The Delhi High Court (HC), in its recent judgment chaired by Justice Vibhu Bakhru and Justice Purushaindra Kumar Kaurav viewed against the decision of the Income Tax Appellate Tribunal (ITAT) that the reduction of disallowance under section 14A of the Income Tax Act, 1961 on Ad-hoc basis.
This appeal was preferred by the Revenue by raising an issue that whether ITAT is right in restricting the disallowance under Section 14A of the Income Tax Act on ad-hoc figures of Rs. 1 lakh when the disallowance under Rule 8D of Income Tax Rule, 1962 comes to Rs.8,53,916/-.
The fact is that the assessee received the dividend from mutual funds aggregating to ₹46,20,578/-, which was not taxable.
The claim of the assessee before the Assessing Officer (AO) that it had not incurred any expenditure that was relatable to the said income that is the Dividend. It claimed that the investment was a ‘passive investment’ and was monitored and managed by a group company, Zuari Investments Ltd., without any charges.
The Assessee also stated that it had not incurred any expenditure on interest on any financial assistance availed by it, therefore, there was no question of any investment in mutual funds being made out of interest-bearing loans or advances.
Further claimed that the dividends received from mutual funds were automatically re-invested and therefore, there were no direct administrative costs involved in obtaining the said dividends.
The AO did not accept that there were no inbuilt costs to earn from the “passive investment” and that there were bound to incidental expenditures of “collection, telephone, follow up even director’s time and energy.”
The AO, thereafter, proceeded to disallow ₹8,53,916/- under Section 14A of the Income Tax Act that is the calculated amount of disallowance at 0.5% of the average investment (the mean of the opening and the closing investment calculated at ₹17,07,83,341/-).
The assessee then preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. However, CIT(A) upheld the decision of the AO and rejected the Assessee’s appeal.
Further, the assessee filed an appeal before the ITAT where the Assessee had substantiated its aforesaid claim by stating that the investments and the dividends earned were automatically re-invested.
The tribunal held that the expenditure towards the deployment of manpower for monitoring dividends from mutual funds and its subsequent redevelopment could not be ruled out. Considering the facts, the learned Tribunal reduced the disallowance from ₹8,53,916/- to ₹1,00,000/- on an ad-hoc basis. Thus, the tribunal rejected the appeal for the revenue on the same.
Aggrieved by the act of the Tribunal, Revenue preferred an appeal before the HC on the reduction from ₹8,53,916/- to ₹1,00,000/- of disallowance under Section 14A of the Income Tax Act. Before the bench, the Revenue contended that that reduction on an ad-hoc basis is not permissible.
On the contention of the revenue, the bench viewed that once the Revenue Authorities have found no reason to doubt the Assessee’s claim that the investments have been managed by a group of companies without levy of charge, it may not be open for the tribunal to disallow expenditure on the basis that some deployment of manpower for managing the investment cannot be “ruled out”.
Moreover, the appeal was not preferred by the assessee, the aggrieved party. Further, it was held that there is no substantial question of law, dismissing the appeals filed by the revenue.
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