2026 (1) TMI 704 - AT - Income Tax

Disallowance u/s14A/Rule 8D for investments yielding exempt income limited to 1% monthly average; AO to recompute

Dominant issue: correctness of disallowance under s.14A read with Rule 8D. The Tribunal held Rule 8D must be applied only to investments that actually ... Disallowance u/s 14A in terms of Rule 8D - AO had observed from the balance-sheet that the assessee held substantial investments which were capable of yielding tax-free income and therefore, according to him, the expenditure incurred in relation to earning such exempt income was to be disallowed - HELD THAT:- This Tribunal in assessee’s own case for AY 2013-14 [2021 (12) TMI 390 - ITAT CHENNAI], had held that, only those investments which yielded exempt income was to be considered for the purposes of computing disallowance under Rule 8D. Thus, we hold that, the disallowance in terms of Rule 8D was required to be computed with reference to only those investments which yielded the exempt income of ₹1,07,44,451/- during the relevant year. Having regard to the amended Rule 8D, the AO is directed to recompute and restrict the disallowance to 1% of the monthly average of exempt income yielding investments. Disallowance computed u/s 14A r.w. Rule 8D, while computing book profit u/s 115JB - Tribunal has considered an identical issue in assessee’s own case for assessment years 2014- 15 to 2016-17 [2019 (12) TMI 1562 - ITAT CHENNAI] and by following decision of Vireet Investment Pvt. Ltd [2017 (6) TMI 1124 - ITAT DELHI] held that “computation under Clause (f) of the Explanation -1 to Section 115JB(2) is to be made without resorting to the computation as contemplated u/s. 14A r.w.rule.8D of the Rules”. Therefore, we direct the AO to delete addition made towards disallowance u/s. 14A r.w.rule 8D to book profit computed u/s. 115JB. Disallowance of proportionate interest on borrowings in relation to the interest-free advances given by the assessee - It is seen that, the assessee had own funds comprising of capital, reserve & surplus which was far in excess of the average balance of interest-free-advances - AR has rightly pointed out that, the Hon’ble Supreme Court in the case of CIT v. Reliance Industries Ltd [2019 (1) TMI 757 - SUPREME COURT] has held that, where the amount of any interest- free loans given is sufficiently covered with the non-interest-bearing fund available with the assessee, then the question of disallowance of interest on borrowed fund does not arise. We find that identical disallowance was made by the AO in the earlier year(s) as well and this Tribunal had deleted the same in the consolidated order passed for AYs 2007-08 to 2011-12 by their order [2016 (1) TMI 1028 - ITAT CHENNAI] Having regard to the position of own interest free funds and the average value of interest free advances, as noted above, we agree with the Ld. AR that, the presumption is that the assessee had given interest free advances from its own funds. Nature of expenditure - disallowance of depreciation attributable to the fees paid to Dr. K. Venkatesan, a purported vastu expert - AO held that such expenses cannot be termed to be for business purposes and therefore disallowed the depreciation attributable to such expenditure - HELD THAT:- Tribunal in [2016 (1) TMI 1028 - ITAT CHENNAI] held that such a huge payment cannot be made year after year. When the assessee claims that payment of Rs. 2,50,00,000/- was made for assessment year 2009-10, it is not known why such a huge payment of Rs. 75 lakhs was made to Dr. K. Venkatesan for the same services. The assessee is expected to incur certain expenditure on the belief that the art of vastu may increase the productivity or profit of the assessee. However, claiming such expenditure year after year cannot be for business purpose. Characterization of receipt - Revenue or capital receipt - treating the subsidy received from the Government of Maharashtra for investing in backward area to by way of income instead of capital receipt not liable to tax - HELD THAT:- Considering the above amendment to section 2(24) of the Act and decision of this Tribunal in the case of M/s Hyundai Motor India Ltd [2025 (2) TMI 1317 - ITAT CHENNAI] for the AY 2018-19 we are of the view that the decision rendered in assessee’s own case for AY 2013-14 is no longer applicable, due to change in position of law. We are therefore of the view that the lower authorities had rightly taxed the impugned subsidy as income of the assessee. Accordingly, this ground of the assessee stands dismissed. Disallowance of royalty payable to the Government on limestone excavation - According to the AO, the royalty paid to the Government on limestone excavation was subject to the rigors of Section 43B of the Act and was deductible only on actual payment basis - HELD THAT:- Though the AR appearing for the assessee vehemently contended in support of this ground, but was neither able to controvert the above findings of the Ld. CIT(A) nor was he able to show as to why the royalty payable to government under the Mines and Mineral (Development Regulation) Act cannot be subject to the provisions of Section 43B of the Act. We thus see no reason to interfere with the impugned action of the Ld. CIT(A), which we confirm, and dismiss this ground of appeal of assessee. Addition made by the AO on account of the provision set aside for leave encashment while assessing the book profit u/s 115JB - We agree with the first contention of the Ld. AR that, Section 115JB being a code in itself, the provisions of Section 43B which is applicable for computing income under the head ‘Profits & Gains of Business’ cannot be imported into the computation mechanism set out in Explanation (1) to Section 115JB - AO is required to ascertain whether the impugned provision can be added back or not, under any of the specified clauses set out in Explanation (1) to Section 115JB of the Act. We find that the lower authorities have not examined this aspect at all and on similar facts, this Tribunal had set aside the issue back to the file of the AO in the earlier year(s) to decide the matters afresh. Respectfully following the same, we set aside the issue back to the file of the AO and direct him to decide the allowability of the impugned provision while computing book profit u/s 115JB de novo, and in light of Explanation (1) to Section 115JB of the Act alone. Disallowance of interest paid on belated TDS while computing book profit u/s 115JB - Interest paid for belated deposit of TDS is allowed as deduction while assessing book profit u/s 115JB of the Act. This ground is accordingly allowed. Disallowance of deduction u/s. 80IA - We, therefore, respectfully following the decision of the Tribunal in the assessee's own case for the assessment year 2018-19, set aside the order of the lower authority, uphold the benchmark analysis undertaken by the assessee and delete the downward transfer pricing adjustment and allow this ground raised by the assessee. Addition made by the AO u/s 68 - deposit of Specified Bank Notes [‘SBNs’] during the period of November-December 2016 - The assessee has claimed that, the impugned amount represented advances which were returned by travelling employees. We however find that no details/evidence has been furnished to substantiate the same. In order to justify their claim, the assessee ought to provide the names, details of the employees, the dates on which advances were given to them, evidence that they were travelling on the date of demonetization, confirmation of accounts from them etc. No such details were either furnished before the lower authorities or before us. Hence, in fitness of the matters, we consider it fit to remit the matter back to the AO with direction to the assessee to submit necessary details/evidences to substantiate the source of these non-permitted cash receipts. The details/evidences mentioned in the foregoing are only illustrative and the assessee is free to produce any other details, as it considers fit. The AO may also make independent enquiries from the employee(s), if so desired. This ground is accordingly allowed for statistical purposes. Issues: (i) Whether disallowance under Section 14A read with Rule 8D should be computed by reference only to investments yielding exempt income and whether such disallowance should be added to book profit under Section 115JB for AY 2017-18; (ii) Whether disallowance of interest attributable to interest-free advances to subsidiaries is allowable; (iii) Whether depreciation attributable to fees paid to Dr. K. Venkatesan is allowable; (iv) Whether subsidy received from Government of Maharashtra is capital or taxable as income; (v) Whether royalty payable under Mines and Minerals (Development and Regulation) Act is deductible or disallowable under Section 43B; (vi) Whether provision for leave encashment may be disallowed while computing book profit under Section 115JB; (vii) Whether interest on belated TDS is to be added back while computing book profit under Section 115JB; (viii) Whether deduction under Section 80-IA for captive power units is to be reduced based on TPO’s benchmarking; (ix) Whether deposits of Specified Bank Notes during demonetisation are unexplained cash credits under Section 68.Issue (i): Whether disallowance under Section 14A r.w. Rule 8D should be computed by reference only to investments which yielded exempt income and whether the disallowance added to book profit under Section 115JB is required.Analysis: The Tribunal followed its coordinate-bench precedents in the assessee’s own case that only investments yielding exempt income are to be considered for Rule 8D disallowance. Noting the amendment to Rule 8D (IT (Fourteenth Amdt.) Rules, 2016) changing the computation to 1% of monthly average, the Tribunal directed recomputation restricted to investments yielding exempt income using the amended monthly-average methodology. Separately, the Tribunal followed earlier decisions holding that computation under Explanation-1 to Section 115JB(2) is to be made without resort to Section 14A r.w. Rule 8D, and therefore additions made to book profit under Section 115JB on account of Section 14A/Rule 8D are to be deleted.Conclusion: Disallowance under Rule 8D to be recomputed in respect of only those investments yielding exempt income at 1% of monthly average; addition to book profit under Section 115JB on account of Section 14A r.w. Rule 8D deleted. Decision in favour of Assessee on the book profit point and partly in favour on Rule 8D (recomputation directed).Issue (ii): Whether interest attributable to interest-free advances to subsidiaries should be disallowed.Analysis: The Tribunal examined the assessee’s own non-interest-bearing funds, finding own funds substantially exceeded average interest-free advances. Relying on binding precedent (including Supreme Court guidance as applied in the assessee’s earlier orders), the Tribunal held the presumption that advances were made out of own funds, and that no notional interest addition was warranted where subsidiaries used funds for business.Conclusion: Addition disallowing interest on advances deleted. Decision in favour of Assessee.Issue (iii): Whether depreciation on amounts paid to Dr. K. Venkatesan is allowable.Analysis: The Tribunal noted conflicting earlier orders in the assessee’s own case; it followed the later coordinate-bench decision for AY 2013-14 which confirmed disallowance, observing repeated large payments lacked bonafides and were not wholly and exclusively for business. The Tribunal applied that later precedent to the year under appeal.Conclusion: Disallowance of depreciation attributable to payments to Dr. K. Venkatesan upheld. Decision against Assessee.Issue (iv): Whether subsidy from Government of Maharashtra is capital or taxable as income.Analysis: The Tribunal examined the post-2015 amendment to Section 2(24) (insertion of clause (xviii)) which includes government assistance/subsidy within the definition of 'income' (except amounts accounted in actual cost of an asset under Explanation 10 to Section 43). The Tribunal followed recent precedents holding that after that amendment subsidies are taxable irrespective of earlier 'purpose test' distinctions, and noted constitutional challenge had been negatived in relevant precedent.Conclusion: Subsidy held to be includible in income and taxed. Decision against Assessee.Issue (v): Whether royalty payable under Mines and Minerals (Development and Regulation) Act is deductible or disallowable under Section 43B.Analysis: The Tribunal accepted the AO/CIT(A) reasoning that amounts payable under statutory levy are covered by Section 43B and deductible only on actual payment. The CIT(A) allowed adjustment for amounts subsequently paid/reversed pursuant to Government notification and confirmed a reduced disallowance. The assessee failed to show error in that application.Conclusion: Disallowance under Section 43B confirmed as modified by CIT(A). Decision against Assessee.Issue (vi): Whether provision for leave encashment can be disallowed while computing book profit under Section 115JB.Analysis: The Tribunal held that computation under Section 115JB is a self-contained code and provisions of Section 43B cannot be imported into Explanation (1) to Section 115JB. The AO had not examined whether the provision fits any clause in Explanation (1). The matter was therefore remitted to AO to decide afresh under Explanation (1) to Section 115JB, with opportunity to assessee to prove whether liability is ascertained.Conclusion: Issue set aside and remitted to AO for fresh decision under Explanation (1) to Section 115JB. Decision in favour of Assessee for statistical purposes.Issue (vii): Whether interest on belated TDS is to be added back while computing book profit under Section 115JB.Analysis: Following coordinate-bench precedent, the Tribunal held TDS is tax deducted on behalf of third parties and not the assessee’s income tax; interest on belated TDS is expenditure deductible and not required to be added back under Section 115JB.Conclusion: Interest on belated TDS allowed while computing book profit. Decision in favour of Assessee.Issue (viii): Whether deduction under Section 80-IA for captive power units should be reduced by TPO adopting lower state-regulated tariffs.Analysis: The Tribunal followed its own coordinate-bench decisions in the assessee’s prior years holding that for captive consumption the market rate to a consumer (i.e., distribution company retail/consumer tariff) should be used rather than the rate at which generators supply to SEBs. On identical facts and precedents, the Tribunal held the assessee’s benchmarking was acceptable.Conclusion: TP downward adjustment deleted and deduction under Section 80-IA allowed as per assessee’s benchmark. Decision in favour of Assessee.Issue (ix): Whether deposits of Specified Bank Notes (SBNs) during demonetisation are unexplained cash credits under Section 68.Analysis: The Tribunal observed that the assessee asserted the SBN deposits represented repayments of advances by travelling employees but has not produced requisite particulars (names, dates of advances, confirmations, evidence of travel). Because the source had not been sufficiently substantiated, the Tribunal remitted the issue to AO with directions to allow the assessee to produce evidence and for AO to make enquiries.Conclusion: Matter remitted to AO for enquiry and verification; issue allowed for statistical purposes.Final Conclusion: The Tribunal partly allowed the appeal by directing recomputation of Rule 8D disallowance limited to investments yielding exempt income (using amended Rule 8D), deleting additions under Section 14A/Rule 8D to book profit u/s 115JB, deleting interest disallowance on advances and TP downward adjustment for Section 80-IA, allowing certain book-profit adjustments (TDS interest) and remitting specified issues for fresh adjudication; other contested disallowances were upheld. Ratio Decidendi: The amended Rule 8D must be applied to compute disallowance only with respect to investments yielding exempt income and, for book-profit computation under Section 115JB, additions under Section 14A r.w. Rule 8D are not to be made because Section 115JB’s Explanation (1) is the exclusive code for such computation; additionally, post-Finance Act 2015 insertion of Section 2(24)(xviii) subsumes government subsidies within 'income' and makes such subsidies taxable except where accounted in actual cost of an asset under Explanation 10 to Section 43.