2018 (4) TMI 1797 - AT - Income Tax

Rectification u/s 154 - additional grounds arise out of a rectification order passed by the AO - Adjustment to the international transactions of the Appellant with its Associated Enterprises - HELD THAT - Though the assessee pleads that there is a merger we are of the considered opinion that the proceedings made by the AO u/s 154/92CA(5) r.w.s. 92CA(3)/144C/143(3) of the Act dated 14.07.2017 is a separate proceedings and has to be separately challenged as the assessee wishes to challenge as to whether the rectification in question carried out by the AO to the final assessment order are mistakes apparent on record or not. Such a challenge to the Sec.154 proceedings can be done only by filing separate appeal against the Sec.154 order. Hence we do not admit these additional grounds of appeal. The assessee is free to file an appeal against the order passed by the AO u/s 154 of the Act. The delay in filing shall be considered sympathetically as and when the appeal is filed before the Appellate Authority. Disallowance u/s 14A r.w.r. 8D - assessee submitted that the assessee has interest free fund in excess of the total investments in shares made which had earned dividend income and that Rule 8D(2)(ii) of the IT Rules will not apply in view of the judgment of HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT - HELD THAT - We restrict the disallowance to the exempt income earned by the assesee i.e. 5, 64, 333/- by applying the judgment in the case of Joint Investment Pvt. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT wherein held that the disallowance u/s 14A cannot exceed the amount of exempt income earned by the assessee.- We do not propose to go into those arguments as it would involve a factual exercise which was not taken by the lower authorities. Suffice to say that this would not be taken as a precedent for the future years. The AO is directed to restrict the disallowance to 5, 64, 333/- only. In the result the assessee gets part relief. Appeal of the assessee is allowed in part.

Summary

Issues Involved:
1. Disallowance under section 14A read with rule 8D of Income Tax Act, 1961.
2. Consideration of investment in foreign subsidiary for disallowance.
3. Application of circular No. 5/2014 dated 11.02.2014 of CBDT.
4. Transfer Pricing Officer's order under section 92CA(3) and confirmation by Dispute Resolution Panel.
5. Selection of comparable companies by TPO and Panel.
6. Initiation of penalty proceedings under section 271(1)(c) of the Act.
7. Admission of additional grounds of appeal arising from rectification order under section 154.

1. Disallowance under Section 14A read with Rule 8D:
The primary issue in this case was the disallowance made under section 14A read with rule 8D of the Income Tax Act, 1961. The appellant contested the disallowance of a specific sum under these provisions. The appellate tribunal referred to the judgment of the Delhi High Court in Joint Investment Pvt. Ltd. Vs CIT, emphasizing that the disallowance under section 14A cannot exceed the exempt income earned by the assessee. The appellant argued that Rule 8D(2)(ii) would not apply due to the interest-free funds exceeding the total investments, citing the judgment of the Bombay High Court in HDFC Bank Ltd. The tribunal, while restricting the disallowance to the exempt income earned by the assessee, directed the assessing officer to limit the disallowance to the specific amount of exempt income, providing partial relief to the assessee.

2. Investment in Foreign Subsidiary and Circular No. 5/2014 of CBDT:
The appellant raised concerns regarding the consideration of investments in foreign subsidiaries for disallowance under Rule 8D(2)(iii) of the Income Tax Rules, 1962. Additionally, the appellant argued against the application of circular No. 5/2014 dated 11.02.2014 of CBDT in their case, asserting that any income generated from foreign subsidiaries would be taxable in India. However, the tribunal did not delve into these arguments, stating that a factual exercise was necessary, which had not been conducted by the lower authorities. The tribunal directed the assessing officer to restrict the disallowance to the exempt income earned by the assessee, without setting a precedent for future years.

3. Transfer Pricing Officer's Order and Comparable Companies Selection:
The case also involved the Transfer Pricing Officer's order under section 92CA(3) and its confirmation by the Dispute Resolution Panel. The appellant contested the adjustment made to international transactions with associated enterprises and the selection of companies not functionally comparable to the assessee. The tribunal acknowledged these contentions but did not provide a detailed analysis in the judgment, indicating that these issues were not central to the final decision.

4. Penalty Proceedings and Additional Grounds of Appeal:
Another issue raised was the initiation of penalty proceedings under section 271(1)(c) of the Act. However, the tribunal did not delve into this matter in detail in the judgment. Additionally, the appellant sought to admit additional grounds of appeal arising from a rectification order under section 154. The tribunal declined to admit these additional grounds, stating that they pertained to separate proceedings and could be challenged through a separate appeal against the rectification order.

In conclusion, the appellate tribunal allowed the appeal in part, primarily focusing on the disallowance under section 14A read with rule 8D of the Income Tax Act, 1961. The judgment provided specific relief to the assessee by restricting the disallowance to the amount of exempt income earned. Other issues raised by the appellant, such as the consideration of investments in foreign subsidiaries and the application of circulars and penalty proceedings, were not extensively addressed in the judgment, indicating a narrower scope of analysis and relief provided by the tribunal.