2024 (12) TMI 1052 - AT - Income Tax

Interest expenditure disallowance under section 14A rejected when interest-free funds exceed exempt income investments

ITAT Ahmedabad allowed the assessee's appeal on multiple grounds. The tribunal held no disallowance of interest expenditure was warranted under section ... Disallowance u/s 14A - disallowance of interest and administrative expenditure - HELD THAT:- Hon’ble Gujarat High Court, in assessee’s own case, for AY 2009-10 & 2010-11 [2018 (8) TMI 922 - GUJARAT HIGH COURT], [2019 (6) TMI 1006 - GUJARAT HIGH COURT] held that where interest free own funds substantially exceed the investment in exempt income yielding securities, there was no justification in making disallowance of interest expenditure. Disallowance of administrative expenditure, Hon’ble Gujarat High Court has deleted the disallowance computed in accordance with Rule 8D and has restricted the disallowance of administrative expenditure to Rs. 15,00,000/-. Thus, we hold that no disallowance on account of expenditure on interest is called for. With regard to the disallowance on account of administrative expenditure, when pointed out, the Ld. AR fairly submitted that there has been slight rise in the administrative expenses owning to the rise in the salary of staff, the administrative expenses disallowable could be Rs. 17,50,000/-. The Ld. DR could not controvert the proposition. Hence, the disallowance is restricted to Rs. 17,50,000/-. Capitalization of interest-WIP - computed the amount of capitalization of interest expenditure in excess of actual interest by taking into account notional interest rate 12% on the closing balance of CWIP - CIT(A) upheld the disallowance made by the AO on account of disallowance of interest debited treating the same as capitalization of interest attributable to Capital Work in Progress - HELD THAT:- We find that the assessee had term loan of External Commercial Borrowing (ECB) taken for acquisition of shares of a foreign company, namely, Kamalyte Resources Inc., Canada and the loan is secured by pledge on shares of the said company. The Assessee also had as short-term loan from Gujarat State Financial Services Ltd. for a period of 90 days for the purpose of financing working capital.It can be found from the record that the assessee had cash credit account, overdraft facility, commercial paper, buyers’ credit, bill discounting, etc. for the purpose of financing working capital. From the detailed examination of the borrowings of the assessee and payment of interest since no loan amount has been raised and utilized for the purpose of Capital Work in Progress, no addition is called for in this account. The notional interest calculated by the AO computing 12% on the closing balance of CWIP cannot stand test of legal scrutiny. Disallowance of CSR Expenses - Disallowance on the grounds that the provisions of Income-tax Act, section 37(1) cannot be invoked for claiming such expenses - HELD THAT:- We have gone through the facts of the issue and the legal position thereof. The Explanation 2 to section 37(1) provides that, 'any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of the business or profession.' It states that, CSR expenses shall not be deemed to be expenditure for the purposes of business. The language of the Act is very clear and unambiguous hence does not call for any interpretations of the statute or inferences contrary to the legislative intention. Disallowance u/s 35(2AB) - AO disallowed the amount the difference between the revenue expenditure and the expenditure approved by the DSIR - HELD THAT:- AR pertained to the period before the amendment brought with effect from 01.07.2016. Hence cannot be considered to be applicable to the present case as it pertains to AY 2016- 17. In the case of Mrs. Manjula Sood [1997 (2) TMI 85 - PUNJAB AND HARYANA HIGH COURT] held that where there are any amendments or alterations in procedural law in course of assessment proceedings, altered procedural law would be applicable. It is held that the appellant is not entitled to claim weighted deduction and the addition made by the AO is hereby confirmed. The ground raised by the appellant is hereby dismissed. GSFC – Donation 80G / 37(1) - HELD THAT:- A donation cannot be treated as business expenditure and the business expenditure do not partake the character “donation”. The donations under 80G, the CSR expenses and the business expenses u/s 37(1) operate under different arena. Hence, we hold that the assessee is rightly eligible for claim of deduction under 80G as claimed and accounted in the books of accounts as per the final accounts drawn. Re-computation 115JB and 14A - By now it has been settled by the order in the case Vireet Investments Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] that the disallowance made u/s 14A cannot be considered for calculating book profit u/s 115JB of the Act. Hence, the appeal of the Revenue on this ground is dismissed. Issues Involved:1. Disallowance of administrative expenditure under Section 14A.2. Capitalization of interest attributable to Capital Work in Progress (CWIP).3. Disallowance of Corporate Social Responsibility (CSR) expenses.4. Disallowance under Section 35(2AB) concerning weighted deduction on research and development expenditure.5. Deduction under Section 80G for donation to GSFC Education Society.6. Re-computation of book profit under Section 115JB in relation to Section 14A disallowance.Detailed Analysis:1. Disallowance of Administrative Expenditure under Section 14A:The Tribunal examined the disallowance of interest and administrative expenditure under Section 14A read with Rule 8D. The Gujarat High Court had previously ruled in favor of the assessee for earlier assessment years, stating that when interest-free own funds substantially exceed investments in exempt income-yielding securities, disallowance of interest expenditure is unjustified. The Tribunal, following this precedent, held that no disallowance of interest was warranted. However, it restricted the disallowance of administrative expenses to Rs. 17,50,000, acknowledging a slight increase due to higher staff salaries. The appeal on this ground was partly allowed.2. Capitalization of Interest Attributable to CWIP:The Assessing Officer had capitalized interest expenditure by applying a notional interest rate of 12% on the closing balance of CWIP. The assessee argued that the interest was on short-term borrowings and term loans for specific purposes, not for CWIP, and that total interest received exceeded interest paid, negating net interest expenditure. The Tribunal found that no loans were raised for CWIP and that the Assessing Officer's notional interest calculation lacked legal basis. The appeal on this ground was allowed.3. Disallowance of CSR Expenses:The Tribunal addressed the disallowance of Rs. 1,51,29,735 in CSR expenses, which the Assessing Officer had denied under Section 37(1). The Tribunal noted that Explanation 2 to Section 37(1) explicitly excludes CSR expenses from being considered business expenditures. Despite the assessee's arguments, the Tribunal upheld the disallowance, citing clear statutory language. The appeal on this ground was dismissed.4. Disallowance under Section 35(2AB):The assessee claimed a weighted deduction for research and development expenditure, which was partially disallowed by the Assessing Officer based on DSIR's certification. The Tribunal noted that the relevant rules requiring DSIR certification were effective from AY 2017-18, not AY 2016-17, but upheld the disallowance as the procedural rules applied to ongoing assessments. The Tribunal found no reason to interfere with the CIT(A)'s order, and the appeal on this ground was dismissed.5. Deduction under Section 80G for Donation to GSFC Education Society:The assessee sought to claim a donation to GSFC Education Society as a business expenditure, which the Tribunal rejected. It clarified that donations, CSR expenses, and business expenses under Section 37(1) operate in distinct legal areas. The Tribunal upheld the deduction claim under Section 80G as per the assessee's accounting. The appeal on this ground was partly allowed.6. Re-computation of Book Profit under Section 115JB:The Revenue's appeal concerning the adjustment of book profit under Section 115JB in relation to Section 14A disallowance was addressed. The Tribunal referred to the Special Bench decision in Vireet Investments Pvt. Ltd., which ruled that disallowance under Section 14A should not be considered for book profit computation under Section 115JB. Consequently, the Revenue's appeal on this ground was dismissed.Conclusion:The Tribunal's order resulted in the assessee's appeal being partly allowed, the Revenue's appeal being dismissed, and the assessee's cross-objection being dismissed as infructuous. The judgment was pronounced in open court on 17.12.2024.