2016 (8) TMI 807 - AT - Income Tax

Disallowance u/s 14A read with rule 8D - disallowance of indirect expenditure computed in accordance with Rule 8D(2)(iii), that is, after taking 0.5% of the average value of investments - Held that - So far as the Ld. Counsel s plea that, investment which have yielded taxable income should be excluded from the working of the average value, we agree with such a contention because these investments have yielded taxable income, therefore, they are outside the purview Rule 8D(2)(iii) and cannot be part of average value of investments. Further so far as contention of the ld. Counsel that, assessee has made strategic investment by way of business necessity in associated and subsidiary companies, we agree with him that same should not be part of the investment for the purpose of disallowance, because the said investment cannot be said to be made for the purpose of earning the exempt income but for business and strategic compulsions which falls within the realm of business purpose and this view has been upheld by the Tribunal in various decisions including that of Hon ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT (2015 (9) TMI 238 - DELHI HIGH COURT ). Thus, we direct the AO to also exclude the strategic investment made in subsidiary companies for the purpose of working the disallowance of value of the investment. However, so far as other contention that the investments which has not yielded dividend or tax free income during the year should only be included, we are unable to accept the Ld. Counsel s contention with regard to Rule 8D(2)(iii) which lays down that, an amount equal to % of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the Balance-sheet of the assessee ,on the first day and the last day of the previous year shall be taken. What is required to be seen is, whether the income from the investment which does not or shall not form part of the income. The phrase does not conveys something done or to be done in present, that is, income during the year ; and shall not conveys something about in future, a strong assertion or intention, that is, not earned income in future . Hence in our opinion, the phrase shall not covers a situation where income earned in future or whenever it is earned, then it shall not form part of the total income at any time. Thus, this contention of the assessee prima facie does not appears to be in correct interpretation or in line with the Rule 8D(2)(iii). Thus, we direct the AO only to remove the investments which are giving taxable income and also the strategic investment from the working of average value of investments and from the balance, he should compute the disallowance as per Rule 8D (2)(iii). - Decided partly in favour of assessee.

Summary

Issues involved:
Appeal against orders passed by Ld. CIT (Appeals)-39, Mumbai for assessment years 2008-09, 2009-10, and 2010-11 regarding disallowance under section 14A read with Rule 8D.

Analysis:

Issue 1: Disallowance under section 14A
The assessee contested the disallowance of administrative expenses under section 14A read with Rule 8D. The AO computed the disallowance at ?14,48,428, including interest and indirect expenses. The assessee argued that the disallowance should be limited to ?1,11,702 after excluding certain investments. The Ld. CIT(A) upheld the disallowance of indirect expenses but directed the deletion of interest disallowance. The ITAT agreed to exclude investments generating taxable income and strategic investments from the disallowance. However, it rejected the exclusion of investments not yielding tax-free income, emphasizing Rule 8D(2)(iii) criteria. The AO was directed to compute the disallowance accordingly.

Issue 2: Similarity in subsequent years
The ITAT found similarities in subsequent years' appeals and applied its decision on the disallowance issue for AY 2008-09 mutatis mutandis. The AO was directed to calculate disallowance for AYs 2009-10 and 2010-11 following the same principles. Consequently, both appeals for these years were partly allowed.

In conclusion, all the appeals of the assessee were partly allowed by the ITAT, with specific directions regarding the disallowance under section 14A read with Rule 8D. The judgment provided detailed reasoning for the disallowance computation and maintained consistency in decisions across the assessed years.