2018 (9) TMI 1900 - AT - Income Tax

Disallowance u/s 14A - HELD THAT - No disallowance u/r 8D(2)(ii) has been made by the lower authorities. It is further noted that Hon ble Supreme Court in a recent judgment, in group of cases titled as Maxopp Investment Ltd. Vs CIT 2018 (3) TMI 805 - SUPREME COURT has decided vital issues concerning disallowance u/s 14A, the benefit of which was not available to the lower authorities at the time of adjudicating this issue. Therefore, respectfully following the judgment of co-ordinate bench of this Tribunal in earlier years and in the light of recent judgment by Hon ble Supreme Court, the matter stand remitted back to the file of Ld. AO on similar lines with similar conclusion. Needless to add that adequate opportunity of being heard shall be provided to the assessee, who, in turn, is directed to substantiate his claim, in this regard, with documentary evidences / suitable explanations etc.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance under Section 14A

Background:
The assessee, a resident corporate entity engaged in Merchant Banking, reported exempt interest/dividend income of ?24.04 Crores for AY 2012-13. The assessee made a suo-moto disallowance of ?18.07 Lacs. However, the Assessing Officer (AO) applied Rule 8D, resulting in an aggregate disallowance of ?119.78 Lacs, leading to a net adjustment of ?101.71 Lacs.

CIT(A) Decision:
The CIT(A) upheld the AO's disallowance but directed the AO to compute the correct figures of average investments for disallowance under Section 14A, following directions from the previous AY 2011-12.

Tribunal's Consideration:
The Tribunal reviewed similar cases from AYs 2008-09 and 2009-10, where it was adjudicated that investments not yielding exempt income should be excluded from disallowance calculations. The Tribunal also considered judicial precedents, including the Delhi Tribunal's decision in ACIT Vs. Vireet Investment (P.) Ltd. and the Madras High Court's decision in Chettinad Logistics (P) Ltd. Vs. CIT.

Key Arguments:
- The AO must record reasons for dissatisfaction with the assessee's claim of expenditure.
- The assessee had sufficient own funds for investments, negating the need for interest disallowance under Rule 8D(2)(ii).
- Direct expenses should be considered under Rule 8D(2)(i), while indirect expenses should be under Rule 8D(2)(iii).

Tribunal's Findings:
1. Recording Dissatisfaction:
- The AO had adequately recorded reasons for dissatisfaction with the assessee's claim, conforming to the Supreme Court's ruling in Godrej & Boyce Manufacturing Co. Ltd.

2. Own Funds and Non-Interest Bearing Funds:
- The Tribunal found that the assessee had sufficient own funds for investments, referencing the Bombay High Court's decision in HDFC Bank Ltd., thus deleting the disallowance under Rule 8D(2)(ii).

3. Direct vs. Indirect Expenses:
- The Tribunal agreed that expenses allocable to the TIG Department should be considered as indirect expenses under Rule 8D(2)(iii) and deleted the disallowance under Rule 8D(2)(i).

4. Strategic Investments:
- Strategic investments capable of yielding exempt income should be included in the disallowance calculation. The Tribunal cited the rationale from the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd.

5. Foreign Investments:
- The Tribunal noted that disallowance under Section 14A is not applicable to investments in foreign companies, as per the Mumbai Tribunal's decision in ITO v. Strides Arcolab Ltd. The matter was remitted back to the AO to verify the taxability of foreign investments and allow the benefit of ?28,19,646/- suo-motu disallowed by the assessee.

Conclusion:
The Tribunal remitted the matter back to the AO for re-evaluation in light of recent Supreme Court judgments and previous Tribunal decisions, ensuring adequate opportunity for the assessee to substantiate claims with evidence.

Order:
The appeal was allowed for statistical purposes, with the order pronounced on 07th September 2018.