2014 (11) TMI 1041 - AT - Income Tax

Disallowance u/s 14A - whether prescribed formula for allocating interest attributable to other income, based on proportionate investment, would apply? - Held that - As we observe from the investment chart adduced, the source of funding of many an investment in shares is ICD , i.e., inter-corporate deposits, which only denotes borrowed capital. Further, even as observed during the course of hearing, with reference to the assessee s balance-sheet (PB pgs.3-14), to of-course no repudiation by the ld. AR, the assessee s entire capital of ₹ 8.36 crores, both at the beginning and the close of the year, stands completely wiped off; the debit balance of the profit and loss account as at the relevant dates being at ₹ 11.36 crores and ₹ 11.62 crores respectively. The assessee s net worth being negative throughout the year, all its assets, including the tax-exempt investment in shares, stand financed from borrowed capital in the form of unsecured loans. Proportionate allocation, as advocated by r. 8D(2)(ii), statutorily prescribed per s. 14A, thus becomes even otherwise, i.e., having regard to the assessee s accounts, the most appropriate method. The interest in respect of the said funds, since lost, would also stand to be allocated amongst the assessee s assets. Qua this, we observe the interest (income) on advances to be much higher than on investments yielding dividend, so that the loss or deficiency on account of interest cost, which is the principal expenditure, is substantially, if not wholly, attributable to these investments. The proportionate method u/r. 8D(2)(ii) followed by the Revenue, according equal weight to all the assets, irrespective of the income generated by them, and therefore their contribution to the loss (of capital), thus, rather, favours the assessee in the facts of the case. We accordingly find no merit in the assessee s case, and have no hesitation in upholding the impugned order qua this disallowance. - Decided against assessee Disallowance of book profit u/s.115JB - Held that - No basis for not confirming the adjustment of the expenditure, as finally sustained for disallowance u/s. 14A(1), in computing the book profit u/s.115JB. - Decided against assessee

Summary

Issues:
1. Disallowance of interest expenditure u/s. 14A(1)
2. Disallowance of book profit u/s. 115JB

Issue 1: Disallowance of interest expenditure u/s. 14A(1)

The appeal concerns the disallowance of interest expenditure u/s. 14A(1) and the corresponding disallowance of book profit u/s.115JB of the Income Tax Act, 1961. The Assessing Officer computed the disallowance u/s. 14A applying Rule 8D, resulting in a disallowance of &8377; 59,84,395, including indirect administrative expenditure. The Commissioner of Income Tax (Appeals) upheld this disallowance, stating that the funds are fungible and there was no established nexus between interest earned and expended. The appellant argued that the disallowance should be adjusted based on the average rate of interest earned and expended. The Tribunal observed that the source of financing investments for the current year is crucial for determining the disallowance. The Tribunal upheld the disallowance, emphasizing the statutory prescription of proportionate allocation under Rule 8D(2)(ii) and the widened theory of apportionment under section 14A.

Issue 2: Disallowance of book profit u/s. 115JB

No specific arguments were raised by the appellant regarding Ground 2, which was not part of the appeal before the first appellate authority. The Tribunal admitted the issue, stating that the disallowance of expenditure, whether interest or administrative, should be based on the books of account. Section 14A codifies the principle that only net income, after excluding expenditure, is taxable. Rule 8D provides a method for determining the amount of expenditure to be excluded in computing taxable income. The Tribunal confirmed the adjustment of expenditure for disallowance u/s. 14A(1) in computing book profit u/s. 115JB, citing legal provisions and supported by various tribunal decisions.

In conclusion, the Tribunal dismissed the assessee's appeal, upholding the disallowances of interest expenditure u/s. 14A(1) and book profit u/s. 115JB as per the provisions of the Income Tax Act.