2017 (10) TMI 1463 - AT - Income Tax

Tribunal decision on tax deductions: Section 14A & Rule 8D applied, interest and expenses limits set

The Tribunal held that Section 14A with Rule 8D applies to calculate deductions under Section 80P(2)(d), but disallowed interest expenditure under Rule ... Deduction u/s 80P(2)(d) on account of interest and dividend income earned and rental income earned for letting out of godown, etc. - section 14A r.w.r. 8D applicability while working out the claim of deduction u/s 80P(2)(d) - HELD THAT:- We find that the Ld. DR has rightly pointed out that the issue has already been dealt with by the Hon'ble jurisdictional High Court in the case of Punjab State Cooperative Milk Producers Federation Ltd. vs Commissioner of Income Tax & Anr. [2011 (3) TMI 615 - PUNJAB AND HARYANA HIGH COURT] wherein the applicability of the said section has been upheld. Applicability of rule 8D r.w.s. 14A has been upheld in the case of the assessee by the Tribunal and accepted by the assessee in preceding years. Therefore, we find no merit in the contention of the assessee that section 14A r.w.r. 8D is not to be applied for the purpose of calculating the deduction allowable u/s 80P(2)(d) of the Act. Enough surplus funds which are interest free and which is demonstrated from the quantum of share capital and reserves available with the assessee over the years - If an assessee establishes that its interest free funds were equal to or more than the interest bearing funds it would be open to it to contend that presumption arises that the expenditure for earning interest income was incurred from out of its interest free funds warranting no disallowance of interest expenditure u/s 14A r.w.r. 8D. Disallowance made on account of interest expenditure as per rule 8D(2)(ii) of the Rules be deleted. We direct that the expenses to be disallowed under rule 8D(2)(ii) be calculated by taking into account only those investments which have earned income during the year. Section 14A r.w.r. 8D is applicable for working out the deduction claimed u/s 80P(2)(d) by the assessee and that no disallowance of interest expenditure is allowable as per Rule 8D(2)(ii) while the expenditure to be disallowed as per Rule 8D(2)(iii) is to be calculated by taking into consideration only those investments which have earned income during the year. Denial of deduction u/s 80P(2)(e) - rental income earned by it from letting out of godowns for storage processing etc. - HELD THAT:- Undoubtedly, the assessee had been denied claim of deduction u/s 80P(2)(e) of the Act by the Ld.CIT(Appeals) following the order of the CIT(Appeals) in assessee’s case for assessment year 2011-12. As rightly pointed out by assessee in the said order the assessee had been denied deduction for want of evidence substantiating his claim of having earned rental income by letting out of godowns, warehousing, etc. As also rightly pointed out by the assessee the said evidence in the present case had admittedly been filed before the Ld.CIT(Appeals). Clearly, therefore, the Ld.CIT(Appeals) had erred in following his order for assessment year 2011-12 and dismissing assessee’s claim for deduction for want of evidence when the same had actually been filed before him - restore the matter back to the file of the Ld.CIT(Appeals) to adjudicate the issue afresh in the light of evidences filed by the assessee substantiating his claim and in accordance with law after giving due opportunity of hearing to the assessee. Issues Involved:1. Disallowance of deduction claimed under Section 80P(2)(d) of the Income Tax Act, 1961, for interest and dividend income.2. Disallowance of deduction claimed under Section 80P(2)(e) of the Income Tax Act, 1961, for rental income derived from letting out godowns.Detailed Analysis:Issue 1: Disallowance of Deduction under Section 80P(2)(d)Background:The assessee, an apex cooperative society, claimed a 100% deduction under Section 80P(2)(d) for interest and dividend income without reducing any proportionate expenditure. The Assessing Officer disallowed this claim, invoking Section 14A read with Rule 8D of the Income Tax Rules, 1962.Arguments:- Assessee's Contentions:1. Section 14A read with Rule 8D is not applicable as the issue pertains to incomes allowed deduction under Chapter VI-A.2. No disallowance of interest expenditure under Rule 8D(2)(ii) should be made since the assessee had sufficient own funds for the investments.3. Disallowance under Rule 8D(2)(iii) should be restricted to investments that actually earned income during the year.- Revenue's Contentions:1. Section 14A read with Rule 8D is applicable, supported by the jurisdictional High Court's ruling in Punjab State Cooperative Milk Producers Federation Ltd. vs. Commissioner of Income Tax.2. Mixed funds available with the assessee justify the application of Rule 8D(2)(ii).Tribunal's Findings:1. Applicability of Section 14A:- The Tribunal upheld the applicability of Section 14A read with Rule 8D, referencing the jurisdictional High Court's decision and previous Tribunal rulings accepted by the assessee in preceding years.2. Disallowance of Interest Expenditure:- The Tribunal agreed with the assessee that sufficient own funds were available, negating the need for disallowance under Rule 8D(2)(ii). This was supported by the High Court's decision in CIT vs. Max India Ltd.3. Administrative Expenses:- The Tribunal accepted the assessee's contention that disallowance under Rule 8D(2)(iii) should be limited to investments earning income during the year, citing the Special Bench of ITAT and the Delhi High Court's ruling in ACB India Ltd. vs. ACIT.Conclusion:The Tribunal held that Section 14A read with Rule 8D is applicable for calculating the deduction under Section 80P(2)(d). However, no disallowance of interest expenditure is warranted under Rule 8D(2)(ii), and administrative expenses disallowed under Rule 8D(2)(iii) should be limited to income-earning investments. Ground No. 2 was partly allowed.Issue 2: Disallowance of Deduction under Section 80P(2)(e)Background:The assessee claimed a deduction under Section 80P(2)(e) for rental income from letting out godowns. The Assessing Officer denied this claim, citing a lack of provision in the assessee's objects and insufficient evidence. The CIT(A) upheld the disallowance based on the previous year's order.Arguments:- Assessee's Contentions:- Unlike the previous year, evidence substantiating the rental income was filed during the assessment proceedings.- Revenue's Contentions:- The CIT(A)'s order was justified based on the previous year's findings.Tribunal's Findings:1. The Tribunal noted that the CIT(A) erred in dismissing the claim for want of evidence when such evidence was indeed filed.2. The matter was remanded back to the CIT(A) for fresh adjudication, considering the evidence provided by the assessee.Conclusion:The Tribunal restored the issue to the CIT(A) for a fresh decision based on the evidence submitted by the assessee. Ground No. 3 was allowed for statistical purposes.Final Order:The appeal of the assessee was partly allowed, with specific directions for re-evaluation of the disallowance under Sections 80P(2)(d) and 80P(2)(e) based on the Tribunal's findings and applicable legal precedents.