2016 (7) TMI 1263 - AT - Income Tax

Disallowance u/s 14A computation - Held that - We deem it fit and proper to set-aside the matter back to the file of the Assessing Officer to verify the plea of the assessee that the investments have been made in the group concerns as strategic investments and if it is so found, then the same shall be excluded for the purposes of computing disallowance out of interest expenditure under section 14A of the Act.

Summary

Issues:
1. Disallowance of interest expenditure towards earning exempt income
2. Computation of disallowance under section 14A
3. Interpretation of provisions of Section 14A
4. Applicability of Rule 80 for disallowance under Section 14A
5. Retroactive application of Rule 80
6. Exclusion of strategic investments for disallowance under Section 14A

Analysis:

Issue 1: Disallowance of interest expenditure towards earning exempt income
The Revenue challenged the deletion of interest expenditure disallowance amounting to ?47,50,382 related to earning exempt income. The CIT(A) had deleted this disallowance, citing that no disallowance could be made under section 14A of the Income Tax Act as per the directions of the Tribunal. The Tribunal set aside the matter to verify if the investments were strategic and made in group concerns, which could exclude them from the disallowance calculation under section 14A.

Issue 2: Computation of disallowance under section 14A
The Revenue contested the method used by the CIT(A) for computing the disallowance under section 14A. The CIT(A) had relied on previous judgments and held that Rule 80 was procedural in nature and should be applied retrospectively. The Tribunal directed the Assessing Officer to reevaluate the disallowance considering the nature of investments and strategic aspects, as per various court orders.

Issue 3: Interpretation of provisions of Section 14A
The Revenue raised concerns about the interpretation of sub-sections 2 and 3 of Section 14A, inserted by the Finance Act, 2006. The CIT(A) was criticized for misinterpreting these provisions and not considering the retrospective application of Rule 80. The Tribunal emphasized the need for a fresh assessment based on the nature of investments and strategic considerations.

Issue 4: Applicability of Rule 80 for disallowance under Section 14A
The applicability of Rule 80 for disallowance under Section 14A was a key point of contention. The CIT(A) and the Revenue differed on whether Rule 80 should be applied prospectively or retrospectively. The Tribunal directed the Assessing Officer to reexamine the disallowance in light of the strategic nature of investments.

Issue 5: Retroactive application of Rule 80
The retrospective application of Rule 80, inserted by the Income Tax (Fifth Amendment) Rules, 2007, was debated. The Revenue argued for retrospective application, while the CIT(A) had a different view. The Tribunal emphasized the need for a fresh assessment considering all relevant factors, including strategic investments.

Issue 6: Exclusion of strategic investments for disallowance under Section 14A
The exclusion of strategic investments for disallowance under Section 14A was a crucial aspect of the case. The Tribunal referred to various court orders supporting the exclusion of such investments from the disallowance calculation. The Assessing Officer was directed to reevaluate the disallowance after verifying the strategic nature of investments made by the assessee.

In conclusion, the Tribunal allowed the Revenue's appeal for statistical purposes and directed a fresh assessment by the Assessing Officer, considering the strategic investments and relevant legal precedents.