During the year under consideration, the assessee received dividend income of Rs. 16,83,27,131 which was claimed to be exempt from tax. A disallowance of Rs. 1,34,95,120 was made u/s 14-A of the Act on account of expenses attributable to the said exempt income. The said disallowance comprises of interest at Rs. 1,28,72,969/- being 35% of the total interest which, according to the assessee, was the ratio between the investment fetching tax free income and total investment. The balance disallowance of Rs. 6,22,151/- was made on account of salary paid to a treasury person who, according to the assessee, was looking after the activity of earning tax free income.
The AO contended that the decision to make further investment in the shares cannot be taken by a person who handles the Treasury Section. The decision for further investment is always taken by Board of Directors. Thus, there is always an element of expenditure involved which is directly linked with dividend income. Therefore, the assessee’s contention to consider only salary to a treasury person is not correct and rejected. The A.O. worked out the total disallowance of expenses u/s 14-A at Rs. 2,94,20,393/- by applying Rule 8-D and since the assessee had already offered a disallowance of Rs. 1,34,95,120/-, a further disallowance of Rs. 1,59,25,273/- u/s 14A was proposed by the assessee in the draft assessment order.
- The disallowance offered by the assessee was worked out on reasonable basis and the A.O. had also accepted the same in principle in so far as it was related to interest expenditure.
- As regards the disallowance on account of administrative expenses, the assessee was providing administrative support services to the concerned subsidiaries and joint venture companies and since the amount of Rs. 25.87 crores charged for such services was offered to tax, the administrative expenses incurred by the assessee were attributable to the said taxable income and not to the tax free income.
- Besides the salary paid to the said staff member, there was no other expenditure required to be incurred by the assessee to make investments in the subsidiaries and joint venture companies
- There being no reason whatsoever given by the A.O. to show his satisfaction that disallowance offered by the assessee was not reasonable, there was no justification to make further disallowance u/s 14-A of the Act.
- The investment activity of the assessee resulting in exempt dividend income of Rs. 16.83 crores was the substantial activity and it cannot be accepted that this entire activity was looked after and handled by one Treasury person drawing the salary of Rs. 6,21,151/-.
- The administrative expenses incurred by the assessee thus were certainly attributable to the investment activity also which fetched the exempt of dividend income of Rs. 16.83 crores and the same therefore were required to be allocated to the exempt dividend income on some reasonable basis.
- The basis adopted by the assessee to attribute the administrative expenses only to the extent of salary of one Treasury staff thus was not reasonable and the findings to this effect was recorded by the A.O. in para 7.4 of his final order giving specific reasons for not accepting the submissions made by the assessee to justify the quantum of disallowance offered u/s 14-A of the Act.
- Having found that the disallowance offered by the assessee on account of administrative expenses u/s 14-A of the Act was not reasonable, the A.O., in our opinion, was fully justified in applying the basis or the formula given in Rule 8-D(2)(iii) of the Income Tax rules, 1962 to compute the disallowance u/s 14-A of the Act on account of other expenses.
- Therefore, the disallowance u/s 14-A as computed by the A.O. is quite reasonable.
Other Issue in the order:
Payment of subscription towards brand equity : The payment in question not only permitted the use of TATA name but also gave an opportunity to the assessee to inform the business world that it was having the back up of excellence, with a code of conduct and a promise of quality. It was held that the fact that the TATA group was already having an infrastructure and brand equity was well established and by making such a contribution, the assessee company was benefited in its day-to-day business. The ITAT relied on the decision in the case of Rallis India, where it was held that the payment was made for acquiring non-exclusive licence to use the logo for the purpose of business was held to be allowable u/s 37(1) of the Act being the expenditure wholly and exclusively incurred for the purpose of business.