2019 (5) TMI 992 - AT - Income Tax

Tribunal directs AO to recompute disallowance under Section 14A with Rule 8D(2)(iii)

The tribunal partially allowed the appeal, directing the AO to recompute the disallowance under Section 14A read with Rule 8D(2)(iii) by considering only ... Disallowance u/s 14A - investments as made in investments in units and shares which generates tax-free income - HELD THAT:- The contention of the assessee that it has made investments in subsidiary companies/strategic investments and hence section 14A will not be applicable, lacks merit keeping in view decision in the case of Maxopp Investments Limited v. CIT [2018 (3) TMI 805 - SUPREME COURT] and hence this contention of the assessee stood rejected. Only those investments which actually yielded tax-free income shall be considered for computing disallowance u/s 14A read with Rule 8D(2)(iii) of the 1962 Rules, keeping in view decision of Special Bench of ITAT, Delhi in the case of Vireet Investments Private Limited [2017 (6) TMI 1124 - ITAT DELHI] and AO is accordingly directed in above lines to recomputed disallowance u/s 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules. - Appeal of the assessee is partly allowed. Issues Involved:1. Confirmation of addition under Section 14A of Rs. 34,93,693/-.2. Applicability of Rule 8D.3. Consideration of strategic investments and investments with no income for disallowance under Rule 8D.Issue-wise Detailed Analysis:1. Confirmation of Addition under Section 14A of Rs. 34,93,693/-:The assessee, engaged in manufacturing and sale of frozen foodstuffs, cold storage facilities, and processing of polymer granules, received dividend income of Rs. 4,01,399/- claimed as exempt under Section 10 of the Income-tax Act, 1961. The assessee had significant investments totaling Rs. 69,69,33,223/-. The Assessing Officer (AO) invoked Section 14A read with Rule 8D to disallow expenses related to earning exempt income. The AO computed a disallowance of Rs. 34,93,693/- under Rule 8D(2), which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) held that the method adopted by the assessee to estimate expenses defied logic and confirmed the applicability of Rule 8D. The assessee's voluntary disallowance of Rs. 3,717/- was deemed insufficient.2. Applicability of Rule 8D:The AO applied Rule 8D(2) of the Income-tax Rules, 1962, for disallowance, which was upheld by the CIT(A). The CIT(A) found the assessee's method of using the ratio of dividend income over sales and other income for disallowance computation illogical. The CIT(A) justified the AO’s application of Rule 8D due to the lack of a sound basis in the assessee's estimation method. The tribunal, upon reviewing the case, concurred with the AO and CIT(A) that the provisions of Section 14A were applicable given the substantial investments in tax-free income-generating assets.3. Consideration of Strategic Investments and Investments with No Income for Disallowance under Rule 8D:The assessee argued that strategic investments and investments yielding no income should be excluded from the disallowance computation. However, the CIT(A) rejected this argument due to the absence of specific details proving the strategic nature of the investments. The tribunal upheld this view, referencing the Supreme Court decision in Maxopp Investments Limited v. CIT, which dismissed the exclusion of strategic investments from Section 14A applicability. Additionally, the tribunal cited the Delhi Special Bench decision in ACIT v. Vireet Investments Private Limited, stating that only investments yielding exempt income should be considered for disallowance under Rule 8D(2)(iii). The tribunal directed the AO to recompute the disallowance considering only those investments that generated exempt income during the year.Conclusion:The tribunal partially allowed the appeal, directing the AO to recompute the disallowance under Section 14A read with Rule 8D(2)(iii) by considering only investments that yielded exempt income, following the principles established in Vireet Investments Private Limited. The AO was instructed to provide the assessee with an opportunity to be heard in accordance with natural justice principles. The order was pronounced on 01.03.2019.