2016 (5) TMI 1128 - AT - Income Tax

Assessing Officer's Rule 8D application flawed; Tribunal excludes interest on specific borrowings from disallowance calculation.

M/s. Tafe Motors and Tractors Ltd. Versus The Assistant Commissioner of Income Tax

The Tribunal found the Assessing Officer's application of Rule 8D for disallowance under Section 14A of the Income Tax Act flawed. The Tribunal held that ... Disallowance u/s 14A - AO considered the investments yielding taxable income and also investments not yielding taxable income to apply the formula in Rule 8D of I.T Rules - Held that:- The interest paid by the assessee on borrowings, which are used for specific purpose cannot be considered for the purpose of computing disallowance u/s.14A r.w.rule 8D. Similarly investments, which are yielding taxable income also, cannot be considered while applying the ( B ) in the formula specified in Rule-8D. - Decided in favour of assessee. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act by applying Rule 8D of the Income Tax Rules, 1962.2. Correctness of the Assessing Officer's computation of disallowance.3. Exclusion of interest on specific borrowings from the computation of disallowance.4. Write-off of advances to subsidiary companies.Issue-wise Detailed Analysis:1. Disallowance under Section 14A by Applying Rule 8D:The primary issue is the disallowance of Rs. 52,45,531/- made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, by applying Rule 8D of the Income Tax Rules, 1962. The AO determined this amount as the expenditure attributable to exempt income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, relying on a precedent set by the Co-ordinate Bench of the Tribunal in the case of M/s. Lakshmi Ring Travellers Vs. ACIT.2. Correctness of the AO's Computation of Disallowance:The assessee contended that they had already calculated the expenditure related to exempt income at Rs. 19,85,000/-. The AO, without providing reasons for rejecting the assessee's claim, recalculated the disallowance under Rule 8D. The assessee argued that Section 14A could only be invoked if the AO was not satisfied with the correctness of the assessee's claim. The assessee cited judgments from the Punjab and Haryana High Court in the case of Hero Cycles and the Delhi Tribunal in the case of ACIT Vs. Sun Investments, which held that disallowance under Section 14A requires the AO to establish that specific expenditure was incurred for earning exempt income.3. Exclusion of Interest on Specific Borrowings:The Tribunal found merit in the assessee's plea that interest paid on borrowings used for specific purposes should not be considered for disallowance under Section 14A r.w. Rule 8D. Investments yielding taxable income should also not be included in the formula specified in Rule 8D. The Tribunal referred to the case of ACIT vs. Best & Crompton Engineering Ltd., where it was held that interest on loans sanctioned for specific projects and utilized for those projects should be excluded from the disallowance computation.4. Write-off of Advances to Subsidiary Companies:The Tribunal also addressed the issue of the write-off of advances to subsidiary companies. The AO had disallowed the write-off, but the CIT(A) deleted this disallowance, following a precedent in the assessee's own case for the assessment year 2004-05. The Tribunal upheld the CIT(A)'s decision, citing that the advances were made for business purposes and were not recoverable due to the financial losses and liquidation proceedings of the subsidiaries. The Tribunal referenced the Supreme Court's decision in the case of S.A. Builders, which allows for the deduction of interest on borrowed funds advanced to subsidiaries for business purposes.Conclusion:The Tribunal found that the AO's application of Rule 8D was flawed, particularly in including interest on specific borrowings and investments yielding taxable income in the disallowance computation. The issue of write-off of advances to subsidiary companies was remitted to the AO for fresh consideration. The appeal was partly allowed for statistical purposes.