2015 (8) TMI 1026 - AT - Income Tax

Disallowance u/s 14A(2) r.w.r. 8D(2)(ii) - CIT(A) delted addition - Held that - As find that in the case of Morgan Stanley India Securities Ltd Vs ACIT (2014 (1) TMI 1412 - ITAT MUMBAI) a co-ordinate bench of this Tribunal has held that for the purpose of disallowance under section 14A what is to be taken into account is net amount debited in the profit and loss account and not the gross interest debited to the profit and loss account. Same was the view of another coordinate bench in the case of DCIT Vs Trade Investments Ltd (2012 (3) TMI 421 - ITAT KOLKATA). Viewed thus, the action of the CIT(A) was fully justified in taking into account only the net figure which was nil in this case. The interest expenditure will have to be excluded from the expenses to be allocated under rule 8D(2)(ii) for the reason that the interest expenditure is no way relatable to exempt income. The entire borrowing by the assesse, as we have seen on the facts of this case, has been passed on the AIDL and entire interest on this borrowing has been received from the AIDL. It is completely a back to back transaction and the material on record clearly demonstrates that. Just because it is routed through the same bank account, it cannot be presumed that the money is out of the common funds. Such a presumption, as has been strenuously argued before us by the learned Departmental Representative, will be contrary to the clearly established facts on record. For this reason also, and in the light of the coordinate bench decision in the case of Champion Commercial Co Ltd (2012 (10) TMI 24 - ITAT, KOLKATA), the relief granted by the CIT(A) was quite justified.

Summary

Issues Involved:
1. Deletion of addition under Section 14A(2) read with Rule 8D(2)(ii).
2. Disallowance of other expenses under Section 14A as per Rule 8D(iii).
3. Proportionate interest expenditure disallowance.
4. Computation methodology under Rule 8D(2)(ii).

Detailed Analysis:

1. Deletion of Addition under Section 14A(2) read with Rule 8D(2)(ii):
The Assessing Officer (AO) added Rs. 23.77 crores under Section 14A(2) read with Rule 8D(2)(ii), arguing that the assessee had no business income, did not maintain separate accounts for earning exempt income, and had composite funds. The CIT(A) deleted this addition, reasoning that the interest expenditure was a back-to-back transaction, with the interest paid on borrowing from IDFC being offset by interest received from Adani Infrastructure & Developers Ltd (AIDL). The Tribunal upheld the CIT(A)'s decision, citing precedents from Morgan Stanley India Securities Ltd Vs ACIT and DCIT Vs Trade Investments Ltd, which support considering the net interest amount for disallowance purposes.

2. Disallowance of Other Expenses under Section 14A as per Rule 8D(iii):
The assessee contested the disallowance of Rs. 20,15,150/- being other expenses debited in the books of account and disallowed as per Rule 8D(iii). The Tribunal noted that this disallowance was rectified by the AO and reduced, with no further controversy on this issue.

3. Proportionate Interest Expenditure Disallowance:
The AO disallowed Rs. 23,77,67,259/- as proportionate interest expenditure under Rule 8D(2)(ii), arguing that the funds were composite in nature and could not be segregated for taxable and exempt incomes. The CIT(A) deleted this disallowance, stating that the interest expenditure was incurred exclusively for earning taxable interest income, and thus, the net figure was nil. The Tribunal supported this view, emphasizing that only common interest expenses should be allocated under Rule 8D(2)(ii), as per the decision in ACIT Vs Champion Commercial Co Ltd.

4. Computation Methodology under Rule 8D(2)(ii):
The Tribunal discussed the correct application of Rule 8D(2)(ii), noting that the formula should exclude interest directly attributable to both taxable and tax-exempt income. This interpretation aligns with the revenue's stance during the constitutional challenge of Rule 8D in Godrej & Boyce Mfg Co Ltd Vs DCIT. The Tribunal concluded that the CIT(A)'s method, even if somewhat serendipitous, was correct as it excluded interest expenditure not relatable to exempt income, consistent with the established facts and legal precedents.

Conclusion:
The Tribunal dismissed both the appeal by the AO and the cross-objection by the assessee, affirming the CIT(A)'s decisions. The Tribunal's judgment emphasized the importance of considering net interest amounts and excluding directly attributable interest expenditures in disallowance computations under Section 14A read with Rule 8D. The decision was pronounced in the open court on 17.7.2015.