2018 (8) TMI 1982 - AT - Income Tax

Tribunal Upholds No Disallowance of Interest Expenses, Clarifies Section 14A Not for Book Profit or Non-Yielding Investments.

Edelweiss Financial Services Ltd. Versus The Dy. Commissioner of Income Tax, Central Circle-1 (1), Mumbai And Vice- Versa.

The ITAT dismissed the Revenue's appeal and upheld the CIT(A)'s decisions, affirming that interest expenses cannot be disallowed merely due to ... Disallowance of expenses of interest being difference in the rate of interest paid on borrowings and interest charged on short term lending to subsidiary companies - According to AO, the rate of interest charged is lower than the interest paid to layman brothers and hence, according to him, the differential interest charged as expense is to be disallowed and added to the returned income of the assessee - HELD THAT:- In this year interest charged from subsidiary is at the rate of 6% as against 9% in earlier years and also received funds from Lehman Brothers at the rate of 12 % as against at the rate of 13.5% in earlier year. When the above order was confronted to the learned CIT DR, Shri R Manjunatha Swamy, he only relied on the assessment order. After hearing both the sides and going through the orders of the lower authorities also the Tribunal order in earlier years, we respectively following the same, confirm the order of CIT(A) deleting the disallowance of interest. Accordingly, this issue of Revenue’s appeal. Disallowance of expenses relatable to exempt income by invoking the provisions of section 14A read with Rule 8D(2)(ii) of the Rules i.e. disallowance of interest expenses - disallowance of exempt income under section 14A of the Act read with Rule 8D(2) while computing the income under section 115JB - HELD THAT:- After hearing both the sides, and going through the facts and circumstances of the case and the decision of Tribunals in assessee’s own case for AY 2008-09, we find that the facts are exactly identical and respectfully following the same, we confirm the order of CIT(A) deleting the addition. The issue is covered in favour of assessee and against Revenue by the decision of Special Bench of this Tribunal in the case of ACIT vs. Vireet Investments (P.) Ltd. [2017 (6) TMI 1124 - ITAT DELHI] wherein the Tribunal has clearly held that no disallowance under section 14A of the Act r.w.r 8D of the Rules can be made while computing book profit under section 115JB of the Act. The learned Sr. DR could not controvert the above proposition. Accordingly, we are of the view that this issue is covered by the special bench decision of this Tribunal in the case of Vireet Investments (P.) Ltd. (supra). Respectfully following the same, we delete the disallowance and allow this issue of assessee’s appeal. This issue of Revenue’s appeal is dismissed and that CO of the assessee is allowed. Disallowance u/s 14A read with Rule 8D(2)(iii) - investments on which assessee has actually earned exempt income - HELD THAT:- Assessee filed computation of disallowance of exempt income relating to parties giving exempt income and that comes to 0.5% on average value of investment under Rule 8D(2)(iii) of the Rules at ₹ 13,35,500/-. After going through the Tribunals order, we are in agreement with the findings of the Tribunal of earlier year and are of the view that the AO has to recomputed the disallowance under Rule 8D(2)(iii) after excluding the investment on which no exempt income has been earned by the assessee. The assessee will file computation before AO and AO after verification will decide the claim. This issue of the assessee’s appeal is set aside and allowed for the statistical purposes. Issues Involved:1. Disallowance of interest expenses due to the difference in the rate of interest paid on borrowings and interest charged on short-term lending to subsidiary companies.2. Disallowance of expenses related to exempt income under section 14A of the Income Tax Act read with Rule 8D(2)(ii).3. Disallowance of exempt income under section 14A while computing book profit under section 115JB.4. Consideration of only those investments on which the assessee has actually earned exempt income for the purpose of disallowance under section 14A read with Rule 8D(2)(iii).Issue-wise Detailed Analysis:1. Disallowance of Interest Expenses:The Revenue challenged the CIT(A)'s decision to delete the disallowance of Rs. 5,85,45,509/- on account of the difference in the rate of interest paid on borrowings from Lehman Brothers and the interest charged on short-term lending to subsidiary companies. The AO had disallowed the differential interest citing lack of business prudence. However, the CIT(A) and the Tribunal, relying on previous years' orders and judicial pronouncements, held that the interest expenditure cannot be disallowed merely because the loan was given at a lower interest rate to wholly-owned subsidiaries. The Tribunal confirmed the CIT(A)'s order, dismissing the Revenue's appeal.2. Disallowance of Expenses Related to Exempt Income:The Revenue contested the deletion of Rs. 19,29,14,802/- disallowed under section 14A read with Rule 8D(2)(ii). The CIT(A) deleted the disallowance, noting that the assessee's own funds were sufficient to cover the investments and that the net interest income was positive. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court's rulings in similar cases and confirming that no disallowance is warranted when the assessee's own funds exceed the investments.3. Disallowance under Section 14A while Computing Book Profit under Section 115JB:Both the Revenue and the assessee raised issues regarding the disallowance of exempt income under section 14A while computing book profit under section 115JB. The Tribunal, following the Special Bench decision in the case of ACIT vs. Vireet Investments (P.) Ltd., held that no disallowance under section 14A read with Rule 8D can be made while computing book profit under section 115JB. Consequently, the Tribunal allowed the assessee's appeal on this issue and dismissed the Revenue's appeal.4. Consideration of Only Investments Yielding Exempt Income:The assessee argued that only those investments which actually yielded exempt income should be considered for disallowance under section 14A read with Rule 8D(2)(iii). The Tribunal, referencing its order from the previous year, directed the AO to recompute the disallowance after excluding investments that did not yield exempt income. The matter was set aside to the AO for verification and computation based on the assessee's submission.Conclusion:The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection for statistical purposes, directing the AO to recompute disallowances as per the Tribunal's directions. The order was pronounced in the open court on 24-08-2018.