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Facts
The assessee claimed exempt income from Mutual Funds. The AO observed that no disallowance under Section 14A was made in the return. The AO initiated disallowance proceedings based on Rule 8D, which was upheld by the CIT(A).
Held
The Tribunal held that for invoking Section 14A, the AO must record satisfaction with demonstrable basis that expenses were incurred. In this case, no such satisfaction was recorded, and investments were carried forward from earlier years without fresh deployment.
Key Issues
Whether disallowance under Section 14A r.w. Rule 8D can be made without recording the AO's satisfaction about expenditure incurred for earning exempt income, especially when investments are old and funded by interest-free funds?
Sections Cited
14A, Rule 8D
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िनधा"रती क" ओर से/Assessee by : Shri Vineet Krishan, Advocate राज"व क" ओर से/ Revenue by : Dr. Ranjeet Kaur, Sr. DR सुनवाई क" तारीख/Date of Hearing : 07/01/2025 उदघोषणा क" तारीख/Date of Pronouncement : 09/01/2025 आदेश/Order
PER VIKRAM SINGH YADAV, AM
This is an appeal filed by the Assessee against the order of the Ld. CIT, Appeal, Addl/JCIT(A)-9, Mumbai pertaining to Assessment Year 2017-18, wherein the sole ground of appeal relates to sustenance of addition of Rs. 3,22,627/- under Section 14A r.w. Rule 8D of the Income Tax Rules.
2. Briefly, the facts of the case are that during the course of assessment proceedings, the AO observed that the assessee has claimed exempt income of Rs. 30,41,259/- against investment of Rs. 322,62,709/- in Mutual Funds and no disallowance under Section 14A has been made by the Assessee in its return of income and the assessee’s explanation was sought. In response, the assessee submitted that the provision of Section 14A are not applicable as no loan has been raised for making the investments in Mutual funds and the same was made out of reserves and surplus of the company in the earlier assessment years and no fresh investment have been made during the year. The submissions so filed by the assessee were considered but not found acceptable to the AO. The AO referred to the provisions of Section 14A r.w. Rule 8D(2) and worked out the disallowance of Rs. 3,22,627/- which, on appeal, has been confirmed by the Ld.CIT(A) and against which, the assessee is in appeal before us.
During the course of hearing, the Ld. AR reiterated the submissions made before the lower authorities. It was submitted that no fresh investment has been made during the year and the same scheme of mutual funds has been continued during the year and even in the earlier years, no interest bearing loans were taken by the assessee and the investment were made out of its own capital. It was submitted that the AO has not rebutted the said explanation and no adverse material has been brought on record and without recording necessary satisfaction that the assessee has incurred certain expenditure during the year in relation to exempt income has straight away applied Rule 8D and worked out the disallowance. It was further submitted that there is a distinction between making investment in shares and making investment in Mutual Funds and in the instant case, the assessee has made investment in Mutual Funds and it is for the Asset Management Company managing the Mutual Funds which are effectively managing the investments and deploying the funds in the various scrips and for the purpose, the expenses are charged from the investors and which is in built in the Net Asset Value and as such, the assessee has not incurred any separate expenditure which has been claimed in the P&L Account and therefore, there is no question of disallowance invoking provisions of Section 14A r.w. Rule 8D(2) of the Income Tax Rules.
Per contra, the Ld. DR submitted that even for making the investment in the Mutual Funds, the assessee has to decide which Mutual Funds to invest in as there are various categories of Mutual Funds and for taking such a decision, the assessee must have employed certain personals or at least a part of their time has been spent in managing the investments in the Mutual Funds and therefore to that extent, the expenditure has been incurred and therefore there is no basis in the contention advanced by the Ld. AR. Further he relied on the order of the lower authorities.
I have heard the rival contentions and purused the material available on record. As per sub-section (2) to Section 14A, where the assessee claims that no expenditure has been incurred for earning exempt income, the AO has to record his satisfaction that such a claim is incorrect having regard to the books of accounts of the assessee and once such a satisfaction is recorded with demonstrable basis that the assessee has incurred the expenses, the AO can then proceed and determined the expenditure which can be disallowed and for the purposes of such determination, can invoke Rule 8D. In the instant case, I find that no such satisfaction has been recorded having regard to the books of accounts that the assessee has incurred the expenses which could directly or indirectly be related to earning of the exempt income. Further, from the perusal of the books of accounts and even as per the working so done by the AO in terms of Rule 8D, it is evident that no fresh investment has been made by the assessee and thus, all the investments have been carried forward from the preceding assessment years and therefore, as far as the source of making such investments is concerned, no fresh deployment of funds has happened during the year and further, in absence of any redemption/switchover among different mutual funds schemes and investments being continued in the same scheme, question of any personnel involvement doesn’t arise for consideration. In the earlier years where such investments were made, the explanation of the assessee is that the same has been done out of interest free funds and no borrowed funds have been utilized and secondly, the expenses if any are factored in while determining the NAV of the mutual funds and no separate expenditure has been incurred. Nothing has been brought on record to rebut the said explanation in terms of any disallowances so made under Section 14A in the earlier years. In light of the aforesaid discussions, the disallowance so made invoking Section 14A r/w Rule 8D is hereby directed to be deleted.
In the result, the appeal of the assessee is allowed.