2017 (3) TMI 78 - AT - Income Tax

Disallowance u/s section 14A read with rule 8D - Held that - A.R. has brought our attention to the order of the Tribunal in the own case of the assessee for A.Y. 2006-07 wherein the Tribunal has restricted the disallowance under section 14A in similar circumstances to the extent of 5% of the exempt income earned by the assessee for that assessment year under consideration. Following the same yardstick, we restrict the disallowance under section 14A to the extent of 5% of the exempt income for this year also. The appeal of the assessee is therefore treated as partly allowed. Disallowance of expenditure - Held that - Hon ble Bombay High Court in the case of CIT vs. Srishti Securities (P.) Ltd. (2009 (1) TMI 408 - BOMBAY HIGH COURT ) while relying upon various case laws, has held that if the capital has been borrowed for the purpose of business or profession of the assessee company then the interest paid on the borrowed funds is an allowable expenditure. It has been further held that in case of an investment company, the amount borrowed may be utilised for the purpose of acquisition of stock in trade or for the purpose of acquisition of capital assets. The ratio of the above decision of the Hon ble Bombay High Court squarely applies in the case of the assessee. Even otherwise as observed above, we have already directed for disallowance under section 14A at the rate of 5% of the dividend income earned. The said disallowance made under section 14A will also take care of the interest expenditure incurred by the assessee on investments relatable to earning of exempt income. Under the circumstances, no further disallowance is attracted in this case. Allowable expenditure u/s 36 - Held that - The interest expenditure incurred by the assessee for the purpose of strategic investment as the investment being the business of the assessee is an allowable expenditure under section 36(1)(iii) of the Income Tax Act. Computation of disallowance under section 14A - Held that - Direct the AO to exclude the strategic investments made in group/associate companies for the purpose of computation of disallowance under section 14A read with Rule 8D.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D for Assessment Year (AY) 2007-08.
2. Allowance of interest expenditure as revenue expenditure for AY 2007-08.
3. Computation of disallowance under Rule 8D for AY 2007-08.
4. Disallowance under Section 14A read with Rule 8D for AY 2008-09.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D for Assessment Year (AY) 2007-08:
The assessee challenged the disallowance of ?51,84,673/- made by the AO under Section 14A read with Rule 8D, which included ?24,16,733/- as interest expenditure and ?27,67,940/- as administrative expenditure. The CIT(A) upheld the AO's disallowance. The Tribunal found merit in the assessee's argument that Rule 8D is not applicable retrospectively and only applies from AY 2008-09 onwards. The Tribunal referenced the Bombay High Court's decision in Godrej & Boyce Manufacturing Co. Ltd., which stated that disallowance under Section 14A for years prior to AY 2008-09 should be made on a reasonable basis. The Tribunal decided to restrict the disallowance to 5% of the exempt income, following its own precedent from AY 2006-07. Thus, the appeal of the assessee was partly allowed.

2. Allowance of Interest Expenditure as Revenue Expenditure for AY 2007-08:
The Revenue appealed against the CIT(A)'s decision to allow interest expenditure of ?33.39 lakhs, which the AO had disallowed. The AO argued that the borrowed funds were used for investment purposes, not for business purposes. The CIT(A) observed that since disallowance under Section 14A had already been made, no further disallowance under Section 37(1) was warranted. The Tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court's ruling in CIT vs. Srishti Securities (P.) Ltd., which allows interest paid on borrowed funds used for business purposes as a deductible expense. The Tribunal concluded that the disallowance under Section 14A would cover the interest expenditure, thus dismissing the Revenue's appeal.

3. Computation of Disallowance under Rule 8D for AY 2007-08:
The Revenue also appealed against the CIT(A)'s decision to set aside the AO's order under Section 154, which increased the disallowance of interest expenditure. The CIT(A) found that the AO's action under Section 154 was not maintainable and agreed with the assessee that disallowance should be made with reference to net interest. The Tribunal noted that it had already restricted the overall disallowance under Section 14A to 5% of the exempt income, which included any interest disallowance. Therefore, the Tribunal dismissed the Revenue's appeal as infructuous.

4. Disallowance under Section 14A read with Rule 8D for AY 2008-09:
Both the assessee and the Revenue filed cross appeals for AY 2008-09. The issues were identical to those in AY 2007-08. The Tribunal noted that the assessee's strategic investments in subsidiaries and associated companies constituted more than 90% of its total investments. Citing the Bombay High Court's decisions in CIT vs. Srishti Securities (P.) Ltd. and CIT, Panaji, Goa vs. Phil Corpn. Ltd., the Tribunal held that interest expenditure on borrowed funds used for strategic investments is allowable under Section 36(1)(iii). The Tribunal also referenced the Delhi High Court's decision in Eicher Goodearth Ltd. vs. CIT, which supports the allowance of interest expenditure for business promotion purposes. Consequently, the Tribunal directed the AO to exclude strategic investments from the computation of disallowance under Section 14A read with Rule 8D. The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed.

Conclusion:
The Tribunal's judgment addressed multiple issues related to disallowance under Section 14A read with Rule 8D and the allowance of interest expenditure. For AY 2007-08, the Tribunal restricted the disallowance to 5% of the exempt income and upheld the allowance of interest expenditure. For AY 2008-09, the Tribunal directed the exclusion of strategic investments from the disallowance computation under Section 14A read with Rule 8D, aligning with various judicial precedents.