2020 (10) TMI 1314 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on exempt income investments for disallowance calculation

DCIT, Circle 6 (2), New Delhi Versus Continental Device India Pvt. Ltd.

The Tribunal upheld the CIT(A)'s decision, emphasizing that investments yielding exempt income should be considered for disallowance calculation under ... Addition u/s 14A r.w.r. 8D - CIT-A deleted the addition - as per revenue CIT(A) ignored the fact that the assessee had incurred huge interest expenses in relation to investments in the instruments income which is exempt - HELD THAT:- The assessment order itself reveals that in so far as the direct expenses u/r. 8D(2)(i) are concerned, the AO accepted that no direct expense was incurred by the assessee for earning the exempt income. There is no denial of the fact from the Revenue that as on 31.03.2014, the share capital of the assessee was ₹ 103.40 crores which is more than enough to cover the investments of ₹ 86.208 crores and therefore, the presumption is that the assessee invested the amounts from out of their own funds and therefore, the question of disallowing the interest component u/r. 8D(2)(ii) does not arise. In so far as consideration of investment which did not yield any dividend income for the purpose of calculating the disallowance u/r. 8D(2)(iii), it is the settled principle of law that only such investments which yielded exempt income during the year have to be considered for computing the average value of investment, and the investments which did not yield any exempt income shall not be considered. Admittedly, the assessee disallowed by following this calculation. Ld. CIT(A) rightly followed the decision of Special Bench of this Tribunal in the case of ACIT vs. Vireet Investment (P) Ltd. [2017 (6) TMI 1124 - ITAT DELHI] which is binding precedent on this aspect. - Appeal of revenue dismissed. Issues:Challenge to order passed by CIT(A) regarding disallowances under sections 14A and 36(1)(iii) of the Income-tax Act.Analysis:The Revenue filed an appeal challenging the order passed by the Commissioner of Income Tax (Appeals)-2 for the assessment year 2014-15 concerning M/s. Continental Device India Pvt. Ltd. The company, engaged in manufacturing and trading electronic devices, had filed its return at a loss. The assessment was completed with disallowances under sections 14A and 36(1)(iii) of the Act. The Revenue contended that the CIT(A) had granted relief to the assessee in respect of the disallowance under section 14A, ignoring the interest expenses incurred by the assessee related to exempt income. The Revenue argued that the Assessing Officer was justified in invoking Rule 8D(2)(ii) of the Rules as the assessee failed to provide evidence that investments were made from its own funds without borrowing. The Revenue also claimed that interest-bearing amounts spent on investments, even if part of it accrued dividend, should be considered under Rule 8D(2)(ii) and (2)(iii) of the Rules.The assessee's representative argued that the CIT(A) correctly followed a precedent set by a Special Bench of the Tribunal, stating that only investments yielding exempt income should be considered for calculating the average value of investments under Rule 8D(2)(iii). The representative highlighted that the assessee's share capital exceeded investments, indicating that investments were made from own funds, thus no disallowance of interest component should apply under Rule 8D(2)(ii). The Tribunal noted that the Assessing Officer acknowledged no direct expenses were incurred for earning exempt income and that the share capital exceeded investments, supporting the presumption that investments were made from own funds. The Tribunal upheld the CIT(A)'s decision, citing the principle that only investments yielding exempt income should be considered for disallowance calculation under Rule 8D(2)(iii). The Tribunal found no legal infirmity in the CIT(A)'s findings and dismissed the Revenue's appeal.In conclusion, the Tribunal upheld the CIT(A)'s decision, emphasizing that investments yielding exempt income should be considered for disallowance calculation under Rule 8D(2)(iii) and that no interference was warranted with the CIT(A)'s findings. The appeal of the Revenue was dismissed.