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Facts
The assessee filed a return declaring a loss. The AO noticed the assessee earned exempt dividend income and made a disallowance under Section 14A after considering the assessee's suo moto disallowance. The CIT(A) upheld the AO's disallowance.
Held
The Tribunal noted that the interest expenditure should be considered on a net basis (expenditure minus income). Furthermore, the disallowance computed by the AO exceeded the total expenses related to earning exempt income, particularly D-mat charges. Since the assessee had already suo moto disallowed a significant amount, no further disallowance was warranted.
Key Issues
Whether the disallowance under Section 14A read with Rule 8D was correctly computed, and whether the AO erred in computing book profit under Section 115JB.
Sections Cited
14A, 8D, 115JB
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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, HON’BLE & SHRI RAHUL CHAUDHARY, HON’BLE
O R D E R
PER NARENDRA KUMAR BILLAIYA, AM:
This appeal by theassessee is preferred against the order dated 26/03/2024 by NFAC Delhi [in short ‘ld. CIT(A)] pertaining to AY 2013- 14.
The grievance of the assessee reads as under :- “1. GROUND NO 1: DISALLOWANCE OF RS. 3,08,61,892/- UNDER SECTION 14AR. W.R. 8D OF THE ACT (GROSS DISALLOWANCE OF RS. 3,83,61,892/- LESS SUO-MOTO DISALLOWANCE RS. 75,00,000/-): 1.1. On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in upholding the disallowance u/s 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 ('the Rules'). 1.2. The Ld. CIT(A) failed to appreciate that Ld. AO cannot invoke Rule 8D without recording any objective satisfaction qua Appellant's claim that no expenditure is 2 relatable to earning of exempt income apart from suo-motu disallowance of 14A offered by the Appellant, having regard to its books of account. 1.3. Without prejudice to the above, the Ld. CIT(A) erred in rejecting the suo-moto disallowance offered by the Appellant, since disallowance u/s. 14A cannot exceed actual expenditure debited to Statement of Profit and Loss and claimed in the computation of income. 1.4. Without prejudice to above, the Ld. CIT(A) failed to appreciate that the insertion of Explanation to first proviso of S. 14A of the Act vide Finance Act 2022, is prospective in nature and therefore ought to have directed the Id. AO to consider only those investments which have actually yielded tax free income during the year. 1.5. The Appellant prays that the disallowance of Rs. 3,08,61,892/- u/s 14A r.w.r. 8D be deleted and /or appropriately reduced. 2. GROUND NO 2: ADDITION OF RS. 3,08,61,892/- BEING DISALLOWANCE U/S14A R. W.R. 8D WHILE COMPUTING THE BOOK PROFIT U/S 115JB OF THEАСТ: 2.1. On the facts and in the circumstances of the case and in law, Ld. AO erred in making addition of Rs. 3,08,61,892/- being the disallowance u/s 14A r.w.r. 8D, while computing the book profit u/s 115JB of the Act. 2.2. The Appellant prays that the addition made in book profit u/s 115JB of the act be deleted. GENERAL The Appellant craves leaves to add to, alter and/or amend any of the above grounds of appeal
on or before the date of hearing.”
3. Briefly stated the facts of the case are that the assessee filed its return of income on 30/09/2014 declaring total loss of Rs.(-) 35,42,755/-. The return was selected for scrutiny assessment under CASS and accordingly, statutory notices were issued and served upon the assessee. While scrutinizing the return of income, the AO noticed that the assessee is engaged in the business of distribution of mutual fund units and earned brokerage on investments made during the year. The AO found that the assessee has earned exempt dividend income of Rs.4,38,01,950/- on which I.T.A. No. 2540/Mum/2024 3 it suo moto disallowed Rs.75,00,000/- u/s 14A r.w.r 8D. the AO was not satisfied with the suo moto disallowance made by the assessee and invoked the provisions of Section 14A r.w.r. 8D. The AO computed the disallowance at Rs.3,83,61,892/- and after reducing the suo moto disallowance of Rs.75,00,000/-, made addition of Rs.3,08,61,892/-. 3.1. Assessee carried the matter in appeal before the ld. CIT(A) but without any success.
4. Before us, the ld. Counsel for the assessee pointed out that finance cost includes interest of Rs.1,23,57,140/- and at the same time the assessee has shown interest income on long term capital assets and others at Rs.30,20,271/- and it is the say of the ld. Counsel that the interest expenditure should have been netted off while computing the disallowance u/s 14 r.w.r. 8D. Further the ld. Counsel for the assessee pointed out that under the head Other Expenses, the only expense which needs to be considered for the disallowance is miscellaneous expenses of Rs.15,17,507/-. The ld. Counsel further stated that out of the total expenses of Rs.20,18,850/-, only sum of Rs.9,648/- relates to D-mat which only deserves to be disallowed. The ld. Counsel for the assessee vehemently stated that for the purpose of computation of book profits u/s 115JB, Rule 8D cannot be applied and only actual expenditure, if any, for earning exempt income has to be considered. 4.1. Per contra, the ld. D/R strongly supported the findings of the lower authorities.
5. We have given a thoughtful consideration to the orders of the authorities below. It is true that the assessee has shown interest