TaxTMI 
TaxTMI 
2026 (7) TMI 486
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....- Rs. 32,95,766/-). 1.2. The Ld. CIT(A) failed to appreciate and ought to have considered that the disallowance u/s. 14A applying Rule 8D can be made only upon recording of objective satisfaction on the part of the Id. AO having regard to the books of account of the assessee that the suo-motu disallowance offered by the assessee is not correct. 1.3. Without prejudice to the above, the Learned CIT(A) further erred in confirming allocation of interest of Rs. 2,68,69,253/- and Other Expenses at 1% of the annual average of monthly average of Investments computed at Rs. 72,04,173/-, though reduced disallowance of Rs. 32,95,766/- offered by Appellant Company in tax return. 1.4. The Appellant prays that the disallowance offered suo-motu by the Appellant be accepted and the incremental disallowance u/s. 14A r.w.r. 8D amounting to Rs. 3,07,77,660/-be deleted. 2. Ground No. 2-Incorrect computation of deduction u/s. 36(1)(viia) and 36(1)(viii) of the Act: 2.1. The Ld. CIT (A) erred in confirming reduction of Rs. 25,12,56,676/- from the allowance of Rs. 164,06,15,655/- for provision for bad and doubtful debts claimed by Appellant Company u/s 36(1)(v....
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....by AO in income computation, automatically allowance u/s 36(1) (viia) should be enhanced by 5% of addition / disallowance. The Appellant craves leave to add to, delete from or alter any or all of the above grounds of appeal." 2. Briefly stated facts of the case are that the assessee, a Public Limited Company, is engaged in the business of providing long-term finance for housing. For the year under consideration, it filed its original return of income on 29.10.2018 declaring a total income of Rs.2,721,20,78,693/-. The return was subsequently revised on 18.03.2019 and again on 30.03.2019, whereby the total income was revised to Rs.2,608,59,08,870/-. 2.1 In the revised return of income, the assessee, inter alia, claimed deduction under Sections 36(1)(viia) and 36(1)(viii) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The return was processed under Section 143(1) of the Act on 21.12.2019 and the total income was determined at Rs.2,611,12,97,300/- after making certain adjustments. 2.2 Subsequently, the case was selected for complete scrutiny assessment. In response to the statutory notices issued under the Act, the assessee furnished the requisite....
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....were long-standing investments held for more than a decade and constituted legacy investments financed entirely out of the assessee's own funds. Consequently, according to the assessee, no portion of the interest expenditure could be attributed to such investments. The assessee also pointed out that in the preceding assessment years, the First Appellate Authority had accepted its contention that no disallowance of interest expenditure was warranted in relation to such investments. The assessee further submitted that, having regard to the substantial availability of its own funds, only indirect administrative expenditure could be said to be attributable to the earning of exempt income. Accordingly, it voluntarily computed and disallowed, on an estimated basis, indirect administrative expenditure amounting to Rs.1,79,322/-, the details whereof are reproduced hereunder: "a) During the FY 2017-18, Company has received dividend income of Rs. 363.34 lakh in 5 transactions wherein dividend income was directly credited to the Bank Account of the Assessee Company and for recording these 5 transactions in its books, company estimates expenditure of Rs. 150/- per transaction i.e. Rs.....
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....79806 August-17 740979806 740979806 Sep-17 740979806 740979806 Oct-17 740979806 740979806 Nov-17 740979806 740979806 Dec-17 740979806 740979806 Jan-18 740979806 740979806 Feb-18 740979806 740979806 Mar-18 740979806 740979806 Total of monthly average 864,50,07,672/- Annual average of monthly average 72,04,17,306/- 4.2 The aforesaid submissions of the assessee, however, did not find favour with the Assessing Officer. According to the Assessing Officer, the assessee itself had consistently maintained that its business activities were financed through a common pool of funds comprising both owned and borrowed funds, which were deployed across various business segments, including investments. The Assessing Officer further observed that, for the purpose of computing deduction under Section 36(1)(viii) of the Act, the assessee had itself allocated interest expenditure amongst different streams of income, thereby acknowledging that the cost of funds formed an integral component of the income-generating activities carried on by it. The Assessing Officer also disputed the assessee's contention that the inve....
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....fore, it is illogical to accept the assessee's different stands in different paras on a single issue. Even otherwise, the assessee's version all the investments were old, is also factually incorrect since the amount of investment as on 01.04.2016 was Rs. 30.14 cr. which increased to Rs. 57.65 cr. as on 31.03.2017 and Rs. 74.10 cr. as on 31.03.2018. Therefore, the funds were regularly being invested in securities generating exempt income to the assessee; and as per the assessee's own claim, the funds were invested out of common pool of funds including interest bearing funds, Therefore, it is logical and as well as legal to allocate proportionate interest expenses to investment generating exempt income. Adopting the figures from the assessee's own calculations, interest expenses allocated is calculated as under: Income H/L Term Income from investment at Rs. 54,30,82,807/- includes exempt income at Rs. 3,63,33,902/-. Thus, after making proportionate allocation, interest amounting to Rs. 2,6....
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.... allocation is not done, one may arrive at a distorted figure of net income from a particular source. Further the facts of the case laws are not applicable in the case of the assessee. From the detailed discussion made in para 2.2 and this para, I am satisfied that a part of total interest cost to the assessee is also attributable to the investments yielding exempt income. Therefore, the amount of disallowance u/s 14A of the Act is calculated as per method provided in Rule 8D of the Rules: Interest attributable to exempt income Rs. 2,68,69,253/- 1% of monthly average of investments Rs. 72,04,173/- Total Rs. 3,40,73,426/- Less: Disallowance made by the assessee in the return Rs. 32,95,766/- Additional disallowance made u/s 14 A Rs. 3,07,77,660/- Therefore, an addition of Rs. 3,07,77,660/- is hereby made to the total income of the assessee. Penalty proceedings u/s 270A of the Act are hereby initiated for under reporting of income." 4.4 On further appeal, the Ld. CIT(A), after considering the submission of the assessee, upheld the disallowance observing as under: "The appellant has contested the disallowance of Rs 3,07,77,660 under se....
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....erit a more cautious approach: 1. On the claim of interest-free funds The appellant asserts that investments are sourced from own funds, but has not submitted fund-flow statements or detailed matching of funds to rebut the AO's inference. The Supreme Court in Maxopp Investment Ltd. held that whether investment is strategic or not is irrelevant, and disallowance under section 14A applies where exempt income is capable of being earned. The claim of own funds must be demonstrably shown to be sufficient and traceable to the investment corpus not just present in the balance sheet. 2. On Rule 8D invocation and satisfaction Though the satisfaction recorded may appear brief, the AO has, in effect, expressed his view that the assessee's methodology is unsatisfactory. In light of Godrej & Boyce Mfg. Co. Ltd. v. DCIT [(2017) 394 ITR 449 (SC)], a general dissatisfaction if borne out by reasoning is sufficient to invoke Rule 8D. Appellate authorities are not expected to substitute their computation for the AO's unless the latter is demonstrably arbitrary, which is not the case here. 3. On administrative expenses and composite interest cos....
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....al Manager-cum-Company Secretary, and the Chief Financial Officer. The Assessing Officer, after analysing the nature of the investments, the source of funds and the overall financial structure of the assessee, recorded detailed reasons for rejecting the aforesaid computation and expressed his dissatisfaction regarding the correctness thereof. The satisfaction so recorded cannot be regarded as either mechanical or devoid of reasoning. 4.7 Even before us, the assessee has not placed any cogent material or contemporaneous evidence to substantiate the basis on which the aforesaid expenditure of Rs.1,79,322/- was determined. The computation appears to be founded merely on estimates and assumptions without any verifiable correlation to the actual expenditure incurred in relation to the earning of exempt income. Significantly, the assessee itself, without prejudice to its principal contention, furnished an alternative computation of disallowance by applying Rule 8D. Such an alternative computation clearly demonstrates that the assessee had accepted, at least contingently, the applicability of Rule 8D to the facts of the case. In these circumstances, we are unable to accept the contenti....
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....ediately preceding assessment years, including Assessment Years 2016-17 and 2017-18. According to the Revenue, the issue whether such investments were sourced from own funds or from a common pool comprising both borrowed and non-borrowed funds requires a detailed factual verification. 4.12 Having regard to the rival submissions and the material available on record, we find that the issue relating to the source of investments has not been conclusively examined. The determination of whether the investments were made out of own funds or borrowed funds is essentially a question of fact which requires verification of the fund-flow statements, balance-sheet position and other supporting financial records. In the interest of justice, therefore, we deem it appropriate to restore this limited issue to the file of the Assessing Officer for fresh adjudication. 4.13 The assessee shall furnish all relevant documentary evidence, including fund-flow statements and supporting financial records, to establish the availability and sufficiency of interest-free own funds at the time the investments were made. The Assessing Officer shall examine the same and adjudicate the issue afresh in accordan....
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....essing Officer, however, did not accept the aforesaid computation. According to him, the deduction claimed under Section 36(1)(viia) exceeded the statutory ceiling prescribed under the Act. Proceeding on the basis of the total income determined while processing the return under Section 143(1), and after adding back only the deduction claimed under Chapter VI-A and Section 36(1)(viia), he computed the eligible base at Rs.27,78,71,79,579/- and determined the allowable deduction at Rs.1,38,93,58,979/-, being five per cent thereof. Consequently, the excess claim of Rs.25,12,56,676/- was disallowed. The ld AO computed deduction allowable to the assessee as under: Total Income as order u/s 143(1) :Rs.2611,12,97,300/- Add: Deduction under Chapter VI-A :Rs. 3,52,66,624/- Add: Deduction u/s 36(1)(viia) claimed :Rs.164,06,15,655/- Base amount for deduction u/s 36(1)(viia) :Rs.2778,71,79,579/- 5% of the above :Rs. 138,93,58,979/- 5.6 The Assessing Officer was of the view that the assessee had adopted an inflated base for computing the deduction and that the claim effectively resulted in deduction exceeding the statutory limit prescribed under Section 36(1)(vii....
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.... relied upon the judgment of Hon'ble Madras High Court. But ld AO noted that with due respect he was not agreed. He noted that on going through para 28 of the judgment, it appeared that main stress of the Hon'ble Court was to hold that all the clauses i.e. clause (i) to (xi) of Sub-Section-1 of Section-36 do not imply that those deduction depend on one another; that if an assessee is entitle to benefit under clause (i) of Sub-Section-1 of Section-36, the assessee cannot be deprived of the benefit of other clauses. The AO further noted that that is how the provisions have been arrayed. He noted that that was the crux of the judgment on this issue. He referred to the last line of the para that 'The computation of the amount of deduction under both these clauses has to be independently made without reducing the total income by deduction under clause (viii) of Section-36 of the Act' and noted that same appears general observation as it again stresses that deduction under both the clauses has to be computed independently. The ld AIO noted that if the assessee's contention was applied to the facts of this case, deduction claimed by the assessee comes to 5.91% of the t....
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....ant statutory language, in their view, supports independent quantification. The appellant, therefore, pleads that the deduction under section 36(1)(viia) (d) be allowed in full without reference to or adjustment for the amount allowed under section 36(1)(viii). Assessing Officer's Position The Assessing Officer has disallowed the deduction under section 36(1)(viia) (d) on the reasoning that the quantum of deduction allowable under this provision must be computed after adjusting for any deduction allowed under section 36(1)(viii). The AO noted that the deductions under both sections are linked to the same pool of qualifying profits i.e., the total income of the institution and if both are claimed without mutual exclusion, it leads to double deduction on the same stream of income. The AO has further reasoned that: * Section 36(1)(viia) (d) requires a provision to be made not exceeding 5% of total income, which must necessarily be computed post-deductions allowed under Chapter VI-A and other sections, including section 36(1)(viii). * If both deductions are allowed without considering their interplay, it results in an artificial....
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....ty of the tax base. 1. On Consistency Argument The claim that similar deductions were allowed in earlier years, even if true, does not create a vested right. As held in Distributors (Baroda) Pvt. Ltd. [(1985) 155 ITR 120 (SC)], a wrong practice does not gain legitimacy by repetition. Finding The Assessing Officer's approach to reconcile and prevent overlap between deductions under section 36(1)(viia)(d) and section 36(1)(viii) is reasonable, legally sustainable, and fiscally prudent. The appellant has not established that the provisions permit parallel and unadjusted claims from a common pool of profits. In absence of any binding precedent mandating a contrary interpretation, the AO's adjustment is upheld. Conclusion This ground of appeal is dismissed. The disallowance of Rs 25,12,56,676 under section 36(1) (viia) (d) is found to be valid and in conformity with law". 5.11 We have given our thoughtful consideration to the rival submissions advanced by the parties and have carefully perused the material available on record. At the outset, it is necessary to delineate the precise controversy arising for our adju....
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....g in a total income of Rs. 25,88,25,24,336/-. For ready reference, relevant computation of the total income available on paper book page 1 is reproduced as under: Sr. No. DESCRIPTION AMT. IN Rs. AMT. IN Rs. PROFITS AND GAINS OF BUSINESS 30,61,87,11,417 PROFIT BEFORE TAX AS PER P& L A/C Add: Disallowables/considered separately Book Depreciation 9,98,07,648 Loss on sale of fixed assets - exps in cap. Nature (2,04,114) Loss on account of w/off of fixed assets 310 Int. income not booked as per NHB guidelines, however taxable u/s 43D 42,51,87,800 Provision for PL encashment-AS15 2,37,26,470 Provision for Sick leave as per AS-15 61,75,359 Provision for PL encashment - AS 15 Bonus act Provision for Housing Loans 2,33,92,22,512 Provision for diminution in value of investment 10,14,65,830 Provision f....
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.... during FY 17-18 pertains to FY 13-14& offered for tax for FY 13-14 on accrual basis under Rule 6EB 605246 Int. Income received during FY 17-18 pertains to FY 14-15 & offered for tax for FY 14-15 on accrual basis under Rule 6EB 48249681 Int. Income received during FY 17-18 pertains to FY 15-16 & offered for tax for FY 15-16 on accrual basis under Rule 6EB 21464172 Int. Income received during FY 17-18 pertains to FY 16-17 & offered for tax for FY 16-17 on accrual basis under Rule 6EB 21035375 Housing loan written off - Provision u/s 36(viiia) 1,64,06,15,655 PL encashment disallowed u/s 43B, allowed on the basis of pyt 1,66,52,884 Deduction u/s 80G 3,52,66,624 2,34,10,93,307 DEDUCTIONS:- 31,13,64,30,831 Special Reserve u/s 36(1)(viii) of I.T. Act 1961 (20% of income from long term Housing Loan) 5,25,39,06,495 T....
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....orms part of the total income. Therefore, while determining the "total income" for the purpose of Section 36(1)(viia), the deduction under Section 36(1)(viii) must necessarily be given effect to, and only the deduction claimed under Section 36(1)(viia) is required to be added back in view of the specific language employed in that provision. 5.17 The dispute between the parties, therefore, centers upon the manner of computing the "total income" for the purposes of Section 36(1)(viia). The Revenue contends that the deduction under Section 36(1)(viii) must necessarily be allowed while arriving at such total income and, consequently, the balance amount alone should constitute the base for computing the deduction under Section 36(1)(viia). The assessee, on the other hand, asserts that the deduction under Section 36(1)(viii) ought not to diminish the total income for this purpose and that the base amount should be determined without reducing the said deduction. Accordingly, the precise issue requiring adjudication is the correct interpretation of the expression "total income" occurring in Section 36(1)(viia) and its interplay with the deduction available under Section 36(1)(viii) of t....
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....Income Tax Appellate Tribunal erred in holding that the deduction to which the appellant was entitled under Section 36(1)(viia) (c) of the Act was to be granted after reducing from the appellant's income, the deduction to which the appellant was entitled under Section 36(1)(viii) of the Act?" 26. In short, the question that falls for consideration is as to whether the deduction should first be allowed in terms of Section 36(1)(viii) for the application of the deduction under Section 36(1)(viia)(c). 27. All the three authorities were of the unanimous view that there is a distinction between the two types of deduction. The deduction allowable under Section 36(1)(viii), after its amendment under the Finance Act, 1995, is on the profits derived from business. The deduction allowable under Section 36(1)(viia)(c) is on the total income. Therefore the authorities held that the deduction under clause (viii) will have to be computed first before applying the deduction under clause (viia)(c). 28. But keeping aside the amendment introduced in 1995 for a moment, if we have a look at the import of Section 36(1) by itself, it is clear that sub-section (1) of Sectio....
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....iding long-term finance for the activities specified in section 36(1)(viii). It will thus take outside the purview of deduction. income arising from other business activities or from sources other than business." 31. If each of the clauses under sub-section (1) of Section 36 is independent in its operation and if each one of them does not depend upon the ther clause for the extension of the benefit, then the interpretation given by the respondent cannot be accepted. 32. Yet another distinction brought forth by the learned counsel for the appellant, also deserves consideration. While the benefit of deduction under clause (viia)(c) is available to any public financial institution or State financial corporation or State industrial investment corporation, in respect of a provision for bad and doubtful debts, the benefit of the deduction under clause (viii) is available only for the financial corporations engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India. Therefore, if the interpretation as given by the authorities are accepted, the benefit that will accrue to a finance corporation incor....