2015 (11) TMI 1511 - AT - Income Tax

Disallowance under section 14A of the Act read with Rule 8D - Held that - In the absence of requisite satisfaction recorded by the Assessing Officer showing how the disallowance offered by the assessee under section 14A was not correct having regard to its books of account, it was not permissible to the Assessing Officer in law to invoke section 14A and make a further disallowance. As such, considering all the facts of the case, we are of the view that the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) under section 14A read with Rule 8D is not sustainable either in law or on the facts of the case and deleting the same we allow the ground in favour of assessee MAT - addition to be made on account of disallowance made towards interest under section 14A while computing book profits of the assessee-Company under section 115JB - Held that - We find that this issue no more survives for consideration independently on merit as a result of deletion by us of the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of interest under section 14A while deciding Ground No. 1 involved in this appeal of the assessee. Consequently this ground is treated as allowed. - Decided in favour of assessee MAT credit against tax before levy of surcharge and education cess - Held that - Assessee s appeal is squarely covered against the assessee by the decision of the Hon ble Supreme Court in the case of CIT -vs. - Tulsyan NEC Limited ( 2010 (12) TMI 23 - Supreme Court of India ), and respectfully following the same, we uphold the impugned order of the ld. CIT(Appeals) holding that MAT credit has to be allowed after calculation of tax plus surcharge and education cess - Decided against assessee

Issues Involved:
1. Disallowance under section 14A of the Income Tax Act read with Rule 8D.
2. Addition to be made on account of disallowance towards interest under section 14A while computing book profits under section 115JB.
3. Claim for allowing MAT credit against tax before levy of surcharge and education cess.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The primary issue revolves around the addition of Rs. 2,11,27,261/- made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] under section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules. The assessee, a company engaged in the business of manufacturing and sale of cars, declared a total income of Rs. 50,97,10,615/- for the assessment year 2008-09, claiming an exempt dividend income of Rs. 1,59,83,440/-. The assessee offered a disallowance of Rs. 36,51,843/- under section 14A, but the AO recalculated this disallowance to Rs. 2,47,79,104/-, including interest expenditure of Rs. 14,40,52,291/-, resulting in an additional disallowance of Rs. 2,11,27,261/-.

The assessee contended that the borrowings were entirely for business purposes, with no part used for investments, and highlighted that similar contentions were accepted in earlier assessments (A.Ys. 2006-07 and 2007-08). However, the CIT(A) rejected these arguments, citing that the funds were from a common pool and mixed accounts, making it impossible to segregate business and investment funds. The CIT(A) also emphasized that Rule 8D, applicable from A.Y. 2008-09, necessitated the calculation of interest expenditure on exempt income.

Upon appeal, the Tribunal noted that the investments in shares were made in earlier years and were not financed through borrowed funds, as established in previous assessments. The Tribunal held that Rule 8D would only apply if there was a nexus between interest-bearing borrowed funds and investments in shares. Given that the assessee had sufficient own funds to cover the investments, the Tribunal concluded that no disallowance under section 14A was warranted. Additionally, the AO failed to record dissatisfaction with the assessee's disallowance claim, as required by the decision in REI Agro Limited, further invalidating the additional disallowance.

2. Disallowance towards Interest under Section 14A while Computing Book Profits under Section 115JB:
This issue was rendered moot due to the Tribunal's decision to delete the disallowance made by the AO under section 14A. Consequently, no addition was required while computing the book profits under section 115JB.

3. Claim for Allowing MAT Credit Against Tax Before Levy of Surcharge and Education Cess:
The assessee claimed that MAT credit should be allowed against tax before the levy of surcharge and education cess, relying on the decision of the Allahabad High Court in CIT vs. Vacment India. However, the Tribunal referred to the Supreme Court's decision in CIT vs. Tulsyan NEC Limited, which held that MAT credit should be set off after the levy of surcharge and education cess. The Tribunal found that the Supreme Court's decision, which overrides any conflicting entries in prescribed forms, was binding. Consequently, the Tribunal upheld the CIT(A)'s order that MAT credit must be allowed after calculating tax, surcharge, and education cess.

Conclusion:
The appeal was partly allowed. The Tribunal deleted the disallowance under section 14A read with Rule 8D, but upheld the CIT(A)'s decision regarding MAT credit, confirming that it should be allowed after the levy of surcharge and education cess. The decision was pronounced in open court on November 20, 2015.

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