2017 (1) TMI 1049 - AT - Income Tax

Assessee's Appeal Allowed: ITAT Directs AO on Section 80IA & 14A Disallowance

The appeal of the assessee was allowed. The ITAT directed the AO to adjudicate the deduction under Section 80IA based on the initial assessment year opted ... Claim of deduction u/s 80IA(5) denied - selection of initial or first assessment year - Held that:- The assessee who is eligible to claim deduction under S.80IA has been given an option to choose initial/first year from which it may desire to claim the deduction for ten consecutive years out of the slab of 15 or 20 years as prescribed under the above sub-section. The term 'initial assessment year' has been held to mean the first year opted to by the assessee for claiming deduction under S.80IA of the Act. Thus, it is clear that the initial assessment year is not the year of operation or commencement of business, as interpreted by the Assessing Officer, but it is the first year in which the assessee has opted to claim the deduction under S.80IA. In view of this clarification of the Board, which clinches the issue in favour of the assessee, and is binding on the Revenue authorities, we accept the contentions of the assessee in this behalf, and direct the Assessing Officer to allow the claim of the assessee, after verifying the records as to the initial assessment year in which the assessee for the first time has claimed the deduction under S.80IA and consider the income of the assessee from the eligible unit from that year alone on a stand alone basis. Assessee's grounds on this issue are accordingly allowed . See M/s Hyderabad Chemical Products Pvt. Ltd., Vs. ACIT [2016 (7) TMI 253 - ITAT HYDERABAD ] Disallowance u/s 14A - assessee is aggrieved because CIT(A) has sustained the disallowance u/r 8D(2)(iii) - whether the investment which has not generated income should also be considered to calculate the quantum of disallowance or the whole investment as per balance sheet should be applied to disallowance as per rule 8D? - Held that:- In applying the formula prescribed under rule 8D(2)(iii) of the Rules, the AO has included all investments, whether it yielded any tax free income or not. It is only the investments which yield tax free income that has to be considered for applying the formula prescribed under rule 8D(2)(iii). Considering this view, we direct the AO to consider only the investments, which yielded the exempt income in the formula under rule 8D(2)(iii) and accordingly, disallow the expenses relating to exempt income. Issues Involved:1. Deduction under Section 80IA of the Income Tax Act.2. Disallowance under Section 14A of the Income Tax Act.Issue-wise Detailed Analysis:1. Deduction under Section 80IA:The assessee company filed its return of income for AY 2010-11, claiming a deduction of Rs. 41,12,784 under Section 80IA and book profit under Section 115JB at Rs. 5,38,964. The AO disallowed the deduction under Section 80IA and computed the total income at Rs. 63,10,378. The assessee had started the operation of windmills, profits from which were eligible for deduction under Section 80IA from AY 2006-07, but the deduction was claimed for the first time in AY 2010-11. The AO held that if the business of windmills was the only source of income, the assessee would not have any profit to claim the deduction under Section 80IA, relying on a decision of the coordinate bench of Hyderabad in the case of Hyderabad Chemicals Supplies Ltd. Vs. ACIT.On appeal, the CIT(A) rejected the assessee's submissions and confirmed the disallowance. The AR submitted that the issue is covered by the decision of ITAT Hyderabad in M/s Hyderabad Chemical Products Pvt. Ltd., which clarified that the initial assessment year for claiming deduction under Section 80IA is the first year opted by the assessee and not the year of commencement of business. The ITAT directed the AO to adjudicate the issue following the directions given by the coordinate bench in the said case, allowing the assessee's grounds on this issue.2. Disallowance under Section 14A:The AO disallowed Rs. 21,97,594 under Section 14A, computed as follows:- Interest expenditure: Rs. 24,04,535- Average value of investments: Rs. 18,98,72,832- Average of total assets: Rs. 36,57,62,756- Total disallowance: Rs. 21,97,594The AR argued that there was no nexus between borrowed funds and investments, citing several judicial decisions. The CIT(A) observed that the issue is whether any expenses were incurred in relation to exempt income, not whether the investments were for business purposes. The CIT(A) held that the assessee had sufficient own funds to make the investments without using borrowed funds and directed the AO to delete the interest expenses of Rs. 12,48,230. However, the CIT(A) confirmed the disallowance of Rs. 9,49,364 under Rule 8D(2)(iii), as it does not require establishing a nexus with interest expenditure.The AR contended that the assessee did not incur any expenditure in earning the exempt income and relied on the decision of the Delhi High Court in Maxopp Investments Ltd. Vs. CIT, which stated that the AO must record dissatisfaction with the assessee's claim before determining the amount of expenditure. The AR also referenced a decision of ITAT Kolkata Bench, which held that only investments yielding tax-free income should be considered for disallowance under Rule 8D(2)(iii).The ITAT agreed with the AR's submissions and directed the AO to consider only the investments that yielded exempt income in the formula under Rule 8D(2)(iii) and disallow the expenses accordingly.Conclusion:The appeal of the assessee was allowed, with directions to the AO to follow the specified guidelines for both issues.