempt income and further the investment in shares was made in earlier years out of own funds and not out of borrowed funds, therefore, no disallowance u/s 14A r.w. Rule 8D is to be made. 2.1. On the other hand, Shri Akhilendra Yadav strongly defended the conclusion arrived at by the ld. Commissioner of Income tax (Appeals) by contending that a well reasoned order has been passed by the ld. First Appellate Authority as apportionment of expenditure for earning the dividend income was done as per the provisions of the Act. It was pleaded that section 14A r.w. Rule 8D of the Rules is clearly applicable to the facts of the present appeal. 2.2. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is a limited company, engaged in trading of bulk and fine, chemicals, solvent and pharmaceutical raw materials declared its
4 M/s Daga Global Chemicals Pvt. Ltd, .
income at Rs.74,40,000/- on 26/09/2009. The assessee credited dividend income of Rs.1,82,262/- in its profit and loss account. The Assessing Officer while framing the assessment invoke section 14A r.w. Rule 8D by contending that assessee claimed various expenses which are related to exempt income in its profit & loss account and disallowed Rs.14,58,412/-. On appeal, before the ld. Commissioner of Income tax (Appeals) broadly the stand taken in the assessment order was affirmed against which the assessee is in further appeal before this Tribunal. The totality of facts clearly indicates, as claimed by the assessee that no borrowed funds were utilized for earning the exempt income by the assessee and further the dividend were directly credited in the bank account of the assessee and no expenditure was claimed. What it may be, we find that the assessee only received Rs.1,82,362/- as dividend income, therefore, there is no question of disallowance of Rs.14,58.412/- by invoking section 14A r.w. Rule 8D under the facts available on record. It was also explained by the ld. counsel for the assessee that on identical fact in earlier years, no disallowance was made. In the present assessment year also, no borrowed funds were invested by the assessee for making investment in shares or for earning dividend income. At best, if any disallowance could be made that can be restricted to Rs. 1,485/- which were claimed as demat charges. Disallowance u/s 14A r.w. Rule 8D cannot exceed the exempt income. In view of this fact, we find merit in the claim of the assessee. The appeal of the assessee is therefore, allowed.
5 M/s Daga Global Chemicals Pvt. Ltd, .
Finally, the appeal of the assessee is allowed.
This order was pronounced in the open court in the presence of ld. Representatives from both sides at the conclusion of the hearing on 01/01/2015.
Sd/- Sd/-
f{x~{tÜ? P.S/.िन.स. आदेश आदेशआदेश आदेश क, क,क, क, ूितिल1प ूितिल1पूितिल1प ूितिल1प अमे1षत अमे1षतअमे1षत अमे1षत/Copy of the Order forwarded to : 1. अपीलाथ+ / The Appellant 2. ू)यथ+ / The Respondent. 3. आयकर आयु3(अपील) / The CIT(A)- 4.
5. 1वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai 6. गाड$ फाईल / Guard file.
आदेशानुसार आदेशानुसारआदेशानुसार
स)या1पत ूित //True Copy// उप उपउप उप/सहायक सहायकसहायक सहायक पंजीकार पंजीकारपंजीकार पंजीकार (Dy./Asstt. Registrar) आयकर आयकरआयकर आयकर अपीलीय अपीलीयअपीलीय अपीलीय अिधकरण अिधकरणअिधकरण अिधकरण, मुंबई / ITAT, Mumbai