Tribunals
Summary and Review of Case Laws Decided by Income Tax Appellate Tribunals
Tuesday, 01 September 2015 11:35

Section 14A - When nexus between the investments made and expenditure incurred cannot be established disallowance u/s 14A cannot be made - Personal, administrative, selling & distribution & other expenses should be excluded - Delhi Tribunal

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Gist

When nexus between the investments made and the expenditure incurred cannot be established disallowance u/s 14A cannot be made. Further, personal expenses, administrative and other expenses and selling & distribution expenses should not be considered for the purposes of disallowance u/s 14A of the Act. A.O. has to follow Sub-section (2) of section 14A of the Act which provides the manner in which the AO is to determine the amount of expenditure incurred in relation to income, which does not form part of the total income.

Facts

1. Assessee is engaged in the business of mining activities for extraction of raw clay matrix which is used by processed clay manufacturers

2. Assessee filed return of income declaring loss of Rs. 5,01,052/-

3. Assessee made investments in Thapar Group of Companies for earning exempt income and also controlling stakes and earned dividend income amounting to Rs. 17,62,49,648/-

4. Case was selected for scrutiny through CASS and notices u/s 143(2) were issued

5. The Assessing Officer invoked provisions of section 14A read with Rule 8D and has disallowed the expenses relating to earning exempt income to Rs. 2,27,77,769/- comprising of the following:

i. Under Rule 8D(2)(i) : Rs. 8,69,481/-
ii. Under Rule 8D(2)(ii) : Rs. 1,28,38,570/-
iii. Under Rules 8D(2)(iii): Rs. 90,69,798/-                      

                        Total Rs. 2,27,77,769/-

6. Assessee preferred an appeal before the CIT(A) who confirmed the addition u/s 14A

7. Being aggrieved by the CIT(A)'s order assessee moved to Tribunal

8. After hearing both parties Tribunal deleted the addition and restricted it to Rs.1,39,39,685/- the amount voluntarily declared by the assessee in its return of income

Adjudication

In view of the above details, we find that there was no expenditure having proximate nexus / direct relation with investment in shares
or earning of exempt dividend income therefrom except for interest income, loss on sale of investments, depository charges and common expenses. It was, therefore, pleaded that personal expenses, administrative and other expenses and selling & distribution expenses should not be considered for the purposes of disallowance u/s 14A of the Act. We find force in the argument of the ld. A.R in this regard.

We also find that the AO has neither recorded his satisfaction nor given reasons as to how the claim of expenditure in relation to tax free income has not been correctly made by the assessee as envisaged under section 14A(2) and has mechanically invoked Rule 8D. Sub-section (2) of section 14A of the Act provides the manner in which the AO is to determine the amount of expenditure incurred in
relation to income, which does not form part of the total income.

Neither AO nor Ld. CIT(A) has established any nexus between the investments made and the expenditure incurred under the head “administrative and other expenses, personal expenses, selling and distribution expenses”. On these facts and circumstances of the case the AO is directed to delete the extra addition of Rs90,69,798/- made u/s 14A read with Rule 8D of the IT Rules.

Cases referred to

Maxopp Investment Ltd. vs. CIT 347 ITR 272

CIT vs. Walfort Share & Stock Brokers: 326 ITR 1 (SC)

Godrej & Boyce Mfg cs. Ltd. v. CIT: 328 ITR 81 (Bom.)

CIT vs. Hero Cycles: 323ITR 518 (P&H)

CIT v. Metalman Auto P. Ltd.: 336 ITR 434 (P&H)

CIT v. Reliance Industries Ltd. : 339ITR 632 (Bom)

CIT Vs Ms. Sushma Kapoor: 3I9 ITR 299 (Delhi)

Additional Info

Read 3664 times Last modified on Saturday, 13 February 2016 16:04
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