2016 (9) TMI 1635 - AT - Income Tax

Disallowance u/s. 14A r.w.s Rule 8D(iii) - HELD THAT - We find that this issue is squarely covered in favour of assessee in its own case for A.Y 2009-10 2016 (3) TMI 873 - ITAT KOLKATA disallowance U/S 14A read with Rule 8D 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 investment which has given rise to this income which does not form part of the total income. Addition u/s 14A r.w.r. 8D(2)(ii) on account of interest - HELD THAT - We find that the entire investments were made long back by the assessee. We hold that the assessee was having sufficient own funds to make those investments in the earlier years. We hold that the Learned AO had not brought on record any nexus between the borrowed funds and the investment in shares of various companies - We also hold that the investments made in subsidiary companies are to be treated as strategic investments and hence the disallowance u/s 14A of the Act would not operate at all as the investment made thereon is not with an intention to earn any exempt income in the form of dividend but only for obtaining controlling interest in the said companies and to further the business interests of the assessee in the said company. Thus we hold that no disallowance of interest is required to be made under rule 8D(i) 8D (ii) as no direct or indirect interest expenditure has incurred for making investments. Hence this ground of appeal of the Revenue is dismissed. Addition u/s 14A r.w.r. 8D(iii) to the book profit computed u/ s 115JB of the Act - HELD THAT - While computing the Book Profit of the company under the provisions of section 115JB of the Act, any disallowance made under the normal provisions of the Act also cannot be given effect to for arriving at the Book Profit for the purpose of Section 115JB of the Act. Accordingly, this ground raised by the assessee is allowed in its favour.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D(iii) of the Income Tax Act.
2. Addition of disallowance under Section 14A to book profit computed under Section 115JB of the Income Tax Act.
3. Deletion of disallowance under Rule 8D(ii) of the Income Tax Rules.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D(iii):
The assessee, a Limited Company engaged in consultancy and financial services, filed its return of income at a loss of ?10,21,13,088/- and claimed dividend income of ?27,78,32,126/- as exempt under Section 10(34). The Assessing Officer (AO) observed that no expenditure related to the dividend income was disallowed under Section 14A and invoked Rule 8D, resulting in a disallowance of ?1,37,20,788/-. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed this disallowance. The assessee argued that the investments were strategic and did not involve managerial services, thus no disallowance should be made. However, the Tribunal found that similar disallowance was made in the earlier year and upheld the consistency principle, confirming the disallowance under Rule 8D(iii).

2. Addition of Disallowance under Section 14A to Book Profit under Section 115JB:
The AO added the disallowance under Section 14A to the book profit computed under Section 115JB, which was confirmed by the CIT(A). The Tribunal, however, referred to Explanation-1(f) of Section 115JB(2) and concluded that the provision does not refer to any disallowance made under Section 14A while computing book profit. The Tribunal emphasized that Section 14A creates a fiction for disallowing deemed expenditure attributable to exempt income, and Section 115JB is another fiction for payment of tax on deemed income. Thus, one fiction cannot be superimposed on another. Consequently, the Tribunal deleted the addition to the book profit.

3. Deletion of Disallowance under Rule 8D(ii):
The AO made a disallowance of ?4,08,49,271/- under Rule 8D(ii) on account of interest, which the CIT(A) deleted. The Revenue appealed, arguing that the assessee had loans at the time of asset transfer to its subsidiary, suggesting the possibility of interest-bearing loans being used for investments. The Tribunal found that the investments were made from the assessee's own funds and not borrowed funds, citing case laws such as CIT vs Reliance Utilities & Power Ltd and G.D. Metsteel Pvt Ltd vs ACIT. The Tribunal also noted that investments in subsidiary companies are strategic, not intended for earning exempt income. Therefore, the Tribunal upheld the deletion of the disallowance under Rule 8D(ii).

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance under Rule 8D(iii) and the addition to book profit under Section 115JB, while dismissing the Revenue's appeal against the deletion of disallowance under Rule 8D(ii). The judgment emphasized the principles of consistency, the nature of strategic investments, and the limitations of superimposing fictional provisions.