2021 (5) TMI 380 - AT - Income Tax

Tribunal ruling on disallowance under Section 14A and interest expenses impact on book profit computation

The tribunal partly favored the assessee and partly the Revenue. It upheld disallowance under Section 14A but allowed exclusion of strategic investments ... Addition u/s 14A r.w.r. 8D - HELD THAT:- The assessee's plea of investment being strategic in nature is no more sustainable in view of honourable Supreme Court decision in the case of Maxopp Investment Ltd [2018 (3) TMI 805 - SUPREME COURT]. Hence, this ground is dismissed. The assessee's plea that when interest free funds are available, which are more than the impugned investment then no disallowance under section 8D(ii) of the Act is permissible is sustainable on the touchstone of honourable jurisdictional High Court decision in the case of HDFC Bank Ltd.[2014 (8) TMI 119 - BOMBAY HIGH COURT] and Reliance Capital Asset Management Ltd. [2017 (10) TMI 177 - BOMBAY HIGH COURT]. Hence this ground is allowed. Disallowance under section 8D(iii) only those investments are to be considered which have earned exempt income on the touchstone of ITAT special men decision in the case of Vireet Investment P. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] Disallowance under section 115JB by importing the provisions of section 14A the same is not sustainable on the touchstone of ITAT Special Bench decision in the case of Vireet Investment (P.) Ltd. [2017 (6) TMI 1124 - ITAT DELHI] Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Exclusion of strategic investments for disallowance computation.3. Computation of book profits under Section 115JB of the Income Tax Act.4. Attribution of interest expenses to exempt income.5. Consideration of net versus gross interest for disallowance.Detailed Analysis:Issue 1: Disallowance under Section 14A of the Income Tax ActFor A.Y. 2012-13, the assessee appealed against the disallowance of Rs. 91,55,480/- under Section 14A, computed as per Rule 8D of the Income Tax Rules, 1962. The CIT(A) upheld the AO's decision, stating that the expenditure incurred for earning dividend income should be disallowed. The tribunal dismissed the assessee's plea that investments were strategic and not subject to disallowance under Section 14A, citing the Supreme Court decision in Maxopp Investment Ltd v/s CIT (402 ITR 640).For A.Y. 2013-14 and 2014-15, the tribunal upheld the CIT(A)'s direction to exclude strategic investments from disallowance computation, following the ITAT's previous orders in the assessee's own case. However, the tribunal reversed the CIT(A)'s decision for excluding investments that did not yield dividend income, aligning with the Supreme Court's decision in Maxopp Investment Ltd.Issue 2: Exclusion of Strategic Investments for Disallowance ComputationThe tribunal found that the exclusion of strategic investments from disallowance computation was not sustainable, referencing the Supreme Court's decision in Maxopp Investment Ltd v/s CIT. This applied to both A.Y. 2012-13 and A.Y. 2013-14.Issue 3: Computation of Book Profits under Section 115JBThe tribunal held that disallowance under Section 14A should not be imported into the computation of book profits under Section 115JB. This decision was based on the ITAT Special Bench ruling in the case of Vireet Investment (P.) Ltd. (ITA No.502 of 2012).Issue 4: Attribution of Interest Expenses to Exempt IncomeThe tribunal agreed with the assessee's plea that when interest-free funds exceed the investments, no disallowance under Rule 8D(ii) is permissible. This decision was supported by the jurisdictional High Court's rulings in the cases of HDFC Bank Ltd. (366 ITR 505) and Reliance Capital Asset Management Ltd.Issue 5: Consideration of Net versus Gross Interest for DisallowanceThe tribunal rejected the assessee's plea to consider only net interest for disallowance purposes, stating that the assessee was already benefiting from the High Court's decisions in HDFC Bank Ltd. and Vireet Investment (P.) Ltd.Conclusion:The tribunal's decisions were partly in favor of the assessee and partly in favor of the Revenue. The tribunal upheld the disallowance under Section 14A but allowed the exclusion of strategic investments only to the extent that they did not yield dividend income. The tribunal also maintained that disallowance under Section 14A should not affect the computation of book profits under Section 115JB. The appeals were partly allowed, and the decisions were pronounced in open court on 8.4.2021.