2016 (12) TMI 54 - AT - Income Tax

Tribunal Decision: Revenue's Appeal Dismissed, Assessee's Appeal Allowed. Section 14A Disallowance Restricted.

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal. The disallowance under Section 14A was restricted to Rs. 26.64 lakhs for ... Disallowance of expenditure attributable to exempt income under section 14A read with Rule 8D(2) - computation of disallowance under Rule 8D(2)(iii) - administrative expenses at 0.5% of average investments - treatment of long term strategic and investments not yielding dividend for exclusion from investment base under Rule 8D(2)(iii) - attribution of interest to borrowing used for business (allowability under section 36(1)(iii)) vis a vis disallowance under section 14A - inclusion of provision for wealth tax in book profit for computation of minimum alternate tax under section 115JBDisallowance of expenditure attributable to exempt income under section 14A read with Rule 8D(2) - attribution of interest to borrowing used for business (allowability under section 36(1)(iii)) vis a vis disallowance under section 14A - quantum of disallowance of interest under Rule 8D(2)(ii) read with section 14A - HELD THAT: - The Tribunal examined the audited accounts and sanction terms of the Rs.500 crore term loan and found the bank facility prohibited use for subscription/purchase of shares and similar investments. Interest debited in P&L amounted to Rs.45.32 crores, of which Rs.45.09 crores related to the term loan used for business purposes. Disallowance under section 14A is permissible only in respect of interest attributable to earning exempt income. Interest on the term loan, being incurred for business capital assets, is deductible under section 36(1)(iii) and not hit by section 14A. The CIT(A)'s computation restricting disallowance under Rule 8D(2)(ii) to the figure of Rs.26,64,777/- (based on the appellant's working and verification) was not controverted and was accordingly confirmed by the Tribunal. [Paras 12]Disallowance of interest under Rule 8D(2)(ii) read with section 14A is restricted to the amount determined by CIT(A) (confirmed).Computation of disallowance under Rule 8D(2)(iii) - administrative expenses at 0.5% of average investments - treatment of long term strategic and investments not yielding dividend for exclusion from investment base under Rule 8D(2)(iii) - whether disallowance under Rule 8D(2)(iii) (0.5% of average investments) is exigible after excluding strategic and non dividend investments, and quantum of such disallowance - HELD THAT: - The Tribunal applied the principle that long term strategic investments and investments not yielding dividend/income exempt from tax should be excluded from the investment base when computing the 0.5% administrative disallowance under Rule 8D(2)(iii). The assessee's working, and the schedule of investments, showed that after excluding specified long term strategic investments (including intra group holdings) and investments not yielding dividend, the balance investment liable to attract the 0.5% computation effectively reduced to nil. Having regard to the assessee's computation and the precedents relied upon, the Tribunal found no justification for a broader disallowance; nevertheless, applying the figures before it the Tribunal limited the disallowance to the amount determined in the order (restricted as indicated). [Paras 13, 15]After excluding long term strategic investments and investments not yielding dividend, no disallowance under Rule 8D(2)(iii) is warranted in principle; the Tribunal nevertheless restricted the disallowance to the figure worked out by the authorities (confirmed/limited accordingly).Inclusion of provision for wealth tax in book profit for computation of minimum alternate tax under section 115JB - whether provision for wealth tax can be added back while computing book profit for section 115JB - HELD THAT: - The Tribunal noted that the CIT(A) had deleted the addition of the provision for wealth tax while computing book profits u/s 115JB following earlier decisions in the assessee's own case and the jurisdictional High Court authority (Echjay Forgings). The Tribunal found no infirmity in the appellate authority following the rule of consistency and the cited High Court decision in deleting the addition. [Paras 16]Addition of provision for wealth tax to book profit for computation under section 115JB is deleted (CIT(A) order upheld).Final Conclusion: The Revenue's appeal is dismissed. The assessee's appeal is allowed in part: disallowance of interest under Rule 8D(2)(ii) read with section 14A is restricted/confirmed as per CIT(A)'s computation; disallowance under Rule 8D(2)(iii) is held not to arise after excluding long term strategic and non dividend investments and is limited to the figure determined by the authorities; addition of provision for wealth tax to book profit under section 115JB is deleted. Issues Involved:1. Disallowance of expenditure under Section 14A.2. Addition on account of provision for wealth tax in book profit computed under Section 115JB.Issue-wise Detailed Analysis:1. Disallowance of Expenditure under Section 14A:The Assessing Officer (AO) made additions by disallowing expenditure under Section 14A read with Rule 8D. The disallowance made under Rule 8D(2)(ii) was reduced by the Commissioner of Income Tax (Appeals) [CIT(A)] from Rs. 16.05 crores to Rs. 26.64 lakhs. The CIT(A) observed that the AO did not provide detailed reasons for the disallowance and noted that the interest expenditure of Rs. 45.09 crores was directly related to term loans used for business purposes, not for investments generating exempt income. The CIT(A) directed the AO to modify the computation under Rule 8D(2)(ii) based on these observations, restricting the disallowance to Rs. 26.64 lakhs.For Rule 8D(2)(iii), the CIT(A) noted that investments not capable of generating exempt income, such as investments in Reliance Engineering (Middle East) DMCC and certain mutual funds, should be excluded. The AO was directed to recompute the disallowance out of administrative expenses at 0.5% of the average value of investments, excluding those not capable of generating exempt income.Upon appeal, the Tribunal confirmed the CIT(A)'s restriction of disallowance under Rule 8D(2)(ii) to Rs. 26.64 lakhs. The Tribunal also agreed that strategic investments and investments not yielding dividend income should be excluded from the total investment for Rule 8D(2)(iii) disallowance. After excluding such investments, the Tribunal found no basis for disallowance under Rule 8D(2)(iii) but restricted the disallowance to Rs. 14,79,411 based on the assessee's working.2. Addition on Account of Provision for Wealth Tax:The AO added the provision for wealth tax to the book profit computed under Section 115JB. The CIT(A) deleted this addition, citing consistency with decisions in the assessee's own case for earlier years and a jurisdictional High Court decision in CIT vs. Echjay Forgings Pvt. Ltd. (251 ITR 0015). The Tribunal upheld the CIT(A)'s deletion of the addition, finding no infirmity in the order and following the jurisdictional High Court's precedent.Conclusion:The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal. The disallowance under Section 14A was restricted to Rs. 26.64 lakhs for interest expenditure and Rs. 14,79,411 for administrative expenses. The addition on account of the provision for wealth tax was deleted, following the jurisdictional High Court's decision. The order was pronounced in the open court on 23/11/2016.