Applicability of Section 14A when no direct expenditure is incurred
Issue Outcome: Remand
- The Assessee was a public sector company, engaged in the business of bauxite mining, manufacture of Alumina and Aluminum & Power Generation.
- Invoking the provisions of Section 14A read with Rule 8D, the Assessing Officer made a disallowance of Rs.6,82 crores by observing that the disallowance suo-moto made by the Assessee was very less compared to the administrative and employee cost devoted to earn the exempt income. In appeal, the CIT(A) confirmed the disallowance as there may not be any direct expense and that the Assessee had not made any interest payments related to earning of exempted dividends and accordingly, the only way disallowance could be computed proportionately as per Rule 8D(2)(iii) of Income-tax Rules.
- The Tribunal observed that the Assessee was earning income under different heads. During the year, the Assessee had received dividend of Rs.11 crores and claimed such income as exempt income. The Assessee had only made disallowance at Rs.1.20 lacs under section 14A to earn the exempt income.
- The Assessing Officer applied section 14A read with Rule 8D and disallowed the expenditure as per formula provided under rule 8D.
- The Assessee was stated to have made no fresh investments out of borrowed funds. The Assessing Officer appeared to have calculated the disallowance as per Rule 8D(2)(iii) observing that administrative expenses could not be denied to earn exempt income. The Tribunal, however, found that the Assessing Officer had considered average total investment appearing on the first day and last day of the financial year, which in Tribunal’s opinion was not justified. These investments may also include such investments from which no exempt income would have been earned by the Assessee. As is clear from the Rule itself, the average of only such investments have to be taken into account, which yielded the income not forming part of the total income.
- Therefore, the Assessing Officer was required to work out the average of such investment, the income from which did not form part of the total income instead of total value of investment. Thus, the matter was remanded back to the file of the Assessing Officer for calculating the disallowance under section 14A read with Rule 8D afresh.
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