2020 (3) TMI 628 - AT - Income Tax

Appeal allowed in part, interest expenses reinstated. Administrative expense and Book Profit issues remitted for review.

M/s. Sri Vishnu Shankar Mill Ltd. Versus The Income Tax Officer, Corporate Ward-1, Tamil Nadu

M/s. Sri Vishnu Shankar Mill Ltd. Versus The Income Tax Officer, Corporate Ward-1, Tamil Nadu - TMI Issues Involved:1. Sustaining the addition under Section 14A related to dividend income.2. Disallowance of interest expenses under Section 14A read with Rule 8D(2)(ii).3. Disallowance of administrative expenses under Section 14A read with Rule 8D(2)(iii).4. Addition to Book Profits under Section 115JB in relation to Section 14A disallowance.Detailed Analysis:1. Sustaining the Addition under Section 14A Related to Dividend Income:The assessee contested the addition of Rs. 36,38,000 under Section 14A, arguing that the investments were funded entirely by the company's own funds, not borrowed funds. The CIT(A) upheld the AO's decision, which the assessee challenged, claiming it was contrary to facts and based on erroneous presumptions. The assessee provided financial statements and details of the source of funding, demonstrating no borrowing was used for the investments.2. Disallowance of Interest Expenses under Section 14A Read with Rule 8D(2)(ii):The AO invoked Section 14A read with Rule 8D(2)(ii) to disallow Rs. 34.21 lakhs of interest expenses, presuming mixed use of interest-bearing funds. The assessee argued that it had sufficient own funds (Rs. 19.75 crores) to cover the investments (Rs. 8.34 crores), and thus, the presumption should be that own funds were used. The assessee also sold land for Rs. 9.35 crores during the year, which was used for investments. The Tribunal agreed with the assessee, noting that the Revenue couldn't demonstrate a direct correlation between borrowed funds and investments. The Tribunal ordered the deletion of the interest expense disallowance.3. Disallowance of Administrative Expenses under Section 14A Read with Rule 8D(2)(iii):The AO also disallowed Rs. 2.17 lakhs as administrative expenses under Section 14A read with Rule 8D(2)(iii). The Tribunal noted that the assessee needed to provide detailed explanations and evidence regarding the investment decision-making process, including the involvement of the Board of Directors, committees, and associated costs. The Tribunal remitted the matter back to the AO for fresh adjudication, directing the assessee to produce relevant details to substantiate its claims.4. Addition to Book Profits under Section 115JB in Relation to Section 14A Disallowance:The AO included the disallowed expenses in the computation of Book Profits under Section 115JB. The assessee argued that Section 14A read with Rule 8D(2) should not apply to Section 115JB, citing the Special Bench decision in Vireet Investment (P) Limited. The Tribunal agreed, stating that disallowance under Section 115JB should be computed according to Explanation 1(f) to Section 115JB, in line with the Vireet Investment decision. The matter was remitted back to the AO for fresh computation of Book Profits.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, ordering the deletion of the interest expense disallowance under Section 14A read with Rule 8D(2)(ii) and remitting the issues of administrative expense disallowance and Book Profit computation back to the AO for fresh adjudication. The Tribunal emphasized the need for the assessee to provide detailed evidence regarding the investment decision-making process and the proper application of Section 115JB in line with judicial precedents.