2020 (3) TMI 868 - AT - Income Tax

Partial allowance of appeals on disallowance under Section 14A of Income Tax Act

The tribunal partially allowed the appeals concerning disallowance under Section 14A of the Income Tax Act for exempted income earned. It directed the ... Disallowance u/s. 14A - HELD THAT:- Upon perusal of assessee’s financial statements as placed on record, we concur with the submissions of assessee’s own funds far exceeded the investments held by the assessee which is evident from the fact that the assessee has year-end share capital and free reserves aggregating to ₹ 17.25 Crores as against investments of ₹ 9.16 Crores held by the assessee. Further, the incremental reserves during the year far exceeds the incremental investments made by the assessee during the year. In such a case, unless nexus of borrowed funds vis-à-vis investments made by the assessee was established by AO, a presumption was to be drawn in assessee’s favor that the investments were out of own funds. The cited case laws, which are binding in nature, squarely apply to facts of the case. Therefore, we hold that on given factual matrix, interest disallowance u/r 8D(2)(ii) would not be warranted. Therefore, we delete the same. Disallowance of direct expenditure u/r 8D(2)(i) - assessee has identified direct expenditure in the shape of demat charges and securities transactions charges and offered suo-moto disallowance of the same in its computation of income. These expenses are directly relatable to earning of exempt income and the same has already been disallowed by the assessee while computing its income under normal provisions. However, the same has not been added back while computing Book Profits u/s115JB. Keeping in view the clause (f) to explanation-1 to Section 115JB (2), the same would be added back while computing Book Profits u/s 115JB. The Ld.AO is directed to add back the same while making computations u/s 115JB. Disallowance of indirect expenditure u/r 8D(2)(iii) - AO is directed to consider only those investments which have yielded exempt income during the year and add back the same while computing income under normal provisions. However, the same would not be added back while making computations u/s 115JB as held by Delhi Tribunal (Special Bench) in ACIT Vs. Vireet Investment (P.) Ltd. [2017 (6) TMI 1124 - ITAT DELHI]. Issues:- Disallowance under Section 14A of the Income Tax Act, 1961 for exempted income earned.- Consideration of direct and indirect expenditures related to earning exempt income.- Adjustment of disallowance while computing Book Profits under Section 115JB.Analysis:Issue 1: Disallowance under Section 14A for exempted income earned- The appeal contested the disallowance made under Section 14A of the Income Tax Act, 1961 for exempted income earned.- The assessee, a resident corporate entity engaged in financing and trading of fabrics, had its income determined at Rs. 113.51 Lacs after disallowance under Section 14A for Rs. 25.10 Lacs.- The assessee earned exempt dividend income of Rs. 24.10 Lacs and offered a suo-moto disallowance of Rs.0.54 Lacs under Section 14A.- The CIT(A) directed the AO to restrict the disallowance to Rs. 24.10 Lacs, being the exempt income earned by the assessee.- The tribunal held that interest disallowance under Rule 8D(2)(ii) was not warranted as the assessee's own funds exceeded the investments, following precedents and case laws.- The tribunal directed the AO to add back direct expenditure while computing Book Profits under Section 115JB.Issue 2: Consideration of direct and indirect expenditures- The tribunal directed the AO to consider only those investments yielding exempt income during the year for disallowance of indirect expenditure under Rule 8D(2)(iii).- The AO was instructed to add back direct expenditure related to earning exempt income while computing Book Profits under Section 115JB.Issue 3: Adjustment of disallowance while computing Book Profits- The tribunal directed the AO to recompute the income under normal provisions and Section 115JB based on the above orders for both Assessment Years.- Consequently, both appeals were partly allowed as per the tribunal's orders pronounced on 10th February 2020.