ACIT, CIRCLE-10(1), NEW DELHI vs. HERO ELECTRONIX P.LTD, NEW DELHI
Facts
The assessee, an investment company, received exempt dividend income of Rs. 14.49 lakhs. The Assessing Officer disallowed Rs. 2.18 crores under section 14A read with Rule 8D for expenses related to this exempt income, which the first appellate authority restricted to the actual exempt income. Additionally, the Assessing Officer disallowed Rs. 1.93 crores under section 40A(2)(b) for payments to Directors/CEO, considering them excessive, but the first appellate authority deleted this disallowance.
Held
The Tribunal affirmed that disallowance under section 14A cannot exceed the actual exempt income earned, thereby upholding the first appellate authority's decision. Regarding the section 40A(2)(b) disallowance, the Tribunal held that the Assessing Officer failed to provide comparable instances or material to establish the fair market value of services, justifying the deletion of disallowance by the first appellate authority.
Key Issues
1. Whether disallowance under section 14A read with Rule 8D can exceed the actual exempt income earned. 2. Whether disallowance under section 40A(2)(b) is valid when the Assessing Officer fails to establish the fair market value of services.
Sections Cited
Section 14A of the Income-tax Act, 1961, Rule 8D of the Income Tax Rules, 1962, Section 40A(2)(b) of the Income-tax Act, 1961
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH: ‘B’ NEW DELHI
Before: SHRI SAKTIJIT DEY, VICE- & SHRI NAVEEN CHANDRA
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘B’ NEW DELHI
BEFORE SHRI SAKTIJIT DEY, VICE-PRESIDENT AND SHRI NAVEEN CHANDRA, ACCOUNTANT MEMBER
ITA No.1370/Del/2023 Assessment Year: 2017-18
ACIT, Vs. M/s. Hero Electronix Pvt. Circle-10(1), Ltd., New Delhi 503, Rectangle-1, D-4, Saket District Centre, Saket, New Delhi PAN :AADCH6305B (Appellant) (Respondent)
Assessee by Sh. Anil Bhalla, CA Department by Sh. Vivek Kumar Upadhyay, Sr. DR Date of hearing 28.05.2024 Date of pronouncement 31.05.2024
ORDER PER SAKTIJIT DEY, VICE-PRESIDENT
This appeal by the Revenue is against order dated
20.03.2023 passed by National Faceless Appeal Centre (NFAC),
Delhi for the assessment year 2017-18.
In ground no. 1, the Revenue has challenged deletion of
disallowance of expenditure made by the Assessing Officer
invoking the provisions of section 14A of the Income-tax Act, 1961
ITA No.1370/Del/2023 AY: 2017-18
(in short ‘the Act’) read with Rule 8D of the Income Tax Rules,
1962 (in short ‘the Rules’).
Briefly the facts are, the assessee is a resident corporate
entity and part of Hero group. As stated by the Assessing Officer,
the assessee is an investment company. In course of assessment
proceedings, the Assessing Officer noticed that as per the
financial statement, the assessee has made an investment of
Rs.218,60,54,882/- during the year in various securities/shares.
Whereas, the assessee has received dividend income of
Rs.14,49,391/-, which was claimed to be exempt. Noticing that
the assessee has not made any disallowance under section 14A
read with Rule 8D, the Assessing Officer called upon the assessee
to explain, as to why disallowance should not be made by
applying methodology provided under Rule 8D. Though, assessee
objected to the proposed disallowance, however, rejecting the
objections of the assessee the Assessing Officer proceeded to
compute the disallowance under Rule 8D at Rs.2,18,60,548/-.
Assessee contested the disallowance before learned first appellate
authority. While deciding the issue, learned first appellate
2 | P a g e
ITA No.1370/Del/2023 AY: 2017-18
authority restricted the disallowance to the quantum of exempt
income earned during the year.
We have heard the parties and perused the materials on
record. Undisputedly, during the year under consideration, the
assessee had earned exempt income by way of dividend
amounting to Rs.14,49,391/-. Whereas, applying Rule 8D(2)(iii),
the Assessing Officer has computed disallowance at
Rs.2,18,60,548/-. It is trite law, disallowance under section 14A
read with Rule 8D cannot exceed the quantum of exempt income
earned during the year. That being the settled legal position, we
uphold the decision of learned first appellate authority on the
issue. Ground raised is dismissed.
In ground no. 2, the Revenue has challenged deletion of
disallowance of Rs.1,93,13,087/- made under section 40A(2) of
the Act.
Briefly the fact are, in course of assessment proceedings, the
Assessing Officer noticed that the assessee had paid
Rs.49,68,846/- and Rs.1,43,44,241/- to one of its Directors and
the CEO, respectively. Being of the view that the payments made
are excessive and unreasonable having regard to fair market
3 | P a g e
ITA No.1370/Del/2023 AY: 2017-18
value of the goods, services provided or facilities availed, the
Assessing Officer disallowed them. However, such disallowances
were deleted by the first appellate authority on the reasoning that
without establishing the fact that the payments made are
excessive or unreasonable having regard to the fair market value,
the Assessing Officer has disallowed them.
Having considered rival submissions, we find, the Assessing
Officer has invoked the provisions of section 40A(2)(b) of the Act
to disallow the expenses. On a reading of the said provision, it is
very much clear that if the Assessing Officer is of the opinion that
the expenditure claimed by the assessee on account of payment
made to some specified person is excessive or unreasonable
having regard to the fair market value of such goods, services or
facilities, such expenditure can be disallowed under the said
provision. However, the crucial fact which needs to be examined
is, what is the fair market value of the goods, services or facilities
for which payment is being made.
On going through the observations of the Assessing Officer,
we find, except making a general observation that the payment
made is excessive or unreasonable having regard to the fair
4 | P a g e
ITA No.1370/Del/2023 AY: 2017-18
market value of the goods, services or facilities, the Assessing
Officer has not brought any comparable instances or any other
material on record to establish what is the fair market value of
the services rendered by the payees so as to demonstrate that the
payments made are excessive and unreasonable having regard to
the fair market value.
That being the factual position emerging on record, learned
first appellate authority was justified in deleting the disallowance.
Ground raised is dismissed.
In the result, appeal is dismissed.
Order pronounced in the open court on 31st May, 2024
Sd/- Sd/- (NAVEEN CHANDRA) (SAKTIJIT DEY) ACCOUNTANT MEMBER VICE-PRESIDENT Dated: 31st May, 2024. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi
\ 5 | P a g e
