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Facts
The assessee, a NBFC engaged in investments, earned exempt income of Rs.3,83,39,579/-. The assessee computed a disallowance of Rs.47,89,076/- u/s.14A, while the AO made an additional disallowance of Rs.2,29,72,864/-.
Held
The Tribunal held that the assessee's working of proportionate disallowance, which excluded expenses not related to earning exempt income, was justified and had been upheld in earlier years. The AO's disallowance made under Rule 8D was directed to be disallowed.
Key Issues
Whether the disallowance made by the AO under section 14A read with Rule 8D is justified when the assessee has already offered a suo moto disallowance and excluded expenses not related to exempt income.
Sections Cited
14A, 143(3), 115JB, 8D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘D‘ BENCH
Before: SHRI AMIT SHUKLA & SHRI GAGAN GOYAL
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 22/08/2023 passed by NFAC Delhi for the quantum of assessment passed u/s. 143(3) for the A.Y.2016-17. 2. In the grounds of appeal, assessee has challenged the additional disallowance of Rs.2,29,72,864/- made u/s.14A over and above the suomoto disallowance offered by the assessee at Rs.47,89,076/-. Apart from that, assessee has also challenged M/s. DSP Investment Pvt. Ltd similar disallowance u/s.14A while computing the book profit u/s.115JB.
3. In short, the facts qua the issue are that Assessee Company is a NBFC engaged in business of investments. Assessee has earned exempt income at Rs.3,83,39,579/- from the following income:- Dividend on Mutual Funds - Rs.2,37,86,288/- Dividend on Shares - Rs.1,32,37,486/- Dividend on Tax Free Bonds - Rs.13,15,805/- 4. The assessee in the computation of income has worked out the disallowance of Rs.47,89,076/- which was on account of direct expenditure of Rs.1,718/- and other indirect expenses of Rs.47,87,358/-. In response to the show-cause notice as to why disallowance should not be made under Rule 8D, assessee submitted that the assessee has already disallowed the direct expenditure related to exempt income as well as proportionate disallowance of the balance expenditure taking proportion of the exempt income to the total income. Further, the assessee has made reference to the decision of the ITAT, Mumbai in the assessee's own case for earlier assessment years wherein the disallowance was restricted to the disallowance voluntarily made by the assessee. The assessee on this issue has also relied upon the various judicial pronouncements. Further assessee also pleaded that that investment which have not generated exempt income cannot be considered. Accordingly, the assessee has stated that no further disallowance is called for.
M/s. DSP Investment Pvt. Ltd 5. However, the ld. AO rejected assessee’s explanation stating that assessee has not maintained separate accounts for investments vis-à-vis their source and the working of the disallowance is not acceptable because the expenses are apportioned in the ratio of exempt income to total income. After referring to the CBDT Circular No.5/2014 dated 11/02/2014, he held that assessee is maintaining an average investment of Rs.555 Crores, which is more than 75% of the total assets and therefore, expenditure incurred on this will be more than the amount disallowed by the assessee u/s.14A. Accordingly, he made the disallowance under Rule 8D at Rs.2,77,61,940/- and after deducing suomoto disallowance of Rs.47,89,076/-, the balance amount of Rs. 2,29,72,864/- has been disallowed.
The ld. CIT (A) had confirmed the said disallowance made by the assessee and also similar disallowance made while computing book profit u/s.115JB.
Before us, ld. Counsel for the assessee submitted that the working of proportionate disallowance by the assessee has been upheld by the Tribunal in the earlier years wherein the assessee’s working has been found to be justified. In any case, he submitted that if investments which have not yielded exempt income is to be removed from the working of Rule 8D(2)(iii), then it will work out to Rs.43,59,051/- which is less than suomoto disallowance offered by the assessee.
M/s. DSP Investment Pvt. Ltd 8. On the other hand, ld. DR relied upon the order of the ld. AO and ld. CIT (A).
After considering the relevant finding given in the impugned order as well as computation for disallowance by the assessee, it is seen that assessee has excluded those expenditure which has no relation with the earning of exempt income. The working of expenditure which had no co-relation with the exempt income was as under:-
Total Expenditure as per profit & loss 130,711,587 a/c Less Expenditure incurred in relation 10,890,055 to income other than Provision for Diminution in Value of 72,675,000 Investments Donation 80G 2,525,000 Donation CSR 1,344,405 Deprecation Audit Fees 551,901 Demat Charges 1,738 Professional Tax 2,500 Security Charges 83,226 Rates and Taxes 60,200 Total 42,577,582 Accordingly, assessee has taken the total income as per profit and loss account and in proportion of the dividend income has calculated the disallowance of indirect expenditure of M/s. DSP Investment Pvt. Ltd Rs.47,87,358/-. The said work of disallowance is based on the nature of expenditure debited to the profit and loss account and those, expenditure has been excluded which do not have any connection remotely with the earning of exempt income. This is evident from the details of expenditure noted above. If these expenditure are removed, then in proportion to the total exempt income, the indirect expenditure which has been offered takes into consideration of the other expenditure which can be said to be attributable for earning of exempt income. Precisely this working has been accepted in the case of the assessee by the Tribunal in the earlier years and therefore, such a working of given by the assessee is upheld. Even otherwise also now it is settled by various decisions that investment which has not yielded exempt income should be excluded from the working of disallowance under Rule 8D and if that exercise is carried out, then amount equal to 0.5% of annual average of investment whose income is or shall be exempt works out to Rs.43,59,051/- which is much more than what assessee has offered as suomoto disallowance. Accordingly, the additional disallowance made by the AO is directed to be disallowed.
In the result, appeal of the assessee is allowed. Order pronounced on 6th March, 2024.