2023 (2) TMI 1215 - AT - Income Tax

AO must consider only dividend-yielding investments for section 14A disallowance computation under Rule 8D

Tata Steel Limited Versus Additional/Joint/Deputy/Assistant Commissioner of Income Tax/Income-tax Officer, National e-Assessment Centre, Delhi

ITAT Mumbai partially allowed the appeal. The AO properly recorded satisfaction before invoking Rule 8D for section 14A disallowance, but must consider ... Disallowance u/s 14A r.w.r. 8D - Mandation of recording satisfaction - HELD THAT:- AO has to first examine assessee’s computation of disallowance u/s 14A of the Act vis-à-vis the accounts of assessee. If the AO is not satisfied with the assessee’s said computation has to record reasons for his dissatisfaction and thereafter proceed to invoke provisions of Rule 8D. In the instant case, we find that the assessee has furnished detailed reasons and the method of computation of disallowance with respect to indirect administrative expenditure under Rule 8D(2)(iii). AO has examined the same, gave reasons for his rejecting the same and thereafter, has proceeded to compute disallowance under Rule 8D(2). After examining the same, we are satisfied that the AO has recorded reasons for disagreeing with the assessee’s calculation of disallowance u/s 14A of the Act. Thus, the primary objection raised by the assessee for deleting addition under Rule 8D(2)(iii) are rejected. Assessee has raised an alternate plea that only dividend yielding investments should be considered for the purpose of disallowance - Assessee has also filed a chart identifying the companies wherein the assessee has earned dividend. It is no more res-integra that only dividend yielding investments should be considered for the purpose of computation of disallowance under Rule 8D(2)(iii). We accept the alternate contention of the assessee. The AO is directed to consider only dividend yielding investments for computing disallowance under Rule 8D (2)(iii). Consequently, ground No. 2 of the appeal is partly allowed in terms aforesaid. Disallowance of interest paid on Perpetual Non-Convertible Debentures (PNCD)u/s 36(1)(iii) - AO rejected the assessee’s claim on the ground that the said expenditure claimed is not in the nature of interest - HELD THAT:- It is not disputed by the Department that the PNCD on which the assessee has paid interest are the same that were subject matter of dispute in AY 2011-12 and 2012-13 in proceedings u/s 263 of the Act. Thus, in the light of the decision of Co-ordinate Bench on same issue in assessee’s own case in preceding assessment year, we hold that the interest expenditure in respect of Perpetual Non-Convertible Debentures is an allowable expenditure u/s 36(1)(iii) of the Act. Disallowance of payment made towards Compensatory Afforestation Fund - HELD THAT:- We find that the Tribunal in assessee’s own case for assessment year 2006-07 [2017 (2) TMI 272 - ITAT MUMBAI] has held that contribution towards Compensatory Afforestation Fund is an allowable expenditure. Computation of Book Profits u/s 115JB after considering disallowance u/s 14A - HELD THAT:- Special Bench of the Tribunal in the case of Asst. CIT Vs. Vireet Investments Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] has held that the computation under clause (f) of Explanation 1 to section 115JB is to be made without resorting to the computation as contemplated u/s 14A r.w.r. 8D of the Act. Admission of additional claim made first time in assessment proceedings - deduction of interest on PNCD in computation of Book Profit u/s 115JB AR fairly admitted that the claim was not made in the return of income and claim was made for the first time in assessment proceedings before the AO - HELD THAT:- Hon’ble Apex court in the case of Goetze India Limited [2006 (3) TMI 75 - SUPREME COURT] as held that the AO has no power to accept claims other than the claims made in return of income/revised return of income. No error in the AO rejecting assessee’s claim for deduction of interest on PNCD. However, the Hon’ble Apex Court has in an unambiguous terms has clarified that powers of the Appellate Tribunal are not impinged to admit additional claim. For deciding this additional claim of the assessee, no fresh evidence is required to be adduced. Therefore, without commenting on merits of allowability of claim, we deem it appropriate to restore it to the file of AO for consideration and deciding the same, in accordance with law. In the result ground of the appeal is allowed for statistical purpose. Non grant of full TDS/TCS credit - AR has pointed that the assessee has filed an application u/s 154 of the Act before the AO for allowing TDS/TCS credit in full - HELD THAT:- As the said application has not been decided by the AO till date. The AO is directed to dispose of the said application of the assessee expeditiously, preferably within a period of 6 months from the date of receipt of this order. Thus, ground of appeal is allowed for statistical purpose. Disallowance of provision for leave encashment - AR submits that the assessee has made clam of deduction for leave encashment on the basis of actual payments only - HELD THAT:- In the facts of the case and the decision of Co-ordinate Bench in assessee’s own case, we hold that the amounts actually paid towards leave encashment is allowable as deduction. The assessee has placed on record Tax Audit Report for AY 2017-18. The same was available before the AO, as is evident from Assessment Order - AO has erred in holding that the assessee has claimed entire provision i.e. in excess of amount actually paid. After examining the Audit Report - The aforesaid sums were paid before the due date of filing return of income u/s 139(1) of the Act. Hence, ground is allowed pro-tanto. Issues Involved:1. General ground2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D3. Disallowance of claim for Education Cess4. Disallowance of interest paid on Perpetual Non-Convertible Debentures (PNCDs)5. Disallowance of expenditure incurred on Compensatory Afforestation6. Deduction under Section 80G7. Details of Capital Gains not considered properly8. Income from business as per Schedule BP not considered properly and arithmetical error in summation9. Disallowance under Section 14A vis-à-vis computation of Book Profit under Section 115JB10. Non-grant of deduction of interest on PNCD in computation of Book Profit under Section 115JB11. Short grant of TDS/TCS Credit12. Non-Granting of Relief under Section 90/91 of the Act13. Disallowance of provision for leave encashment (AY 2017-18)Issue-wise Detailed Analysis:1. General Ground:The general ground was not specifically addressed in the judgment.2. Disallowance under Section 14A read with Rule 8D:The assessee's primary contention was that the Assessing Officer (AO) did not record dissatisfaction with the assessee's computation of disallowance under Section 14A, as mandated by Section 14A(2). The Tribunal found that the AO had indeed recorded reasons for rejecting the assessee's calculation and proceeded to compute disallowance under Rule 8D. However, the Tribunal accepted the alternate plea that only dividend-yielding investments should be considered for the purpose of disallowance under Rule 8D(2)(iii). Thus, the AO was directed to recompute the disallowance accordingly, and the ground was partly allowed.3. Disallowance of claim for Education Cess:The assessee did not press this ground, and it was dismissed as not pressed.4. Disallowance of interest paid on Perpetual Non-Convertible Debentures (PNCDs):The Tribunal referred to its earlier decision in the assessee's case for AY 2011-12 and 2012-13, where it was held that the interest paid on PNCDs is an allowable deduction under Section 36(1)(iii). The Tribunal found that the PNCDs in question were the same, and thus, the interest expenditure was allowable. This ground was allowed.5. Disallowance of expenditure incurred on Compensatory Afforestation:The Tribunal referred to its decision in the assessee's case for AY 2006-07, where it was held that contribution towards the Compensatory Afforestation Fund is an allowable expenditure. Following this precedent, the Tribunal allowed the ground.6. Deduction under Section 80G:The assessee did not press this ground, and it was dismissed as not pressed.7. Details of Capital Gains not considered properly:The assessee did not press this ground, and it was dismissed as not pressed.8. Income from business as per Schedule BP not considered properly and arithmetical error in summation:The assessee did not press this ground, and it was dismissed as not pressed.9. Disallowance under Section 14A vis-à-vis computation of Book Profit under Section 115JB:The Tribunal referred to the Special Bench decision in the case of Vireet Investments Pvt. Ltd., which held that computation under clause (f) of Explanation 1 to Section 115JB should be made without resorting to the computation under Section 14A read with Rule 8D. This ground was allowed.10. Non-grant of deduction of interest on PNCD in computation of Book Profit under Section 115JB:The Tribunal noted that the assessee had not claimed this deduction in the return of income. However, it restored the matter to the AO for consideration, as appellate authorities can admit fresh claims. This ground was allowed for statistical purposes.11. Short grant of TDS/TCS Credit:The Tribunal directed the AO to dispose of the assessee's application under Section 154 for allowing full TDS/TCS credit expeditiously, preferably within six months. This ground was allowed for statistical purposes.12. Non-Granting of Relief under Section 90/91 of the Act:The assessee did not press this ground, and it was dismissed as not pressed.13. Disallowance of provision for leave encashment (AY 2017-18):The Tribunal found that the assessee had claimed deduction for leave encashment based on actual payments and directed the AO to allow the amounts actually paid towards leave encashment before the due date of filing the return. This ground was allowed.Conclusion:The appeals for AY 2016-17 and AY 2017-18 were partly allowed, with specific directions issued for recomputation and consideration of certain claims by the AO.