2018 (12) TMI 1651 - AT - Income Tax

Disallowance u/s 14A - huge interest-free funds - assessee itself has added back on adhoc basis - HELD THAT - The Ld. Assessing Officer ought to have taken into consideration net interest income available with the assessee. In such situation, as per sub-clause(2) to Section 14A he could not make disallowance out of interest expenditure. It is also pertinent to observe that assessee has huge interest-free funds available which can take care of investment made by the assessee. As far as the disallowance required for the purpose of administrative expenses is concerned, we find that assessee has not debited any expenditure specifically incurred for taking care of investment in the accounts. It has not claimed any expenditure for taking care of investment, i. e. salary of a particular employee etc. , then how AO can calculate the amount for disallowance. Apart from above, assessee itself has added back a sum of ₹ 6 lakhs on adhoc basis, which can take care of all possible expenditure attributable for earning tax-free towards administrative expenses. Therefore, considering all these details coupled with the finding of CIT(A), we are of the view that there is no merit in the first fold of contention raised by the Revenue. Adjustment in the book profit on the basis of disallowance made u/s. 14A once we have upheld the order of CIT(A) deleting the addition made by the Assessing Officer, then no amount is available which could be added in the book profit. Otherwise also, the decision of CIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has held that disallowance made with the help of section 14A r. w. r. 8D of IT Rules, 1962 ought not to be added in the book profit. CIT(A) has rightly deleted the addition and also rightly excluded this amount while computing the book profit u/s. 115JB. Thus, we do not find any merit in this ground of appeal of the Revenue, it is dismissed.

Summary

Issues:
1. Disallowance of expenditure under section 14A of the Income Tax Act, 1961.
2. Exclusion of disallowed amount from book profit for section 115JB computation.

Issue 1: Disallowance under section 14A:
The Revenue appealed against the CIT(A)'s order deleting the addition of ?85,37,514 made by the Assessing Officer under section 14A of the Act. The Assessing Officer disallowed the expenditure attributable to tax-free income, resulting in a net disallowance of ?85,37,514. The CIT(A) deleted this disallowance after the assessee argued it had sufficient interest-free funds to cover the investments. The Tribunal found that the Assessing Officer did not consider the net interest income available with the assessee, which is crucial for disallowance under section 14A. Additionally, the Tribunal noted that the assessee had substantial interest-free funds to support the investments. As the assessee had not debited any specific expenditure for investment purposes, and had already added back ?6 lakhs for possible administrative expenses, the Tribunal upheld the CIT(A)'s decision to delete the disallowance.

Issue 2: Exclusion from book profit calculation:
Regarding the exclusion of the disallowed amount from the book profit for section 115JB computation, the Tribunal held that since the disallowance under section 14A was deleted by the CIT(A), no amount could be added to the book profit. Citing a previous Special Bench decision, the Tribunal affirmed that disallowances under section 14A with Rule 8D should not be included in the book profit. Therefore, the Tribunal upheld the CIT(A)'s decision to exclude the disallowed amount while computing the book profit under section 115JB. Consequently, the Revenue's appeal was dismissed.

In conclusion, the Tribunal found no merit in the Revenue's appeal and dismissed it, affirming the CIT(A)'s decision to delete the disallowance under section 14A and exclude the amount from the book profit calculation for section 115JB.