2018 (1) TMI 1404 - AT - Income Tax

Disallowance u/s 14A - determination of average value of investment to compute disallowance of expenditure u/r 8D(2)(iii) - Held that - As in Cheminvest Ltd vs CIT (2015 (9) TMI 238 - DELHI HIGH COURT) categorically held that the average value of investment is to be worked out by taking into account the entire opening and closing investments in quoted and unquoted shares of group and other companies but only investment in shares which have yielded tax free income. In this case the CIT(A) has considered investments in Wadhwa Food Retail Pvt Ltd for the purpose of average value of investments even though investment in Wadhwa Food Retail Pvt Ltd is not yielded any exempt income. For the purpose of determination of average value of investments investments in Wadhwa Food Retail Pvt Ltd has to be excluded. Accordingly we direct the AO to exclude investments in shares of Wadhwa Food Retail Pvt Ltd for the purpose of determination of average value of investment to compute disallowance of expenditure u/r 8D(2)(iii) of Income-tax Rules 1962. - Appeals filed by the assessee and the revenue are partly allowed.

Summary

Issues Involved:
1. Reopening of assessment under section 147 of the Income-tax Act, 1961.
2. Disallowance of expenditure under section 14A related to exempt income.
3. Application of Rule 8D(2)(iii) for determining disallowance.
4. Inclusion of specific investments for computing average value of investments.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessee challenged the reopening of the assessment on the grounds that it was based merely on a change of opinion without any fresh tangible material indicating escapement of income. The CIT(A) upheld the reopening, referencing the Supreme Court decision in CIT vs Kelvinator of India, which allows reopening if there is no new material suggesting escapement of income within the meaning of section 147. The tribunal agreed with the CIT(A) that the reopening was justified.

2. Disallowance of Expenditure under Section 14A Related to Exempt Income:
The assessee contended that no expenditure was incurred in relation to exempt income. The CIT(A) rejected this argument, noting that the assessee incurred various administrative and general expenses, some of which could be attributed to investment activities. The CIT(A) partially accepted the assessee's alternative plea, following the Delhi High Court decision in Cheminvest Ltd vs CIT, and recalculated the disallowance by considering only investments that yielded exempt income.

3. Application of Rule 8D(2)(iii) for Determining Disallowance:
The AO applied Rule 8D(2)(iii) to disallow 0.5% of the average value of investments, resulting in a disallowance of Rs. 1,06,56,506. The CIT(A) recalculated this disallowance to Rs. 51,47,177 by considering only investments that yielded exempt income. The tribunal upheld the application of Rule 8D(2)(iii), agreeing that the assessee's general administrative expenses could be partially attributed to investment activities.

4. Inclusion of Specific Investments for Computing Average Value of Investments:
The assessee argued that the CIT(A) erroneously included investments in Wadhwa Food Retail Pvt Ltd, which did not yield exempt income and where capital gains were taxable. The tribunal found merit in this argument, directing the AO to exclude investments in Wadhwa Food Retail Pvt Ltd from the average value of investments for the purpose of computing disallowance under Rule 8D(2)(iii).

Conclusion:
The tribunal partially allowed the appeals of both the assessee and the revenue. It upheld the reopening of the assessment and the application of Rule 8D(2)(iii) for disallowance but directed the exclusion of specific investments that did not yield exempt income from the computation of the average value of investments. The order was pronounced in open court on 31st January 2018.