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 ... Addition u/s 14A read with Rule 8D(2)(ii) - Held that:- In the instant case before us, interest amount other than interest on term loans works to be ₹ 23 lakhs i.e., (45.32 crores – 45.09 crores). However, the interest incurred on the loan taken from bank is to be considered u/s.36(1)(iii) and since it is not incurred for earning exempt income, the same cannot be disallowed u/s.14A read with Rule 8D(2)(ii). As per the working of CIT(A), such disallowance of interest works out to be ₹ 26,64,777/-. However, nothing was brought on record to controvert the findings of CIT(A). Accordingly, we confirm the action of CIT(A) for restricting the disallowance of interest under Rule 8D(2)(ii) to the extent of ₹ 26,64,777/-. For disallowance warranted under Rule 8D(2)(iii) it is clear from the working that after excluding the long term strategic investment and investment not yielding dividend income there remains to be ‘nil’ investment on which disallowance under Rule 8D(2)(iii) can be applied. Applying the proposition of law as cited by Ld. A.R. and referred by us in para 8 to the facts of instance case, we found that no disallowance is warranted under Rule 8D(2)(iii), in so far as after excluding such investment there remains to be nil investment. However, keeping in view the working given by the assessee, we restrict the disallowance to the extent of ₹ 14,79,411/-. Addition made on account of provision for wealth tax for MAT calculation - Held that:- Issue is squarely covered by the decision of Jurisdictional High Court in case of Echjay Forgings Pvt. Ltd. [2001 (2) TMI 56 - BOMBAY High Court]. Respectfully following the same, we do not find any infirmity in the order of CIT(A) for deleting the addition made on account of provision of wealth tax while computing book profit u/s.115JB of the IT Act. 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.