2019 (7) TMI 1621 - AT - Income Tax

ITAT Mumbai rules in favor of Assessee on Section 14A disallowance, netting interest expenses against income

The ITAT Mumbai allowed the Assessee's appeal, ruling in their favor on the disallowance under Section 14A of the Act r.w.r 8D. The court held that ... Disallowance u/s 14A r.w. Rule 8D (2)(ii) of the Rules - HELD THAT:- We are of the view that the disallowance of interest expenses should be made after the net off interest only. Accordingly, this issue is decided in favour of the assessee against the revenue in the manner as indicative above. Expenditure in view of the provisions u/s 14A of the Act r.w. Rule 8D (2)(iii) of the Rules - HELD THAT:- In the case decided by Special Bench of Delhi titled as ACIT Vs. Vireet Investment P. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] it is specifically held that those investments which yielded the exempt income is liable to be considered for assessing the expenditure to earn the exempt income in view of the provisions u/s 14A of the Act r.w. Rule 8D(2)(iii) of the Rules. In the instant case, the whole investment has been considered for assessing the expenditure to earn the exempt income which is not justifiable. Accordingly, the finding of the CIT(A) is hereby order to be set aside and the issue is remanded to the AO to decide the matter of controversy afresh and to consider the investment which yielded exempt income for assessing the expenditure to earn the exempt income in view of the provisions u/s 14A of the Act r.w. Rule 8D(2)(iii) of the Rules in view of the decision of the special Bench in case of ACIT Vs. Vireet Investment P. Ltd(supra) in accordance with law. Issues Involved:1. Disallowance under Section 14A of the Act r.w.r 8D2. Disallowance of interest expenses without netting off interest income3. Disallowance of administrative cost under Section 14A of the Act r.w.r 8D(2)(iii)Issue No. 1:The appeal was filed against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance made under Section 14A of the Act r.w.r 8D. The Assessee challenged the disallowance, arguing it was unjustified. The Assessee's income included Trading in Shares Securities, Lending and Borrowing of Money, and Commission Agents. The AO applied Section 14A r.w. Rule 8D and assessed the expenditure incurred to earn exempt income, resulting in a total income assessment of &8377; 65,75,780. The CIT(A) confirmed the addition, leading to the appeal before ITAT Mumbai.Issue No. 2:The Assessee challenged the confirmation of disallowance of &8377; 5,72,805 under Section 14A r.w. Rule 8D(2)(ii) of the Rules. The argument was that interest expenses should be netted off against interest income. The ITAT Mumbai referred to a decision where netting off interest was required for assessing interest expenditure. Following this precedent, the disallowance of interest expenses should be made after netting off interest. The issue was decided in favor of the Assessee against the revenue.Issue No. 3:This issue concerned the assessing of expenditure under Section 14A of the Act r.w. Rule 8D(2)(iii) of the Rules. The Assessee argued that only investments yielding exempt income should be considered for disallowance. The ITAT Mumbai referred to a decision stating that investments yielding exempt income should be considered for assessing expenditure. In this case, all investments were considered for assessing expenditure, which was deemed unjustifiable. The finding of the CIT(A) was set aside, and the issue was remanded to the AO to consider investments yielding exempt income for assessing expenditure. The issue was decided in favor of the Assessee against the revenue for statistical purposes.In conclusion, the ITAT Mumbai allowed the appeal filed by the Assessee, ordering in their favor on the issues of interest expenses and administrative cost disallowance.