2018 (2) TMI 2090 - AT - Income Tax

Tribunal remits disallowance issue for verification, directs re-computation. Review of interest disallowance instructed. Appeal partly allowed.

The Tribunal remitted the issue of disallowance under section 14A r.w. Rule 8D to the Assessing Officer for verification of interest-free funds against ... Disallowance u/s. 14A r.w. Rule 8D - contention of the assessee that, the Capital Reserves and interest free funds are much more than the investments, have to be examined by the AO - HELD THAT:- It is true that the in the cases of CIT v. HDFC Bank Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT] and CIT v. Reliance Utilities Power Limited [2009 (1) TMI 4 - BOMBAY HIGH COURT] held that, if assessee had adequate interest free funds available with it, no disallowance needs to be made u/s 8D2(ii). We remit this issue to the file of the AO who shall examine the contentions of the assessee that the interest free funds are much more than the investments. If the submissions of the assessee are found to be correct, no disallowance under Rule 8D2(ii) is required in view of the decisions in the cases of CIT v. HDFC Bank Ltd [2014 (8) TMI 119 - BOMBAY HIGH COURT] and CIT v. Reliance Utilities Power Limited [2009 (1) TMI 4 - BOMBAY HIGH COURT] Similarly, the Special Bench in the case of ACIT v. Vireet Investments Private Limited [2017 (6) TMI 1124 - ITAT DELHI] held that only those investments which yielded dividend income should be considered for disallowance under Rule 8D2(iii). Thus, respectfully following the Special Bench decision, we direct the Assessing Officer to recompute the disallowance under Rule 8D2(iii) following the Special Bench. Accordingly, we set-aside this issue to the file of the Assessing Officer with the above observations. This ground of appeal is allowed for statistical purpose. Disallowance of interest u/s. 36(1)(iii) - HELD THAT:- This issue arose in the Assessment Years 2008-09 [2013 (9) TMI 1297 - ITAT MUMBAI], 2009-10 and 2010-11 [2016 (6) TMI 1460 - ITAT MUMBAI] and the Tribunal had set aside the issue to the file of the AO for examining the contentions of the assessee and the consequential orders were passed accepting that the assessee has its own funds much more than the investments and no interest was disallowed u/s. 36(1)(iii) and also no proportionate interest expenses were disallowed towards and the advances to partnership firm. Issues:1. Disallowance under section 14A r.w. Rule 8D of the Act.2. Disallowance of interest under section 36(1)(iii) of the Act.Issue 1: Disallowance under section 14A r.w. Rule 8D of the Act:The appeal was filed by the assessee against the order of the Ld.CIT(A) for the Assessment Year 2011-12, mainly concerning the disallowance under section 14A r.w. Rule 8D of the Act. The Assessing Officer calculated the disallowance under Rule 8D2(ii) and Rule 8D2(iii), which was upheld by the Ld.CIT(A) based on the previous year's order. The assessee argued that interest-free funds exceeded investments, citing relevant case laws. The Tribunal remitted the issue to the Assessing Officer to verify the adequacy of interest-free funds compared to investments, following High Court decisions. The Tribunal directed the Assessing Officer to recompute the disallowance under Rule 8D2(iii) based on a Special Bench decision, allowing the appeal for statistical purposes.Issue 2: Disallowance of interest under section 36(1)(iii) of the Act:Regarding the disallowance of interest under section 36(1)(iii) of the Act, the assessee contended that no specific borrowing was made for acquiring assets, and it had sufficient interest-free funds. The Assessing Officer disallowed interest expenses assuming borrowing funds were used for assets. The Tribunal noted similar issues in previous years and directed the Assessing Officer to re-examine the case in line with earlier decisions, granting the assessee an opportunity to present evidence. Grounds 2 and 3 were allowed for statistical purposes, and the appeal was partly allowed.In conclusion, the Tribunal addressed the issues of disallowance under section 14A r.w. Rule 8D and disallowance of interest under section 36(1)(iii) of the Act. The Tribunal remitted the first issue to the Assessing Officer to verify the adequacy of interest-free funds compared to investments and directed a re-computation of disallowance under Rule 8D2(iii) based on a Special Bench decision. For the second issue, the Tribunal directed the Assessing Officer to re-examine the case in line with earlier decisions, granting the assessee an opportunity to present evidence, and allowed the appeal partly for statistical purposes.