2018 (2) TMI 1934 - AT - Income Tax

Addition u/s 14A - HELD THAT - In Godrej Boyce Manufacturing Company Ltd. 2017 (5) TMI 403 - SUPREME COURT has held that the literal meaning of Section 14A, far from giving rise to any absurdity, appears to be wholly consistent with the scheme of the Act and the object/purpose of levy of tax on income. The statute does not grant any exemption to the strategic investments which are capable of yielding exempt income to be excluded while computing disallowance u/s 14A. Our decision is fortified by the decision of the Hon ble Karnataka High Court in the case of United Breweries vs. DCIT 2016 (6) TMI 647 - KARNATAKA HIGH COURT As we have relied on the decision of the Hon ble High Court, we are not adverting to the order of the Tribunal on the same issue. We hold that strategic investment made by the appellant are not be excluded while calculating average value of investment. As the above details were not examined either by the AO or the Ld. CIT(A), we restore the matter to the file of the AO to make a fresh order on disallowance u/s 8D(2)(iii) only, after examining the shares of the appellant in the foreign company vis-a-vis its taxability and allowing the same for the purpose of working out the average investment. We direct the appellant to file the details of shares in foreign company before the AO. Needless to say, the AO would give a reasonable opportunity of being heard to the appellant before finalizing the order. Also the AO is directed to allow the benefit of ₹ 28,19,646/- suo motu disallowed by the appellant. Grounds of appeal in respect of disallowance under Rule 8D(2)(i) and Rule 8D(2)(iii) are allowed, whereas, the appeal under Rule 8D(2)(iii) is allowed for statistical purposes. Depreciation of leased assets - HELD THAT - During the course of hearing, both the Ld. counsel and the Ld. DR agree that the issue may be sent back to the AO for verification. Having perused the relevant materials on record, we restore the matter on claim of depreciation on leased assets to the file of the AO to verify the same and allow as per the provisions of the Act, after giving reasonable opportunity of being heard to the appellant. We direct the appellant to file the relevant documents/evidence before the AO. Thus the above ground of appeal is allowed for statistical purposes.

Issues Involved:
1. Disallowance of interest and other expenses attributed to tax-free income under Section 14A of the Income Tax Act, 1961.
2. Application of Rule 8D of the Income Tax Rules, 1962.
3. Allocation of direct and indirect expenses.
4. Exclusion of strategic investments from the calculation of average investment.
5. Depreciation on leased assets.

Detailed Analysis:

1. Disallowance of Interest and Other Expenses:
The appellant contested the disallowance of ?95,17,503/- attributed to tax-free income under Section 14A of the Income Tax Act, 1961. The Assessing Officer (AO) had disallowed ?1,23,37,149/- under Rule 8D, but since the appellant had already disallowed ?28,19,646/-, the AO added ?95,17,503/- to the total income. The CIT(A) upheld the AO's decision.

2. Application of Rule 8D:
The appellant argued that Rule 8D can only be applied if the AO is dissatisfied with the correctness of the assessee's claim. The appellant cited several cases, including Godrej & Boyce Manufacturing Co. Ltd. v. DCIT, to support their claim that the AO did not record reasons for dissatisfaction. However, the tribunal found that the AO had indeed recorded reasons for dissatisfaction, thus justifying the application of Rule 8D.

3. Allocation of Direct and Indirect Expenses:
The appellant claimed that no direct expenditure was incurred to earn exempt income and that the expenses allocable to the Treasury and Investment Group (TIG) Department should be considered as indirect expenses under Rule 8D(2)(iii). The tribunal agreed with this contention and deleted the disallowance of ?48,97,979/- made under Rule 8D(2)(i), reallocating it under Rule 8D(2)(iii).

4. Exclusion of Strategic Investments:
The appellant argued for the exclusion of strategic investments while calculating the average value of investments for disallowance under Section 14A. The tribunal held that strategic investments capable of yielding exempt income should be included in the calculation. However, the tribunal directed the AO to exclude shares of foreign companies, as dividends from these are taxable. The matter was remanded to the AO for fresh calculation, allowing the appellant's suo motu disallowance of ?28,19,646/-.

5. Depreciation on Leased Assets:
Both parties agreed to remand the issue of depreciation on leased assets back to the AO for verification. The tribunal directed the AO to verify and allow the claim as per the provisions of the Act, after giving the appellant a reasonable opportunity to present relevant documents.

Conclusion:
The appeals were partly allowed, with specific directions for recalculating disallowances and remanding the issue of depreciation on leased assets to the AO for further verification. The tribunal's decision for AY 2008-09 applied mutatis mutandis to AY 2009-10.

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