2023 (10) TMI 1361 - AT - Income Tax

Addition made u/s 14A and 115JB - Expenditure incurred on earning exempt income - HELD THAT - We notice that the CIT(A) has followed the decision rendered in the case of Caraf Builders and Constructions P Ltd 2018 (12) TMI 410 - DELHI HIGH COURT in holding that the disallowance u/s 14A should not exceed exempt income. Addition to be made under clause (f) of Explanation given under sec. 115JB of the Act for computing book profit - Delhi Special Bench of ITAT in VIREET INVESTMENT (P.) LTD. 2017 (6) TMI 1124 - ITAT DELHI has held that the disallowance computed u/s 14A of the Act cannot be imported into sec. 115JB of the Act. Thus, we notice that both the decisions rendered by Ld CIT(A) is backed by judicial orders of higher forums. The revenue did not show any contrary decision before us. Accordingly, we uphold the order passed by Ld CIT(A) on both these issues. Contention of the assessee that the average value of investments to be computed for the purpose of Rule 8D should be computed by considering only those investments, which have yielded dividend income - The above said contention finds support from the decision of Vireet Investments P Ltd 2017 (6) TMI 1124 - ITAT DELHI - Accordingly, we direct the AO to compute average value of investments by considering only those investments, which have yielded dividend income and then compute the disallowance under Rule 8D. One more principle to be followed is that, if the own funds available with the assessee exceeds the value of investments, then no disallowance of interest expenditure is called for u/r 8D(2)(ii) of I T Rules. If the disallowance so computed by applying above said principles works out to be lower than the value of exempt income, then the disallowance u/s 14A should be restricted to the lower amount so computed. Appeal of the revenue is dismissed and the cross objection filed by the assessee is allowed.

Summary

Issues involved:
The judgment involves issues related to the disallowance under sections 14A and 115JB of the Income Tax Act for the assessment year 2014-15.

Disallowance under Section 14A:
The assessee, engaged in power generation projects, received exempt income from mutual fund units. The Assessing Officer (AO) initially computed a disallowance under Rule 8D at a high amount, which was later reduced. The assessee contended that the disallowance should not exceed the exempt income, citing a Delhi High Court decision. The Commissioner of Income Tax (Appeals) (CIT(A)) agreed with this contention and directed the AO to restrict the disallowance to the exempt income. The AO had added this disallowance to the book profit under section 115JB, but the CIT(A) reversed this action, following previous judicial decisions. The revenue appealed against these decisions.

Disallowance under Section 115JB:
The AO's addition of the disallowance under section 14A to the book profit under section 115JB was reversed by the CIT(A) based on precedents. The revenue challenged this decision, but the Tribunal upheld the CIT(A)'s order, noting the lack of contrary decisions presented by the revenue.

Cross Objection by the Assessee:
The assessee filed a cross objection, arguing that for computing the average value of investments under Rule 8D, only investments yielding dividend income should be considered. This contention was supported by a decision of the Delhi Special Bench. The Tribunal directed the AO to calculate the average value of investments based on dividend-yielding investments and to apply specific principles. If the disallowance computed under these principles is lower than the exempt income, the disallowance under section 14A should be restricted accordingly. The Tribunal dismissed the revenue's appeal and allowed the assessee's cross objection.