2015 (1) TMI 731 - AT - Income Tax

Disallowance u/s 14A - dividend of ₹ 80,45,298/- from the domestic companies and ₹ 13,85,100/- from tax free US 64 Bonds of UTI - expenditure incurred for earning tax-free income - Held that - For the assessment year under consideration rule 8D is applicable and the working of disallowance has to be as per formula provided under rule 8D and there is no scope of any estimation of disallowance under section 14A. For the purpose of computing disallowance as per rule 8D the investment in subsidiaries including Excel Crop Care Limited as well as the investment which does not yield tax free income as in the case of Saraswat Co-op. Bank shall be excluded from the average investment.As we have already directed the AO that the investment in the subsidiary and not yielding taxable income shall be excluded from the average investment therefore, the disallowance on account of administrative expenses shall be computed accordingly. It is made clear that disallowance computed under rule 8D shall not be more than the actual expenditure attributable for earning the tax free income and debited in the profit and loss account. The AO to ear mark the expenses which can be attributable for earning taxable as well as tax free income. The expenditure incurred exclusively for business activity cannot be included in such attributable expenses for the purpose of disallowance u/s.14A. - Decided partly in favour of assessee for statistical purposes. Taxability of advance licence/duty free replenishment certificate benefit as well as taxability of pass book benefit receivable - CIT(A) deleted the addition - Held that - An identical issue has been decided by the Hon ble Supreme Court in case of the assessee for the assessment year 2001- 02 in CIT Versus M/s Excel Industries Ltd. and Mafatlal Industries P. Ltd. 2013 (10) TMI 324 - SUPREME COURT that it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. - Decided against revenue.

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act.
2. Double taxation of advance license benefit utilized/written off and DFIA benefit receivable utilized/written off.
3. Disallowance of interest paid attributable to loans to a subsidiary.
4. Rate of interest on borrowings for disallowance out of interest paid.
5. Taxability of advance license/duty-free replenishment certificate benefit and passbook benefit receivable.
6. Taxability of advance license obligation reversed.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act:
The assessee received Rs. 94,30,398/- as exempt income from dividends and tax-free bonds. The AO disallowed Rs. 61,51,000/- under Section 14A, applying Rule 8D. The assessee contended that investments were made from its own funds and were old, hence no interest expenditure was incurred. The CIT(A) upheld the AO's decision. The Tribunal noted that Rule 8D is applicable for the assessment year under consideration and disallowance must be computed as per the formula provided under Rule 8D, excluding investments in subsidiaries and non-tax-free income. The Tribunal directed the AO to verify the availability of own funds and compute disallowance accordingly, ensuring it does not exceed actual attributable expenses.

2. Double taxation of advance license benefit utilized/written off and DFIA benefit receivable utilized/written off:
The assessee argued that the CIT(A) erred in confirming the double taxation of Rs. 28,36,888/-. However, this ground became anfractuous due to the Tribunal's findings on other related grounds and was dismissed.

3. Disallowance of interest paid attributable to loans to a subsidiary:
The AO disallowed Rs. 2,26,000/- out of interest paid, upheld by the CIT(A). The Tribunal noted that a similar issue was restored to the AO for fresh adjudication in the preceding assessment year. Following this precedent, the Tribunal restored the issue to the AO for fresh adjudication.

4. Rate of interest on borrowings for disallowance out of interest paid:
This issue was considered an alternative to the previous ground. The Tribunal, following the decision in the preceding assessment year, set aside the issue to the AO for fresh adjudication, allowing it for statistical purposes.

5. Taxability of advance license/duty-free replenishment certificate benefit and passbook benefit receivable:
The Revenue challenged the deletion of additions by the CIT(A) on account of these benefits. The Tribunal referenced the Supreme Court's decision in the assessee's case for the assessment year 2001-02, which held that such benefits represent hypothetical income and are not taxable until realized. Consequently, the Tribunal dismissed the Revenue's grounds, affirming the CIT(A)'s deletion of the additions.

6. Taxability of advance license obligation reversed:
The Tribunal noted that this issue was considered in the assessee's favor in earlier years, where it was established that the assessee did not claim the expenditure in the earlier year. The Tribunal directed the AO to verify whether the expenditure was claimed previously and decide accordingly.

Conclusion:
The cross appeals were partly allowed for statistical purposes, with specific directions for the AO to verify and decide on certain issues as per the Tribunal's guidelines and precedents. The Tribunal's order emphasized adherence to Rule 8D for disallowance computations and upheld the Supreme Court's stance on hypothetical income for taxability of certain benefits.

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