2024 (6) TMI 1060 - AT - Income Tax

ITAT deletes Section 14A disallowances, rules AO failed mandatory satisfaction before applying Rule 8D

The ITAT Delhi ruled in favor of the assessee on multiple grounds. The tribunal deleted disallowances under Section 14A, finding that the AO failed to ... Disallowance u/s 14A - Expenses incurred earning exempt income - manadation to record satisfaction - HELD THAT:- We respectfully following the order of the Tribunal in assessee own’s case for the earlier years [2018 (7) TMI 209 - ITAT DELHI] this issue is allowed in favour of the assessee we find that in so far as disallowance of interest expenditure is concern, the same has rightly been deleted by CIT (A) after due verification of the records that none of the investments have been made out of borrowed funds and has been made by assessee's own fund. In view of such a clear cut finding, no disallowance of interest can be made. With regard to other disallowance on account of administrative cost, we find that assessee has given a categorical explanation that no expenditure can be said to be attributable especially when all the investments were made in much earlier years and there is only one dividend cheque received during the year. Once assessee has produced all the relevant books of account, explained the nature of expenses debited and has explained that none of the expenditure can be said to be attributable to earning of exempt income, then onus shifts upon the Assessing Officer to examine the books of account and nature of expenditure debited and after recording his 'satisfaction' as per the mandatory requirement given in Section 14A(2) and (3) r.w.s. Rule 8D(1), then only he can proceed to make disallowance under Rule 8D, Accordingly, disallowance made by the AO is hereby directed to be deleted. Thus in the absence of any recording of mandatory satisfaction as per Section 14A (2) r.w.s. Rule 8D (1) Assessing Officer cannot mechanically apply Rule 8D for the purpose of disallowance. Accordingly disallowance made u/s. 14A by Assessing Officer is hereby deleted Computation of book profit under Section 115JB - This matter has also been decided in favour of the assessee by the Tribunal and this issue is also covered by the judgment of Sobha Developers [2021 (1) TMI 378 - KARNATAKA HIGH COURT] Accordingly we hold that no disallowance u/s. 14A is made while computing the book profit. The ground no 2 is allowed. Inclusion of self Cenvat Credit availment in the book profit u/s. 115JB - This issue has already been decided by the Tribunal in assessee’s own case so the self Cenvat credit cannot be treated as a part of book profit. Deduction u/s 80IB and 80IC - HELD THAT:- Assessee has submitted that same were allowed in favour of the assessee by the Ld CIT(A) by the common order. Failure to explain the source of cash seized from the assessee premise - HELD THAT:- Assessee has explained the nature and source of the impugned cash balance therefore addition made by AO was rightly deleted by the Ld CIT(A). The ground taken by revenue decided accordingly. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act, 1961.2. Inclusion of disallowance under Section 14A in computing book profit under Section 115JB.3. Inclusion of self CENVAT Credit in book profit under Section 115JB.4. Reduction of deduction under Section 80IB due to self CENVAT Credit.5. Reduction of other income while computing deduction under Sections 80IB and 80IC.6. Source of cash seized during search operation.Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act, 1961:The assessee contested the disallowance of Rs. 23,85,191/- under Section 14A, arguing that the section was not applicable. The Assessing Officer (AO) had disallowed Rs. 55,61,011/- under Section 14A read with Rule 8D, based on the dividend income of Rs. 52,91,268/- claimed as exempt. The CIT(A) followed the decision from the assessee's earlier assessment years (2009-10, 2010-11) and upheld the application of Section 14A read with Rule 8D. However, it was noted that investments were made from the assessee's own funds, and no disallowance on account of interest could be made. The AO was directed to recheck and make disallowance only if borrowed funds were used. The Tribunal, following its own earlier orders, deleted the disallowance made by the AO.2. Inclusion of Disallowance under Section 14A in Computing Book Profit under Section 115JB:The assessee also challenged the inclusion of Rs. 23,85,191/- disallowed under Section 14A in computing book profit under Section 115JB. The CIT(A) had restricted the disallowance to the amounts adjudicated in ground no. 2. The Tribunal, referring to its earlier decisions and the judgment of the Hon'ble Karnataka High Court in Sobha Developers vs. DCIT, held that no disallowance under Section 14A should be made while computing book profit under Section 115JB.3. Inclusion of Self CENVAT Credit in Book Profit under Section 115JB:The assessee contested the inclusion of self CENVAT Credit of Rs. 71,65,295/- in the book profit under Section 115JB. This issue had been decided in the assessee's favor in earlier years by the Tribunal, which held that self CENVAT credit could not be treated as part of book profit. The Tribunal followed the same reasoning and decided in favor of the assessee.4. Reduction of Deduction under Section 80IB Due to Self CENVAT Credit:The CIT(A) had confirmed the reduction of deduction under Section 80IB due to the inclusion of self CENVAT credit. The Tribunal found that this issue had been allowed in favor of the assessee by the CIT(A) in a common order dated 13-10-2017.5. Reduction of Other Income While Computing Deduction under Sections 80IB and 80IC:The assessee argued against the reduction of certain other income while computing deductions under Sections 80IB and 80IC. This issue was also allowed in favor of the assessee by the CIT(A) in the same common order dated 13-10-2017.6. Source of Cash Seized During Search Operation:The Revenue contended that the assessee failed to explain the source of Rs. 2.05 crore cash seized during a search operation. The CIT(A) observed that the cash book showed a closing balance of Rs. 2,17,11,538/- on the day of the search, supported by documentary evidence. The Tribunal upheld the CIT(A)'s finding that the assessee had explained the nature and source of the cash balance, and therefore, the addition under Section 68 was not justified.Conclusion:The Tribunal allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal. The disallowances under Section 14A and their inclusion in book profit under Section 115JB were deleted, the self CENVAT credit was excluded from book profit, and the reductions in deductions under Sections 80IB and 80IC were reversed. The source of the seized cash was satisfactorily explained, negating the addition under Section 68.