2019 (3) TMI 1745 - AT - Income Tax

Disallowance u/s.14A of the Act read with Rule 8D(2)(iii) - HELD THAT - It is not in dispute that the AO had duly recorded his satisfaction for ignoring the said workings and resorted to computation mechanism under rule 8D of the rules. The arguments advanced by the AR before us has got lot of force in as much as the investments made in foreign companies should be excluded ; the disallowance voluntarily made by the assessee should be excluded while computing the final disallowance u/s.14A and disallowance under third limb of rule 8D of the rules should be restricted to only those investments which had actually fetched dividend income by the assessee during the year. We find that the issue of investments made in the category of strategic investment have already been held against the assessee by the recent decision of Hon ble Supreme Court in the case of Maxopp Investments Ltd. vs CIT 2018 (3) TMI 805 - SUPREME COURT We direct the Ld. AO to consider only those investments which had actually yielded dividend income to the assessee during the year for computing the disallowance under third limb of rule 8D(2) towards administrative expenses and from the figure arrived thereon the Ld. AO should reduce the disallowance already made in the sum of 27, 70, 985/- while giving effect to this order. The disallowance however should be restricted to the minimum of 27, 70, 985/- made voluntarily by the assessee. Accordingly grounds Nos.1 to 4 raised by the assessee are partly allowed for statistical purposes. Disallowance u/s.14A of the Act while computing book profits u/s.115JB - HELD THAT - In the instant case the assessee had culled out the actual expenses incurred in the sum of 27, 70, 985/- as being expenditure incurred for the purpose of earning exempt income which in our considered opinion should be disallowed while computing the book profits u/s.115JB of the Act. We find that the assessee placed reliance on certain orders of this Tribunal in its own case for the earlier years wherein disallowance at certain percentage of dividend income had been sought to be disallowed u/s.14A. We find that in the instant case the Ld. AO had duly recorded his satisfaction and resorted to computation mechanism provided in the statement under Rule 8D(2) of the rules which cannot be found fault in the facts of instant case. Accordingly the arguments advanced by the assessee and the Ld. AR in this regard are dismissed. Accordingly the grounds raised by the assessee are partly allowed for statistical purposes.

Summary

Issues:
1. Disallowance u/s.14A of the Act read with Rule 8D(2)(iii) under normal provisions and while computing book profits u/s.115JB of the Act.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance made under section 14A of the Income Tax Act, 1961. The assessee, a public limited company engaged in various businesses, declared its total income for A.Y. 2012-13. The Assessing Officer (AO) observed that the assessee had received exempt dividend income and had made a suo moto disallowance of expenses towards earning that income. The AO, however, disagreed with the assessee's disallowance and proceeded to compute the disallowance under Rule 8D(2) of the rules, resulting in a total disallowance of Rs. 1,94,81,758. The Commissioner of Income Tax (Appeals) sustained part of the disallowance under Rule 8D(2)(iii) while deleting the disallowance under the second limb of Rule 8D(2) due to the assessee having sufficient own funds.

The Tribunal considered the validity of the disallowance made under the third limb of Rule 8D(2) of the rules. It was noted that the AO had ignored the assessee's voluntary disallowance and resorted to the computation mechanism under Rule 8D. The Tribunal directed the AO to consider only those investments that had yielded dividend income to the assessee during the year for computing the disallowance under the third limb of Rule 8D(2). The disallowance was to be restricted to a minimum of the voluntary disallowance made by the assessee. The Tribunal partly allowed the grounds raised by the assessee for statistical purposes.

Regarding the disallowance while computing book profits u/s.115JB of the Act, the Tribunal referred to a Special Bench decision stating that the computation mechanism under Rule 8D cannot be applied for making disallowance u/s.14A while computing book profits. The Tribunal held that the actual expenses incurred for earning exempt income should be considered for disallowance. The Tribunal dismissed the arguments against the disallowance u/s.14A read with Rule 8D while computing book profits, stating that the AO had validly resorted to the computation mechanism provided in Rule 8D(2). The Tribunal partly allowed the grounds raised by the assessee for statistical purposes.

In conclusion, the appeal of the assessee was partly allowed for statistical purposes, with directions given regarding the computation of disallowances under Rule 8D(2) and the consideration of actual expenses for disallowance while computing book profits.