2017 (9) TMI 1891 - AT - Income Tax

Tribunal excludes investments in subsidiaries from disallowance calculation under Rule 8D

The Assistant Commissioner of Income Tax, Corporate Circle 3 (1), Chennai Versus M/s. Thiru Arooran Sugars Ltd.

The Tribunal upheld the CIT(A)'s order directing the exclusion of investments in subsidiary/associated companies from the disallowance calculation under ... Disallowance u/s 14A r.w.r. 8D - HELD THAT:- As decided in assessee's own case for assessment year 2009-10 VERSA [2016 (7) TMI 1582 - ITAT CHENNAI] AO has to consider the assessee’s own fund i.e. capital and reserves as available for investment which yields exempted income and thereafter he shall apply the Formula in Rule 8D and also exclude investments in subsidiaries as held by the above order of Co-ordinate Bench. With this observation, we remit the issue to the file of AO for fresh consideration. Hence, this ground is allowed for statistical purposes Issues Involved:1. Legality of the CIT(A)'s order.2. Exclusion of investments in subsidiary/associated companies from the disallowance calculation under Rule 8D.3. Consideration of the assessee's own funds for investments yielding exempt income.4. Lack of clear break-up of investments and funds during assessment proceedings.5. Pending appeal before the Hon’ble Madras High Court regarding a similar decision.Detailed Analysis:1. Legality of the CIT(A)'s Order:The Revenue contended that the order of the CIT(A) was contrary to law and the facts of the case. The Tribunal, however, found that the CIT(A)'s decision was consistent with previous judgments and legal principles.2. Exclusion of Investments in Subsidiary/Associated Companies from Disallowance Calculation under Rule 8D:The CIT(A) directed the AO to re-compute the disallowance under Rule 8D by excluding the appellant's investments in subsidiary/associated companies. The Tribunal upheld this direction, referencing a prior decision in the assessee's own case for the assessment year 2009-10, where it was held that investments in sister concerns and associated companies made on account of commercial expediency should not be considered for disallowance under Rule 8D. The Tribunal cited multiple cases, including CIT Vs. Bharti Overseas Pvt. Ltd., and Farida Shoes Pvt. Ltd., to support this view.3. Consideration of the Assessee's Own Funds for Investments Yielding Exempt Income:The CIT(A) directed the AO to consider the assessee’s own funds, i.e., capital reserves available on the date of investment, for calculating disallowance. The Tribunal agreed with this approach, citing the case of Sun TV Networks, where it was held that if the assessee had sufficient share capital, reserves, and surplus, there could be no disallowance towards the interest paid on borrowed funds under Section 14A. The Tribunal emphasized that the nexus between borrowed funds and investments must be established for disallowance under Rule 8D.4. Lack of Clear Break-Up of Investments and Funds During Assessment Proceedings:The Revenue argued that the assessee did not provide a clear break-up of investments along with the statistics of own funds and borrowed funds during the assessment proceedings. The Tribunal, however, found that the CIT(A) had directed the AO to re-evaluate the disallowance considering the assessee’s own funds, thus addressing the issue.5. Pending Appeal Before the Hon’ble Madras High Court:The Revenue noted that the decision relied upon by the CIT(A) was under appeal before the Hon’ble Madras High Court. The Tribunal acknowledged this but did not find it sufficient to overturn the CIT(A)'s order, instead directing the AO to follow the Tribunal's previous decisions and re-evaluate the disallowance.Conclusion:The Tribunal remitted the issue back to the AO for fresh consideration, directing the AO to re-compute the disallowance under Rule 8D by excluding investments in subsidiary/associated companies and considering the assessee’s own funds. The appeal of the Revenue was partly allowed for statistical purposes.