By TIOL News Service

NEW DELHI, JULY 03, 2014: THE issues before the Bench are - Whether disallowance u/s 14A is warranted, when the disallowance suo motu made by the assessee is itself more than the disallowance envisaged under Rule 8D and Whether it can be presumed that the assessee must have had incurred some administrative expenditure for earning the exempted income, although the AO has failed to return any finding on expenditure incurred by the assessee. And the verdict goes against the Revenue.

Facts of the case

The assessee, a company is engaged in full bouquet of travel services. It has grown to be one of the largest Complete Travel Management companies in India, with each of its products and services bearing the distinct ISO 9001 quality benchmarking. The assessee had claimed depreciation @60% on computer, UPS and printers, etc. The assessee had dividend income on which it allowed himself expenses relating to the earning of the dividend. AO concluded that UPS, printers, etc., were not part of computer, but part of machinery, therefore reduced depreciation @ 15%. Whereas, in respect of the expenses incurred on dividend income the AO asked the assessee to further furnish clarification. The assessee submitted no expenses had been incurred for earning the exempted income, therefore such allowance should be allowed. The AO rejected the submission of the assessee, invoked the provisions of Rule 8D and made a disallowance in regard to the expenses incurred.

Aggrieved the assessee filed an appeal before the CIT(A), which was allowed. Hence, the present appeal of the Revenue. Before the Tribunal, the counsel of the assessee pleaded that during its computation of income filed along with the return of income, the assessee had suo motu added back Rs. 1,15,394/ which was more than the disallowance that could possibly had been made under the provisions of Rule 8D (2) (iii). It was further submitted that the assessee had not incurred any interest expenditure for making investment in mutual funds and no interest bearing borrowings, taken in the earlier years, was for the purpose of making investment in shares/mutual funds.

Having heard the parties, the Tribunal held that,

Depreciation on computer, UPS and printers

++ further, it has been brought to our notice that vide order dated 15.12.2011, passed in ITA No.1284 of 2011 in the case of 'Birla Soft Ltd.', the High Court again decided the matter in favour of the assessee, following 'BSES Rajdhani Powers Ltd.' The SLP filed by the department against the aforesaid order of the High Court in the case of 'Birla Soft Ltd.' also stands dismissed vide order dated 14.02.2014 in SLP (Civil) No.20645/2012. In view of the above, Ground No.1 is rejected;

++ we have heard the parties on this issue and have perused the material on record with regard thereto. The assessee has maintained all through that no expenses were incurred for earning the exempt income of Rs. 37,92,143/- by way of dividend. The AO made disallowance of 0.5% of the average investment of Rs. 2 crore, amounting to Rs. 1 lac. At the outset, undisputedly, the assessee had itself added back Rs.1,15,395/- in its computation of income in this regard. Therefore, the disallowance suo motu made by the assessee was itself more than the disallowance envisaged in the formula provided by Rule 8D of the Rules. Therefore, on this short score, no further disallowance was called for and the AO erred on this count;

Disallowance u/s 14A

++ it is on record, as before the taxing authorities also, that the assessee had not incurred any expenditure during the year. Also, no loans were taken to make investment in mutual funds. In fact, as available which is a copy of Schedule-6 to the audited financial statement of the assessee for the year under consideration, the total investment in mutual funds and equity shares. No fresh borrowing was made by the assessee as per the assessee's balance sheet;

++ in the present case, to reiterate, from the facts as discussed, it is evincible that though she was required to do so, the AO did not return a finding that the claim of the assessee that no expenses had been incurred for earning the exempt income, was incorrect. She merely held that administrative expenses had to be incurred for earning of exempt income also. The rejection of the assessee's claim in this manner is found to be improper and the CIT (A) correctly reversed the action of the AO by deleting the disallowance made.

(See 2014-TIOL-402-ITAT-DEL)