2016 (2) TMI 236 - AT - Income Tax

Disallowance u/s. 14A - Held that - The assessee company has made investment from earlier years and received dividend income every year and demonstrated that funds utilized for investments are surplus funds or interest free funds. The assessee earned exempt income ;1,64,06,932/-. Since Rule 8D provisions was introduced with effect from 24.03.2008, which was prospective in operation and cannot be regarded as being retrospective as held by Delhi High Court in the case of Maxopp Investment Ltd vs. CIT 2011 (11) TMI 267 - Delhi High Court . However, incurring certain administrative expenses cannot be ruled out. Accordingly, we direct the Assessing Officer to disallow 2% of exempt income as expenditure towards earning that income. - Decided in favour of assessee Disallowance of setting off of loss u/sec. 10AA against the normal business income - Held that - The assessee is having two separate units and as per the provisions of Secs.70 and 71 set off of loss from one source against the income from any other source under same head of income is allowed except capital loss and relied on CBDT circular No.07/2013. We after analyzing the provisions of set off and Sec.10A, the assessee company loss from the SEZ unit has to carried forward and set off against profit of eligible units only. We draw support from the decision of Delhi High Court in the case of CIT vs. KEI Industries Ltd 2015 (3) TMI 618 - DELHI HIGH COURT , wherein it was held that loss suffered by the assessee in a unit entitled for exemption cannot be set off against income from any other unit not eligible for such exemption. In the present case by applying the above ratio, we are not inclined to interfere with the order of the Commissioner of Income Tax (Appeals) on this ground and accordingly dismiss the ground of the assessee. - Decided against assessee

Summary

Issues Involved:
1. Disallowance under section 14A of the Income Tax Act.
2. Disallowance of setting off of loss under section 10AA of the Income Tax Act.

Detailed Analysis:

1. Disallowance under section 14A of the Income Tax Act:
The assessee, engaged in the manufacturing business, filed a return of income declaring total income after claiming deductions. The Assessing Officer referred the case to the Transfer Pricing Officer for computing the 'Arms Length Price' of international transactions. The Assessing Officer found dividend income claimed as exempted. The assessee argued that no expenditure was incurred for earning the exempt income. The Assessing Officer calculated disallowance under Rule 8D, attributing expenditure and added it to the returned income. The Commissioner of Income Tax (Appeals) upheld this decision based on judicial precedents. However, the Tribunal ruled that Rule 8D was prospective and directed the Assessing Officer to disallow 2% of exempt income as expenditure, citing a relevant High Court judgment. Consequently, the ground of the assessee was allowed.

2. Disallowance of setting off of loss under section 10AA of the Income Tax Act:
The assessee's SEZ unit incurred a loss, which was claimed to be set off against normal business income. The Commissioner of Income Tax (Appeals) disallowed this set off, citing the provisions of Secs.70 and 71. The Tribunal analyzed the provisions and held that the loss from the SEZ unit could only be set off against profit from eligible units. Relying on a High Court decision, the Tribunal dismissed the ground of the assessee regarding the set off of loss from the SEZ unit against normal business income. Therefore, the Tribunal partly allowed the appeal of the assessee.

In conclusion, the Tribunal partially allowed the appeal by directing the disallowance of 2% of exempt income as expenditure under section 14A while dismissing the ground regarding the set off of loss from the SEZ unit against normal business income under section 10AA of the Income Tax Act.