[2013] 35 taxmann.com 299 (Article)
Section 14A disallowance saga in light of judicial precedents
V.P. GUPTA
Advocate
Introduction
1. Provisions of section 14A were inserted in the Income-tax Act vide Finance Act, 2001 with retrospective effect from 1-4-1962 with a view to provide specific provision in the Act for disallowance of an expenditure incurred in relation to exempt income. The provisions of the aforesaid section were inserted for the reason that in some of the judgments the Supreme Court had taken a view that wherever activities of an assessee giving rise to exempt income as well as taxable income are indivisible no expenditure can be disallowed on the ground of earning of exempt income. [CIT v. Indian Bank Ltd. [1965] 56 ITR 77(SC); CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC) and Rajasthan State Warehousing Corpn. v. CIT [2000] 109 Taxman 145 (SC)]. Initially only sub-section (1) was inserted which provided for disallowance of an expenditure incurred by the assessee in relation to income, which did not from part of total income. On the basis of the above provision a controversy had arisen that no disallowance could be made unless there was direct nexus between the exempt income and the expenditure incurred. Since in most of the cases there would be no direct nexus, it was held that no disallowance was called for.
In view of the aforesaid controversy provisions of sub-sections (2) and (3) of section 14A were inserted in the Income-tax Act vide Finance Act, 2006 w.e.f. 1-4-2007. It was provided vide sub-section (2) that the expenditure disallowable shall be determined in accordance with such method, as may be prescribed. Pursuant to above provision made in the Act, Rule 8D of the Income Tax Rules was notified by the Government on 25-3-2008. In view of insertion of sub-sections (2) and (3) and Rule 8D of the Income Tax Rules a controversy had arisen. Whether above referred to sub-sections as well as Rule 8D was retrospective or prospective? It was claimed on behalf of the Department that Rule being a procedural provision was retrospective and, accordingly, would apply to earlier assessment years as well. This controversy, however, has now been settled vide decisions of the Hon'ble High Court of Mumbai in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 194 Taxman 203and of the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. v. CIT [2011] 203 Taxman 364/15 taxmann.com 390. Accordingly, now the admitted position is that upto A.Y. 2007-08 the disallowance has to be made only on the basis of sub-section (1) of section 14A of the Income-tax Act, which provides for disallowance of an expenditure incurred in relation to exempt income and, accordingly, disallowance has to be determined keeping in view the direct nexus between the exempt income and the expenditure incurred. Disallowance is to be calculated on a reasonable basis. The prescribed method in Rule 8D has no application in respect of the assessment years upto 2007-08. The provisions of sub-sections (2) and (3) of section 14A and the Rule 8D of Income Tax Rules have to be considered for the purpose of determining the disallowance in respect of A.Y. 2008-09 onwards.
2. Relevant provisions
2.1 Sub-sections (2) and (3) of section 14A -These read as under:
"(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act"
2.2 Rule 8D of the Income-tax Rules - In view of specific language of sub-section (2), the prescribed method of Rule 8D is to be applied by the Assessing Officer only if he having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of an expenditure incurred in relation to exempt income. Sub-section (3) also provides that provisions of sub-section (2) would apply where an assessee claims that no expenditure has been incurred in relation to exempt income. Accordingly, in the cases where either the assessee claims that no expenditure has been incurred or the assessee makes disallowance on the basis of his own calculations or determinations, Rule 8D can be applied by the Assessing Officer only if he is not satisfied as regards the claim of the assessee. It may further be stated that Rule 8D of Income Tax Rules also uses the same language as has been mentioned in sub-section (2) of section 14A of the Act. It also provides that the basis provided therein will be applied only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Further, the basis provided in Rule 8D for determination of an expenditure is that apart from expenditure incurred directly in relation to exempt income, proportionate disallowance on account of interest is to be made with reference to average investments to average total assets and in addition thereto, an amount equal to 0.5% of average investment is disallowable on account of administrative expenses.
Controversies in the determination of an expenditure incurred in relation to exempt income
3. In the light of provisions of section 14A of the Income-tax Act and also Rule 8D of Income Tax Rules various controversies have arisen in the context of determination of an expenditure incurred in relation to exempt income. An attempt is being made in this article to list the controversies and discuss the views expressed thereon by the appellate authorities. Major controversies have been as under:—
3.1 No interest disallowance, if investment is out of own funds or own funds are more than investments - As regards the direct expenditure incurred by an assessee in relation to exempt income, there is no controversy whether it is in the nature of interest or otherwise is disallowable. The controversy, however, is in respect of the expenditure which is not directly relatable to the investments or to the exempt income. Most important controversy in this regard is on account of disallowance of interest expenditure incurred by an assessees. In a case where the assessee has incurred interest expenditure, the Assessing Officers are invariably taking a view that proportionate disallowance in the ratio of average investments and average assets is to be made. The assessees, however, are claiming that no disallowance on account of interest is called for where the assessee is having its own sufficient funds to make investments. In such a case it becomes necessary for an assessee to prove on facts that investments have been made out of his own funds. In case an assessee is able to prove on the basis of his facts and bank statements that investments have undoubtedly been made out of own funds and no borrowed funds have been utilized, there would no case of disallowance. The controversy, however, arises in the circumstances where there are mixed funds. The Assessing Officer in such a case holds that proportionate disallowance is to be made. There are, however, following decisions of Supreme Court and High Courts wherein it has been held, in the context of interest free loans given to sister concerns, that where an assessee is having own funds more than interest free loans it should be presumed that interest free loans have been given out of own funds and no disallowance of interest is called for:—
| - | Munjal Sales Corpn. v. CIT [2008] 168 Taxman 43 (SC). | |
| - | CIT v. Reliance Utilities & Power Ltd. [2009] 178 Taxman 135 (Bom.). | |
| - | CIT v. Tin Box Co. [2004] 135 Taxman 145 (Delhi) | |
| - | CIT v. Motor Sales Ltd. [2008] 304 ITR 123 (All.) | |
| - | CIT v. Bharti Televenture Ltd. [2011] 200 Taxman 39 (Mag.)/11 taxmann.com 356 (Delhi) | |
| - | J.K. Industries Ltd. v. CIT [2011] 11 taxmann.com 72 (Cal.) | |
| - | CIT v. Indian Sugar Exim Corpn. Ltd. [2012] 206 Taxman 242/19 taxmann.com 158 (Delhi). |
In the light of the aforesaid legal position an assessee can very well argue that since he has sufficient own funds to make investments, even if he is not able to match entries of investments to interest free funds, no disallowance on account of interest is called for. Relying on above decisions, the claim of the assessee is likely to succeed. In certain cases this issue has already come up before the Courts in the context of disallowance under section 14A also and view has been taken by the High Courts and the Tribunals that no disallowance is called for where the assessee has made investments out of his own funds or the own funds available with the assessee are quite sufficient to make investments, which have given rise to exempt income. In this regard following decisions can be referred to:—
| - | CIT v. Winsome Textile Industries Ltd.[2009] 319 ITR 204 (Punj. & Har.) | |
| - | CIT v. Suzlon Energy Ltd. [Tax Appeal No. 223 of 2013, dated 3-4-2013] | |
| - | Yatish Trading Co. (P.) Ltd. v. Asstt. CIT [2011] 129 ITD 237/9 taxmann.com 164 (Mum.) | |
| - | CIT v. K. Raheja Corpn. (P.) Ltd. [IT Appeal No. 1260 of 2009, dated 8-8-2011] | |
| - | Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 (Delhi.) | |
| - | Paranjape Autocast (P.) Ltd. v. Dy. CIT [IT Appeal Nos. 1090 & 1091 (Pune) of 2010, dated 25-6-2012] | |
| - | ITO v. Strides Arcolab Ltd. [2012] 138 ITD 323/24 taxmann.com 89 (Mum.) | |
| - | Yamuna Prasad Peshwa v. Dy. CIT [IT Appeal No. 416 (Jodh.) of 2009, dated 9-12-2011] | |
| - | Dy. CIT v. Maharashtra Seamless Ltd. [2011] 48 SOT 160 (URO)/16 taxmann.com 97 (Delhi) | |
| - | Balarampur Chini Mills Ltd. v. Dy. CIT [2012] 20 taxmann.com 117 (Kol.) |
It has also been recently held by the ITAT Delhi Bench in the case of Asstt. CIT v. Keshav Shares & Stocks Ltd. [IT Appeal No. 4394/Delhi/2011, decided on 26-4-2013] that in a case where interest income is also there which has been taxed under the head Business Income, same should be set off against the interest expenditure and only the net amount of interest should be considered for determining the disallowance under Rule 8D.
3.2 Interest on loans taken for the purpose of business to be excluded for the purpose of proportionate disallowance - In the context of calculating proportionate disallowance on account of interest the Kolkatta Bench of the Tribunal in the case of Asstt. CIT v. Champion Commercial Co. Ltd. [2012] 139 ITD 108/26 taxmann.com 342 has held that interest expenditure which is directly attributable to loan taken for the purpose of earning taxable income is to be excluded from the amount of interest to be proportionately allocated. Above holding of the Tribunal is in consonance with the language of clause (ii) of sub-rule (2) of Rule 8D of the Income Tax Rules. The aforesaid clause provides for proportionate allocation of the expenditure incurred by way of interest, which is not directly attributable to any particular income or receipt. Accordingly, any interest which is directly attributable to loan taken for the purpose of earning taxable income is to be excluded. An assessee can claim and prove on the basis of fact in respect of a loan that loan had been taken for the specific purpose and had been utilized accordingly. For example, if a term loan has been taken for the purpose of purchase of plant and machinery of a particular manufacturing unit, the assessee will be able to prove on the basis of loan agreements as well as on the basis of bank statements that the amount of loan had been utilized only for the purpose of purchase of plant and machinery for the manufacturing unit and, therefore, interest relating thereto had been incurred only for the purpose of earning taxable income. Similarly, if an assessee has taken vehicle loan for purchase of vehicles no disallowance out of interest paid on such loan can be made. There would be other cases of loans also where an assessee can prove that the loan has been taken and utilized only for the purpose of business. Hence, disallowance of interest on proportionate basis is to be determined with reference to interest paid on loans commonly used for the purpose of business and investments.
3.3 Disallowance where shares are held as stock-in-trade - Special Bench of the ITAT Mumbai had taken a view in the case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 that disallowance is to be made in respect of shares held as stock-in-trade also. The aforesaid view has been subject matter of controversy and discussion in other cases. It is being claimed by the assessees that since shares held as stock-in-trade are held as part of its business asset and income arising on sale and purchase of shares is in the nature of business income, which is taxable, no disallowance on account of interest as well as other expenditure in relation to such holding can be made. Dividend income is only incidental income in such cases. This controversy has been considered by the Courts and various Benches of the Tribunals and almost a consistent view is now emerging that no disallowance can be made under section 14A of the Income-tax Act where shares are held as stock-in-trade. In this regard reference can be made to decisions in the following cases:—
| - | CIT v. Smt. Leena Ramachandran [2011] 199 Taxman 122 (Mag.)/10 taxmann.com 109 (Ker.) | |
| - | CCI Ltd. v. Jt. CIT [2012] 206 Taxman 563/20 taxmann.com 196 (Kar.) | |
| - | Apoorva Patni v. Addl. CIT [2012] 54 SOT 9 (URO)/24 taxmann.com 223 (Pune.) | |
| - | Dy. CIT v. India Advantage Securities Ltd. [IT Appeal No. 6711 (Mum.) of 2011, dated 14-9-2012] | |
| - | Esquire (P.) Ltd. v. Dy. CIT [IT Appeal No. 5688 (Mum.) of 2011, dated 29-8-2012] | |
| - | Dy. CIT v. Gulshan Investment Co. Ltd. [2013] 31 taxmann.com 113 (Kol.) | |
| - | Ethio Plastic (P.) Ltd. v. Dy. CIT [IT Appeal No. 848 (Ahd.) of 2012, dated 10-12-2012] | |
| - | Asstt. CIT v. Keshav Shares & Stocks Ltd. [IT Appeal No. 4394/Delhi/2011, dated 26-4-2013] |
In the context of above controversy language of Rule 8D of the Income Tax Rules is also very important. The language used in Rule 8D for the purpose of disallowance is "Investments". Investments cannot include shares held as stock-in-trade. Investments would imply only the shares which have been held as investments. Accordingly, the language of Rule 8D also supports the proposition that no disallowance is called for in a case where shares are held as stock-in-trade.
3.4 Disallowance under section 14A on account of depreciation - A controversy has also come up before the Special Bench of the ITAT, Ahmedabad in the case of Vishnu Anant Mahajan v. Asstt. CIT [2012] 137 ITD 189/22 taxmann.com 88 in the context of disallowance of depreciation in respect of car maintained by the assessee. The Tribunal has held that depreciation is not in the nature of an expenditure, being a statutory allowance as per section 32 of the Income-tax Act and, accordingly, same is not covered under section 14A of the Income-tax Act.
3.5 Disallowance is to be made even if no income is earned during the year - A controversy has arisen in certain cases to the effect that disallowance can be made even if no income has been earned by an assessee which has been claimed as exempt during the year. If we look at the language of section 14A of the Income-tax Act, it provides for disallowance of an expenditure incurred in relation to income which does not form part of total income. In case there is no exempt income during the year, it can very well be argued that no disallowance is called for, as no expenditure can be said to be incurred in relation to income which does not form part of total income. The Rule, 8D, however, provides for disallowance of an expenditure in respect of an income, which does not or shall not form part of total income. Accordingly, the language of the Rule goes beyond the language of section 14A of the Income-tax Act and also provides for disallowance with reference to income which shall not form part of the total income. Further, in the light of the intention of the Legislature one can say that an expenditure which has been incurred by an assessee which is likely to give rise to exempt income, irrespective of the fact whether income has been earned during the year or not, such expenditure is not allowable. For example, if an assessee has incurred an expenditure on agriculture activities, same cannot be claimed as deduction even if there is no income from agriculture activities during the year. View, to the effect that disallowance is to be made even if there is no income earned during the year, has been taken by the Tribunal in the cases ofCheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi)(SB)and Sanchayita Mercantile (P.) Ltd. v. Asstt. CIT [2008] 25 SOT 57 (Mum.). Recently the Chandigarh Bench of the Tribunal, however, has taken a view in the case of Gurdas Mann v. Dy. CIT [2013] 31 taxmann.com 392 that no disallowance was to be made since there was no dividend income. Notwithstanding above controversy, the fact whether exempt income has been received during the year or not can definitely be one of the important factors to decide the quantum of an expenditure incurred.
3.6 Expenses incurred on statutory compliances in case of company are allowable - Another claim which can justifiably be raised by an assessee is to the effect that the expenditure incurred by an assessee, which is a company, for the purpose of statutory compliances, cannot be subject matter of disallowance for the reason that a company is mandatorily required to incur such an expenditure, irrespective of the fact that any activity has been undertaken by it or not. Accordingly, such an expenditure cannot be said to be incurred in relation to exempt income. In regard to legal proposition that in case of companies expenditure incurred on statutory compliances is in the nature of allowable expenditure, reference can be made to decisions made in the following cases:—
| - | CIT v. New Savan Sugar & Gur Refining Co. Ltd.[1991] 55 Taxman 189 (Cal.) | |
| - | CIT v. Ganga Properties Ltd. [1992] 62 Taxman 285 (Cal.) | |
| - | CIT v. Rampur Timber & Turnery Co. Ltd. [1981] 6 Taxman 241 (All.) | |
| - | Daljeet Export (Ind.) (P.) Ltd. v. ITO [1991] 36 ITD 305 (Delhi) |
3.7 Revision under section 263 on the issue of disallowance under section 14A of the Income-tax Act - This issue had come up for consideration before the Hon'ble Delhi High Court in the case of CIT v. DLF Ltd. [2013] 214 Taxman 91/31 taxmann.com 158. In the facts of above case the assessee had made certain disallowance, which was accepted by the Assessing Officer. The CIT passed the order under section 263 of the Income-tax Act holding that the disallowance under section 14A was not examined. The High Court held that issue was debatable and, therefore, CIT could not exercise the powers under section 263 of the Income Tax Act. The Hon'ble Calcutta High Court, however, in the case of CIT v. RKBK Fiscal Services (P.) Ltd. [2013] 214 Taxman 89/32 taxmann.com 153 took a view that it was the responsibility of the assessee to give one-to-one co-relation between the funds available and funds deployed in the investments for the purpose of determining the disallowance on account of interest. Since the Assessing Officer had not examined the same, CIT was justified in passing the order under section 263 of the Income-tax Act.
3.8 No adjustment under section 115JB for disallowance on notional basis as per rule 8D - It has been held by the different Benches of the Tribunals in the following cases that adjustment under section 115JB of the Act cannot be made for disallowance determined on a notional basis. The argument in this context is that language of clause (f) of the Explanation to section 115JB is pari materia to language of sub-section (1) of section 14A of the Act. Accordingly, the expenditure incurred in relation to exempt income can only be adjusted under section 115JB of the Act and disallowance made on a notional basis cannot be adjusted.
| - | Goetze India Ltd. v. CIT [2009] 32 SOT 101 (Delhi.) | |
| - | Quippo Telecom Infrastructure Ltd. v. ACIT [IT Appeal No. 4931/Delhi/2010, dated 18-2-2011] | |
| - | Essar Teleholdings Ltd. v. Dy. CIT [IT Appeal No. 3850 (Mum.) of 2010, dated 29-7-2011] | |
| - | Asstt. CIT v. Spray Engineering Devices Ltd. [2012] 53 SOT 70 (URO)/23 taxmann.com 267 (Chd.) |
3.9 Disallowance on account of administrative expenses in respect of assessment year 2008-09 onwards - The issue regarding disallowance on account of administrative expenses w.e.f. A.Y. 2008-09 has become very important for the reason that technically Rule 8D is held to be applicable from A.Y. 2008-09 and as per the Rule 0.5% of average investments is disallowable on account of administrative expenses. It goes without saying that in such cases there can be no definite basis for determination of an expenditure incurred in relation to exempt income by an assessee for the obvious reason that in most of the cases there are multifarious activities and no separate identifiable expenditure would be incurred in relation to investment activity, which has given rise to exempt income. Therefore, the issue arises that on what basis the assessee should offer the disallowance on account of administrative expenses in terms of section 14A of the Income-tax Act and what are the parameters for an Assessing Officer to hold that he is not satisfied as regards the correctness of the claim made by an assessee in regard to quantum of an expenditure disallowable? In this context it can very well be argued by the assessees that in terms of sub-section (1) of section 14A of the Act an expenditure incurred in relation to exempt income is disallowable. Therefore, the assessee is required to determine and quantify the expenditure disallowable applying the reasonable parameters. The Assessing Officer can disregard the basis adopted by the assessee only when there are strong reasons available with him to hold that the quantification made by the assessee is not correct. Further, it is also worth mentioning that in many cases amount disallowable, keeping in view the specific facts of an assessee, may be small amount whereas applying formula of 0.5% provided in Rule 8D would result in a substantial amount of disallowance. In such a case holding by the Assessing Officer, that he is not satisfied as regards the quantum of disallowance made by the assessee and, accordingly, he has powers to determine the disallowance in terms of Rule 8D, cannot be said to be correct and justified stand of the Assessing Officer.
Assessing Officer is required to record as to why disallowance offered by assessee is not correct before invoking Rule 8D
4. As matter of clear legal mandate it has already been held by the Tribunals in a number of cases that the Assessing Officer is required to record satisfaction as to why the disallowance offered by an assessee is not correct before invoking Rule 8D. In this regard recent decision of the Hon'ble Mumbai Bench of the Tribunal in the case of Kodak India (P.) Ltd. v. Addl. CIT [IT Appeal No. 7349/Mum./2012, dated 30-4-2013] can be referred to wherein the Hon'ble Bench has observed as under:—
"106. In our opinion, Rule 8D is not automatic, it is for the AO to examine, at the outset, the correctness of the claim of the assessee, whether he has incurred any expenditure or not and has to give a definite finding, as to how the claim of the assessee is unacceptable. If, on examination, it is found that such expenditure is lower than the disallowance, as computed under Rule 8D, then actual expenditure, as estimated by the AO would have to be disallowed. If, on the other hand, the assessee is able to substantiate on facts, that the exempt income does not bear any cost/expenditure, in such cases, disallowance under section 14A, may become invalid.
107. As observed above, Rule 8D cannot be invoked directly and mechanically, i.e., without giving a detailed and speaking reasons. Bald statement, made by the AO that he has referred to the accounts, does not give him an automatic jurisdiction to invoke the provisions of section 14A read with Rule 8D. Disallowance, made on such basis is not permissible."
In the light of above holding of the Tribunal and also the logical interpretation of section 14A and Rule 8D of the Income Tax Rules, it is stated that it is the requirement of the law that facts of each case have to be examined by the Assessing Officer and the expenditure, as is relatable to the exempt income, is to be disallowed. Sub-section (1) of section 14A is the basic and primary provision, which provides for disallowance of an expenditure incurred in relation to exempt income. Sub-section (2) is only supplementary to provisions of sub-section (1) and cannot override the same. In any case language of sub-section (2) also makes it clear that Rule 8D can be invoked only if the Assessing Officer is not satisfied as regards the claim of the assessee. In these circumstances it becomes necessary for an assessee as well as for the Assessing Officer that disallowance should be determined on a reasonable basis. Therefore, the assessees should make the disallowance in the return of income on account of administrative expenses on a reasonable basis, duly supported by the facts of the case and the expenditure incurred. The disallowance should be duly authenticated by the auditors in the Tax Audit Report after giving the basis and calculations thereof. As and when the Assessing Officer raises the query during the course of the assessment proceedings a detailed explanation should be given alongwith full facts justifying the disallowance offered in the return. In case the assessee is able to justify the amount of disallowance with reference to facts, the Assessing Officer will have no power to invoke the basis provided in Rule 8D and the disallowance as offered by the assessee has to be accepted by the Assessing Officer. In case the Assessing Officer is not satisfied as regard the quantum of disallowance, the expenditure, as is estimated by him, will only be disallowable, if same is less than the amount disallowable as per the Rule 8D of the Income Tax Rule. This is the clear holding of the Mumbai bench in the above-mentioned case of Kodak India Pvt. Ltd. (supra). In other words, it is stated that the Assessing Officer cannot make disallowance as per Rule 8D disregarding the quantum of actual expenditure incurred.
4.1 Relevant case laws - It cannot be said that Assessing Officer has no power to determine the amount of disallowance with reference to actual expenses incurred and he has to mandatorily follow the basis provided for in Rule 8D of I.T. Rules. In regard to determination of quantum of expenses disallowable under section 14A of the Act on a reasonable basis, which can be adopted by an assessee or by the Assessing Officer, reference can be made to the following decisions:—
4.1.1 Asstt. CIT v. Oriental Structural Engineers (P.) Ltd. [IT Appeal No. 4245 (Delhi) of 2011, dated 2-12-2011] – affirmed by Delhi High Court in ITA No. 605/2012 decided on 15-1-2013 - In the facts of this case the Assessing Officer had made the disallowance by applying Rule 8D. The CIT(A) apart from the interest disallowance, had restricted the disallowance on account of administrative expenses to the extent of 2% of dividend income earned during the year. The Tribunal had also upheld the basis adopted by the CIT(A). The Department had also gone in appeal before the Hon'ble Delhi High Court against the order of the Tribunal. It was argued before the Hon'ble High Court that Rule 8D of the Income Tax Rules had not been applied in this case and it was a case for A.Y. 2008-09. The Hon'ble High Court, however, upheld the order of the Tribunal wherein disallowance was restricted to 2% of dividend income, disregarding Rule 8D of the Income Tax Rules.
4.1.2 J.K. Investors (Bombay) Ltd. v. Asstt. CIT [IT Appeal Nos. 7851 & 7858/Mum./2011, dated 13-3-2013] - In the facts of the above case the assessee apart from expenditure incurred on account of interest and DEMAT charges had offered disallowance of Rs. 10,000 on account of administrative expenses. The contention of the assessee was that there were only six dividend receipts, though the dividend income was of Rs. 8.14 crores and one of them was transfer through ECS. Further, there was also income of Rs. 25 lakhs on mutual fund which was earned through re-investments. Therefore, there was hardly any administrative expenditure incurred. The Assessing Officer, however, had made disallowance of Rs. 83.58 lakhs. The Hon'ble Tribunal after a detailed discussion upheld the disallowance made by the assessee of Rs. 10,000 on account of administrative expenses, keeping in view the facts of the case. This was also a case related to A.Y. 2008-09.
4.1.3 Escorts Ltd. v. Asstt. CIT [2007] 104 ITD 427 (Delhi) - In the facts of this case relating to an earlier year, the assessee had earned dividend income of Rs. 8.9 crores and interest income of Rs. 10.13 crores which were claimed as exempt. The Assessing Officer determined the disallowance at Rs. 2.01 crores. It was claimed by the assessee that it had primarily incurred administrative expenses only for the purpose of carrying on the business and not for the purpose of earning exempt income. After examining the details the CIT(A) had restricted the disallowance to Rs. 21.70 lakhs. The Tribunal while considering the case had observed that estimate was inevitable, the estimate could not be made by the Assessing Officer on thumb rule basis and the assessee had primarily incurred expenditure for the purpose of carrying on its business. Accordingly, the Tribunal held that an ad hoc disallowance of Rs. 2 lakhs would meet the ends of justice.
4.1.4 Jt. CIT v. Pilani Inv. & Ind. Corpn. Ltd. [IT Appeal No. 653/Kol./2012, dated 4-2-2013] - The case related to the assessment year 2008-09. The facts of the case as discussed in the order of the Tribunal revealed that the Assessing Officer had himself adopted the basis of tax exempt receipts to gross total receipts for determining the administrative expenses disallowable.
Conclusion
5. The assessees should make disallowance under section 14A of the Act on a reasonable basis in the light of actual expenses incurred. The basis should be duly disclosed in the return and it should be such a disclosure which the assessee will be able to substantiate when a question is raised by the Assessing Officer. In the light of facts and the holdings in the various decisions mentioned above, the basis can be volume and the frequency of the transactions. It can be the receipts of exempt income to the receipts/turnover of other activities or any other basis as may be suitable in the facts of the case. The Assessing Officer, while examining the claim of the assessee, should carefully go into the facts of the case and also the basis adopted by the assessee. In case the basis and the quantum of disallowance made by the assessee are justified in the light of the facts of the case, same should be accepted. In case the basis adopted by the assessee is not correct in view of the Assessing Officer, he should give a holding as regards the facts as to why the basis adopted by the assessee is not correct and how another basis would be more appropriate. Further, he should also determine the quantum of an expenditure as has been incurred in his view, either on the basis adopted by the assessee or on another basis, which is appropriate in his view. In case quantum of expenditure incurred, as is estimated by the Assessing Officer, is more than the amount of disallowance offered by the assessee, the Assessing Officer should make the disallowance on the basis of his estimate of actual expenditure, in case same is lower than the disallowance as per Rule 8D. If estimated actual expenditure is more than the disallowance as per Rule 8D, the Assessing Officer should make the disallowances as per Rule 8D. It is also suggested that the CBDT, in the interest of avoiding litigations, should clarify the position and also suitably modify Rule 8D. Further, it is also suggested that since determination of an expenditure on an estimated basis is practically difficult, the Rule should provide for the disallowance, based on a percentage of exempt income, limited to the disallowance as per Rule 8D.
Regards
Prarthana Jalan
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