2018 (12) TMI 410 - HC - Income Tax

Disallowance for exempt-income investments u/s14A r.8D: capped at exempt income; Revenue bid to raise amount rejected.

The dominant issue was the quantum of disallowance under s.14A read with r.8D. Applying SC and HC precedent, the HC held that the disallowance cannot ... Quantum of disallowance u/s 14A r.w.r 8D - Held that:- The question of netting i.e. reduction of interest received from interest paid for the purpose of computation of disallowance under Rule 8D sub-rule (2) would in a given case require consideration. We would not express any firm or final opinion in this regard, as the question of quantum of deduction under Section 14A of the Act read with Rule 8D of the Rules is otherwise covered against the Revenue by decisions of the Supreme Court and this Court. Total exempt income earned by the assessee in this year was ₹ 19 lakhs. In these circumstances, we are not required to consider the case of the Revenue that the disallowance should be enhanced from ₹ 75.89 crores to ₹ 144.52 crores. Upper disallowance as held in Principal Commissioner of Income Tax vs. McDonalds India Pvt. Ltd. [2018 (11) TMI 1057 - DELHI HIGH COURT] cannot exceed the exempt income of that year. This decision follows the ratio and judgment of the Supreme Court in the case of Maxopp Investments Ltd. vs. CIT [2018 (3) TMI 805 - SUPREME COURT]. There is another error made by the AO in computing the disallowance under clauses (ii) of Rule 8D (2) with reference to the formula prescribed. Numerical B in clause (ii) refers to average value of the investment, income from which does not form part or shall not form part of the total income. The Assessing Officer for numerical B in clause (ii) had taken the total value of the investment and not the investment that had yielded exempt income. The Delhi High Court in ACB India Ltd. vs. Asstt. Commissioner of Income Tax [2015 (4) TMI 224 - DELHI HIGH COURT] has held that only average value of the entire investment that does not form part of the total income is the factor which could be covered by the numerical B for computing disallowance under clause (ii) of Rule 8D(2) of the Rules. Issues Involved:1. Condonation of delay in refiling the appeal.2. Quantum of disallowance under Section 14A of the Income Tax Act, 1961.Detailed Analysis:1. Condonation of Delay in Refiling the Appeal:The application sought condonation of a 36-day delay in refiling the appeal. The respondent-assessee's counsel did not oppose this application. Consequently, the court allowed the application for condonation of delay.2. Quantum of Disallowance under Section 14A:The primary issue raised by the Revenue in this appeal was the quantum of disallowance under Section 14A of the Income Tax Act, 1961, concerning the Assessment Year 2009-10.Income and Investments:- The respondent-assessee declared a short-term capital gain of Rs. 6,30,950 from an investment of Rs. 38 crores in mutual funds.- The respondent-assessee had invested over Rs. 820 crores in equity shares of associated companies but did not earn any dividend income from these shares.- The respondent-assessee showed an interest liability of Rs. 153,08,66,463, broken down into various components such as interest on term loans, pre-payment charges, interest on debentures, and interest to others.Interest and Administrative Expenses:- The respondent-assessee earned and declared interest income of Rs. 41,61,57,245 from loans and advances to subsidiaries.- The respondent-assessee incurred administrative expenses of Rs. 5,15,147 and paid Rs. 25,34,548 as fees and taxes for an increase in share capital.- The respondent-assessee did not declare any other taxable income apart from the short-term capital gains.Dividend Income and Disallowance:- The respondent-assessee earned Rs. 19,25,655 as dividend income from mutual funds, claimed as exempt under Section 10(34) of the Act.- The respondent-assessee disallowed expenses of Rs. 70,20,602 under Section 14A, attributing them to the earning of exempt income.Assessing Officer's Computation:- The Assessing Officer included the Rs. 820 crores investment in equity shares while computing disallowance under Section 14A, arguing that the investment must be considered even if no dividend income was earned.- The Assessing Officer computed disallowance under Rule 8D of the Income Tax Rules, 1962, disallowing Rs. 113.57 crores under clause (i), Rs. 27.55 crores under clause (ii), and Rs. 4.09 crores under clause (iii), totaling Rs. 144,52,68,698.- The Assessing Officer did not allow the set-off of interest received from subsidiaries against the interest paid.Commissioner of Income Tax (Appeals) Findings:- The Commissioner reduced the disallowance to Rs. 75,89,66,443.93, accepting the respondent-assessee's alternative computation.- It was noted that interest expenditure should be netted against interest received from subsidiaries.- The Commissioner held that no direct correlation existed between interest paid and investment in shares, thus disallowance under clause (i) was not warranted.- The Commissioner computed indirect interest expenditure related to investment in shares at Rs. 75,84,51,296 and disallowed administrative expenses of Rs. 5,15,147 under clause (iii).Tribunal's Decision:- The Tribunal upheld the computation of disallowance made by the Commissioner of Income Tax (Appeals).Court's Observations:- The court noted that the question of netting interest received against interest paid requires consideration but did not express a firm opinion as the quantum of deduction under Section 14A was covered by Supreme Court and Delhi High Court decisions.- The court highlighted that the total exempt income earned by the respondent-assessee was Rs. 19 lakhs, and disallowance cannot exceed the exempt income as per precedents set by the Supreme Court and Delhi High Court.Errors by Assessing Officer:- The court identified an error in the Assessing Officer's computation under clause (ii) of Rule 8D(2), where the total value of the investment was incorrectly considered instead of the investment yielding exempt income.- The court referenced the Delhi High Court's decision in ACB India Ltd. vs. Asstt. Commissioner of Income Tax, which clarified that only the average value of investments not forming part of total income should be considered.Conclusion:The appeal was dismissed without any order as to costs, upholding the Tribunal's decision and the reduced disallowance computed by the Commissioner of Income Tax (Appeals).