2021 (1) TMI 45 - AT - Income Tax

Tribunal allows assessee's appeal, directs AO to recompute disallowance under section 14A.

The Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the revenue's appeal. The Tribunal directed the AO to recompute ... Disallowance u/s 14A r.w.r. 8D(2)(iii) - as per assessee CIT (A) has erred in upholding the action of AO to disallow expenses incurred towards earning exempt income in accordance with Rule 8D(2) (iii) of the Income Tax Rules (the Rules) and the disallowance made should have been restricted to the suo moto disallowance made by the assessee or the same should have been appropriately reduced - HELD THAT:- CIT (A) has directed the AO to recompute the disallowance under rule 8D(2)(iii) after excluding investment in growth schemes of Mutual Funds, which are not capable of generating any exempt income - In our considered view, the findings of the Ld. CIT(A) are based on the law laid down by the Hon’ble Supreme court and the various High Courts. Hence, we are of the considered view that the authorities below have rightly invoked Rule 8D(2)(iii) of the Rules for determining the disallowance. Average investment for the purpose of calculating disallowance under rule 8D(2)(iii) should include only those investments from which the assessee has earned exempt income during the year - CIT (A) has rejected the plea of the assessee holding that the same cannot be accepted in view of the decision of the Special Bench of the ITAT, Delhi in the case of ACIT and another vs. Vireet Investments Pvt [2017 (6) TMI 1124 - ITAT DELHI] - Under rule 8D(2)(iii) disallowance is made equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of total income as appearing in the balance sheet of the assessee on the first day and the last day of the previous year - AO has brought on record the fact that the assessee has worked out 20% of the time of two employees out of total strength of 90 employees of head office only as expenses attributable to investment activity and has not provided any justification for such allocation. Hence since the AO had computed the disallowance under rule 8D(2)(iii), the Ld. CIT(A) has rightly upheld the action of AO in applying Rule 8D(2)(iii) of the Rules, for determining disallowance. However, the Ld. CIT(A) has rejected the contention of the assessee that only those investments from which exempt income has been earned during the year may be included for the purpose of determining disallowance under rule 8D(2)(iii) of the Rules by following the decision of the special Bench in the case of ACIT vs. Vireet Investments Pvt. Ltd. (supra) CIT (A) has decided this issue contrary to the decision of the Special Bench of the Delhi Tribunal. The Special Bench has categorically held in the said case that while computing disallowance under Rule 8D(2)(iii), only those investments are required to be taken into consideration which yielded exempt income during the year. Accordingly, we set aside the order passed by the Ld. CIT(A) and direct the AO to recomputed the disallowance u/s 14A r.w.r 8D(2)(iii). Disallowance u/s 14A r.w.r. 8D from the book profit u/s 115JB - HELD THAT:- As pointed out by the Ld. counsel, this issue is covered in favour of the assessee by the judgment of the Hon’ble jurisdictional High Court and the decision of the Special Bench of the Delhi Tribunal in Vireet Investments Pvt [2017 (6) TMI 1124 - ITAT DELHI]. Since, the findings of the Ld. CIT (A) are in accordance with the ratio laid down by the Hon’ble Bombay High Court and the decision of the Special Bench, we do not find any reason to interfere with the same. Hence, we dismiss this ground of appeal of the revenue. Allowing loss claim on sale of Mutual Funds and equity shares on the basis of revised statements by CIT-A - HELD THAT:- CIT (A) has decided this issue in favour of the assessee following the ratio laid down by the Hon’ble Bombay High Court in the case of M/s Pruthvi Brokers and shareholder Pvt. Ltd. [2012 (7) TMI 158 - BOMBAY HIGH COURT] - So far as the judgment of the Hon’ble Supreme Court in the case of Goetze (India) [2006 (3) TMI 75 - SUPREME COURT] is concerned the issue involved in the said case was the power of assessing authority an not the powers of appellate authorities. Since the decision of the Ld. CIT(A) is in accordance with the judgment of the Hon’ble jurisdictional High Court, we do not find any infirmity in the order passed by the Ld. CIT (A) to interfere with. Issues Involved:1. Disallowance under section 14A of the Income Tax Act read with Rule 8D(2)(iii) of the Income Tax Rules.2. Exclusion of investment in growth schemes of Mutual Funds for computation of average investment for disallowance under section 14A.3. Deleting disallowance under section 14A from book profit under section 115JB.4. Allowing loss claimed on sale of Mutual Funds and equity shares based on revised statements instead of a revised return.Issue-wise Detailed Analysis:1. Disallowance under section 14A of the Income Tax Act read with Rule 8D(2)(iii) of the Income Tax Rules:The assessee challenged the CIT(A)'s decision to uphold the AO's disallowance of expenses incurred towards earning exempt income under section 14A read with Rule 8D(2)(iii). The assessee argued that the disallowance should be limited to the suo moto disallowance made or appropriately reduced. Additionally, the assessee contended that only those investments which earned exempt income during the year should be included for calculating disallowance under Rule 8D(2)(iii). The Tribunal, after considering the submissions and the decision of the Special Bench of the Delhi Tribunal in ACIT vs. Vireet Investments Pvt. Ltd., held that only investments yielding exempt income during the year should be considered for disallowance under Rule 8D(2)(iii). Therefore, the Tribunal set aside the CIT(A)'s order and directed the AO to recompute the disallowance accordingly.2. Exclusion of investment in growth schemes of Mutual Funds for computation of average investment for disallowance under section 14A:The revenue challenged the CIT(A)'s direction to exclude investments in growth schemes of Mutual Funds for computing average investment for disallowance under section 14A read with Rule 8D. The Tribunal upheld the CIT(A)'s findings, noting that the CIT(A) based the decision on established law and correctly directed the AO to exclude such investments. Consequently, the Tribunal dismissed this ground of appeal by the revenue.3. Deleting disallowance under section 14A from book profit under section 115JB:The revenue contested the CIT(A)'s decision to exclude disallowance under section 14A from book profit under section 115JB. The Tribunal noted that the issue was covered in favor of the assessee by the judgment of the Bombay High Court in CIT vs. Bengal Finance & Investments Pvt. Ltd. and the Special Bench of the Delhi Tribunal in ACIT vs. Vireet Investments P. Ltd. Both rulings held that disallowance under section 14A cannot be added to book profit under section 115JB. Therefore, the Tribunal upheld the CIT(A)'s decision and dismissed this ground of appeal by the revenue.4. Allowing loss claimed on sale of Mutual Funds and equity shares based on revised statements instead of a revised return:The revenue argued that the CIT(A) erred in allowing the loss claimed on the sale of Mutual Funds and equity shares based on revised statements, citing the Supreme Court decision in Goetze India Ltd. vs. CIT, which mandates filing a revised return for such claims. However, the Tribunal observed that the Bombay High Court in M/s Pruthvi Brokers and Shareholder Pvt. Ltd. held that appellate authorities have the jurisdiction to admit and adjudicate additional claims raised during appellate proceedings. Since the CIT(A)'s decision aligned with the jurisdictional High Court's ruling, the Tribunal upheld the CIT(A)'s findings and dismissed this ground of appeal by the revenue.Conclusion:The assessee's appeal was partly allowed for statistical purposes, and the revenue's appeal was dismissed. The Tribunal directed the AO to recompute the disallowance under section 14A read with Rule 8D(2)(iii) by including only those investments that yielded exempt income during the year. The Tribunal upheld the CIT(A)'s decisions on excluding growth scheme investments for disallowance computation, deleting disallowance from book profit under section 115JB, and allowing loss claims based on revised statements.