2021 (6) TMI 1063 - AT - Income Tax

Disallowance made u/s 14A - As contended before the A.O. that it did not incur any expenditure to earn the exempt income - AO Computed the disallowance under Rule 8D consisting of interest disallowance under Rule 8D(2)(ii) of the Act and expenses disallowance under Rule 8D(2)(iii) HELD THAT - We notice that the own funds available with the assessee was Rs. 355.57 crores while the value of investment in partnership firm mutual funds and shares aggregated to Rs. 251.82 crores. In view of the decision rendered by Hon ble Karnataka High Court in the case of CIT Vs. Micro Labs Ltd. 2016 (4) TMI 219 - KARNATAKA HIGH COURT no disallowance out of interest expenditure is called for - we confirm the deletion of disallowance of interest expenses of 8D(2)(ii) of IT Rules. Disallowance out of expenditure under rule 8D(2)(iii) - We notice that CIT(A) has deleted the disallowance by accepting the submissions of the assessee that the assessee has cross charged a sum of Rs. 1.19 crores out of operating and other expenses to the respective partnership firms. We are unable to agree with the view of Ld CIT(A) on this aspect. The cross charging of expenses is normally made in respect of services/facilities availed by one concern from another concern Accordingly the amount of Rs. 1.19 crores cross charged by the assessee to other concerns would represent facilities/services availed by the partnership firms from the assessee. Object of provisions of section 14A of the Act is to disallow expenses relatable to exempt income i.e. it is required to segregate the expenses debited to the Profit and Loss account as relatable to taxable income and exempted income . Hence what is required to be considered for the purpose of section 14A of the Act is the amount finally debited to profit loss account. The actual expenses incurred by the assessee would have been reduced by the amount cross charged to the partnership firms and the net amount would have been charged to the profit loss account. The disallowance u/s 14A of the Act is called for out of the above said net amount. Provisions of rule 8D need not be applied for computing the disallowance out of general expenditure. Accordingly we are of the view that a lumpsum disallowance of Rs. 15 lakhs may be made out of general expenditure and the same in our view would meet the requirements of section 14A of the Act. Accordingly we set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to restrict the disallowance under 14A of the Act to Rs. 15 lakhs. Appeal filed by the revenue is partly allowed

Summary

Issues: Disallowance under section 14A of the Income-tax Act, 1961

Issue 1: Disallowance under Rule 8D(2)(ii) of the Act
The appeal and cross objection were against the disallowance made under section 14A of the Income-tax Act, 1961. The assessee, engaged in property development, received share income and dividends claimed as exempt without making any disallowance under section 14A. The Assessing Officer (A.O.) computed disallowance under Rule 8D, resulting in interest and expenses disallowance totaling Rs. 1,51,37,386. The assessee contended before the CIT(A) that no disallowance was necessary as no expenditure was incurred to earn exempt income. The CIT(A) accepted the assessee's contentions, directing the A.O. to delete the disallowance. The revenue challenged this decision.

Issue 2: Disallowance under Rule 8D(2)(ii) of the Act
The Tribunal noted the own funds available with the assessee exceeded the value of investments, citing the decision of the Hon'ble Karnataka High Court in CIT Vs. Micro Labs Ltd. Consequently, the Tribunal confirmed the deletion of the interest expenses disallowance under Rule 8D(2)(ii) of the IT Rules.

Issue 3: Disallowance under Rule 8D(2)(iii) of the Act
Regarding the disallowance out of expenditure under Rule 8D(2)(iii), the CIT(A) deleted the disallowance based on the assessee's cross-charging of expenses to partnership firms. However, the Tribunal disagreed, stating that the cross-charging represented services availed by the partnership firms from the assessee. The Tribunal emphasized the need to segregate expenses related to taxable and exempt income under section 14A, directing a lumpsum disallowance of Rs. 15 lakhs from general expenditure.

Issue 4: Cross Objection
The assessee filed a cross objection belatedly, seeking a reasonable disallowance under section 14A. However, the Tribunal dismissed the cross objection due to the delay in filing and the absence of a petition for condonation.

In conclusion, the appeal by the revenue was partly allowed, restricting the disallowance under section 14A to Rs. 15 lakhs, and the cross objection of the assessee was dismissed. The Tribunal's decision was pronounced on 28th June 2021.