2018 (2) TMI 2015 - AT - Income Tax

Disallowance u/s 14A r.w.r 8D(2)(iii) - HELD THAT - Disallowance u/s 14A r.w.r8D(2)(iii) should be in relation to funds generating exempt income only. In respect of provisions of Rule 8D(2)(iii), which is the subject matter of the appeal in the assessee‟s case under consideration, a perusal of the said provision shows that what is disallowable under Rule 8D(2)(iii) is the amount equal to % of the average value of investment, the income from which does not and shall not form part of the total income - under Rule 8D(2)(iii) what is disallowable is % of the dividend bearing securities or funds generating exempt income. Therefore, not all investments become the subject matter of consideration while computing disallowance u/s 14A r.w Rule 8D(2)(iii). The disallowance u/s 14A r.w.Rule 8D(2)(iii) is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investments which has given rise to this income which does not form part of the total income. We note that as far as Rule 8D(2)(iii) of the Rules is concerned, it has been held in the case of DCIT vs REI Agro Ltd. 2013 (5) TMI 582 - ITAT KOLKATA that it is only the investment which yielded tax free income that should be considered for working out the average value of investment while applying the Rule 8D(2)(iii) of the Rules. This order of the tribunal has been confirmed by the decision of Hon‟ble Calcutta High Court i. 2013 (12) TMI 1517 - CALCUTTA HIGH COURT - In view of the aforesaid legal position we are of the view that the order of the CIT(A) on this issue cannot be sustained. Plea of the assessee to exclude funds which are not generating exempt income, that is, which had not yielded any exempt dividend income during the previous year while working out the average value of investments for the purpose of applying Rule 8D(2)(iii) of the Rules, should be accepted. We do not accept the plea of the assessee that commission of financial advisor was paid by the Mutual Fund directly therefore no any expenses have been incurred by the company to maintain the investment portfolio. Ultimately, the directors of the company or top management instructs the financial advisor, about how much investment is to be done, how much is to be sold or retained. We restore the present issue to the file of the assessing officer for computation of disallowance u/s 14A r.w. Rule 8D(2)(iii) and we direct the assessing officer to consider only funds generating exempt income to compute the disallowance under Rule 8D(2)(iii) of the I.T.Rules. Addition of income under the head of profit and gains of business or profession , while computing the tax liability - HELD THAT - AO while going through the income-tax computation form, has taken the amount of ₹ 7,15,07,112/- as profit and gains of business or profession . However, in the assessment order, the AO after making disallowance u/s 14A has correctly computed income under the head profit and gains of business or profession at ₹ 7,08,45,144/- - we note that anarithmetic error committed by the assessing officer to the tune of ₹ 25,008/- needs to be rectified. Therefore, we direct the AO to examine the figures and facts referred above and rectify the mistake as per provisions of law.

Summary

Issues Involved:
1. Disallowance under section 14A read with Rule 8D(2)(iii).
2. Addition of income under the head "profit and gains of business or profession."

Detailed Analysis:

1. Disallowance under section 14A read with Rule 8D(2)(iii):

The primary issue raised by the assessee pertains to the disallowance of ?6,36,960/- under section 14A read with Rule 8D(2)(iii) of the Income Tax Act, 1961. The Assessing Officer (AO) noticed that the assessee had earned a dividend income of ?14,79,630/- and claimed interest expenses of ?29,09,739/-. The assessee's balance sheet showed non-current investments of ?8,38,68,940/- and total investments of ?19,57,15,948/- as of 31.03.2012.

The AO applied the provisions of section 14A r.w.r 8D, which led to the disallowance of ?6,36,960/- based on the average value of investments, including both income-generating and non-income-generating funds. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, stating that some expenses must have been incurred by the assessee to manage its investments.

The assessee contended that no expenses were incurred for earning exempt income, as the financial advisor appointed by the mutual fund was paid directly by the mutual fund. The assessee argued that only funds generating exempt income should be considered for disallowance under Rule 8D(2)(iii). The assessee provided a detailed breakdown of funds generating and not generating exempt income, showing a significantly lower disallowance of ?96,943/- if only income-generating funds were considered.

The Tribunal noted that disallowance under Rule 8D(2)(iii) should be related to funds generating exempt income only. Citing precedents from the ITAT Kolkata Bench and the Hon’ble Calcutta High Court, it was held that only investments yielding tax-free income should be considered for disallowance. The Tribunal directed the AO to recompute the disallowance under Rule 8D(2)(iii) by considering only funds generating exempt income.

2. Addition of income under the head "profit and gains of business or profession":

The second issue raised by the assessee relates to an addition of ?25,000/- made by the AO under the head "profit and gains of business or profession." The assessee pointed out a discrepancy in the AO's computation, where the AO initially took the amount of ?7,15,07,112/- as "profit and gains of business or profession" but later correctly computed it as ?7,08,45,144/- after making the disallowance under section 14A.

The assessee provided a reconciliation showing the difference of ?25,008/-, which needed rectification. The Tribunal acknowledged the arithmetic error and directed the AO to rectify the mistake as per the provisions of law.

Conclusion:

The appeal filed by the assessee was allowed for statistical purposes. The Tribunal directed the AO to recompute the disallowance under Rule 8D(2)(iii) by considering only funds generating exempt income and to rectify the arithmetic error in the computation of "profit and gains of business or profession." The order was pronounced in the open court on 27.02.2018.