2018 (2) TMI 1340 - AT - Income Tax

Tribunal rules no disallowance of interest expenses under Section 14A & excludes CCD investments from disallowance.

Asstt. Commissioner of Income Tax-14 (2) (1), Mumbai Versus M/s L & T Infrastructure Finance Co. Ltd.

The Tribunal upheld the CIT(A)'s decision, ruling that no disallowance of interest expenses under Section 14A read with Rule 8D(2)(ii) was necessary as ... Disallowance u/s 14A r.w. Rule 8D - Held that:- CIT(A) had rightly concluded that no disallowance of the interest expenditure was called for in the hands of the assessee under Sec. 14A r.w. Rule 8D(2)(ii). While computing the disallowance as per Rule 8D(2)(iii), the average investments were to be worked out after excluding the said CCD’s. We have given a thoughtful consideration to the issue and are of the considered view that as per 8D(2)(iii) the average value of investments that have to be considered for working out the disallowance are those, the income from which does not or shall not form part of the total income. We are of the considered view that the CIT(A) rightly observing that as the interest received on the Compulsorily Convertible Debentures of Tikona Digital Networks Pvt. Ltd. was taxable, therefore, the same could not be permitted to form part of the average value of investments contemplated in the formula laid down in Rule 8D(2)(iii). We thus finding no infirmity in the directions of the CIT(A) that the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) was to be worked out after excluding the Compulsorily Convertible Debentures of Tikona Digital Networks Pvt. Ltd. of ₹ 49,97,15,040/-, therefore, uphold his order to the said extent. Issues Involved:1. Consideration of interest expenses while calculating disallowance under Section 14A read with Rule 8D.2. Inclusion of Compulsorily Convertible Debentures (CCDs) in the calculation of disallowance under Section 14A read with Rule 8D(2)(iii).Detailed Analysis:Issue 1: Consideration of Interest Expenses for Disallowance under Section 14A read with Rule 8DThe revenue contested the CIT(A)'s decision to not consider interest expenses while calculating disallowance under Section 14A read with Rule 8D. The assessee, a non-banking finance company, had declared a total income of Rs. 231,33,25,226/- for A.Y. 2011-12. During the assessment, the A.O. observed that the assessee claimed Rs. 4,08,55,890/- as exempt dividend income and had disallowed Rs. 81,25,709/- under Section 14A. However, the A.O. recomputed the disallowance to Rs. 13,08,51,210/- under Rule 8D, attributing Rs. 12,14,76,213/- to interest expenses and Rs. 93,74,997/- to administrative expenses.The CIT(A) found that the assessee had sufficient own funds (Rs. 1,012 crores) to cover its investments (Rs. 350 crores) in exempt income-yielding assets. Relying on the judgments of the Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd. and CIT Vs. HDFC Bank Ltd., the CIT(A) concluded that no disallowance of interest expenditure was warranted under Section 14A read with Rule 8D(2)(ii). The Tribunal upheld this view, noting that the assessee's own funds were sufficient to cover the investments, thus no borrowed funds were used for these investments.Issue 2: Inclusion of Compulsorily Convertible Debentures (CCDs) in Disallowance Calculation under Section 14A read with Rule 8D(2)(iii)The A.O. included investments in CCDs of Tikona Digital Networks Pvt. Ltd. (Rs. 49,97,15,040/-) while calculating the disallowance under Rule 8D(2)(iii). The assessee argued that these CCDs generated taxable interest income and should not be included in the calculation. The CIT(A) agreed, directing the A.O. to exclude the CCDs from the average value of investments for the purpose of disallowance under Rule 8D(2)(iii). The Tribunal supported this decision, stating that only investments generating exempt income should be considered under Rule 8D(2)(iii).ConclusionThe Tribunal upheld the CIT(A)'s order, concluding that:1. No disallowance of interest expenditure under Section 14A read with Rule 8D(2)(ii) was warranted as the assessee's own funds were sufficient to cover its investments.2. The disallowance under Section 14A read with Rule 8D(2)(iii) should exclude investments in CCDs that generate taxable income.The revenue's appeal was dismissed, and the CIT(A)'s order was affirmed.