2017 (5) TMI 161 - AT - Income Tax

Addition u/s 14A read with rule 8D - disallowance u/r 8D(2)(iii) made suo-moto by the assessee in the return of income at 0.5% of average investments and reiterated by AO in the assessment order - Held that - AO accepted the disallowance computed by the assessee in the return of income. This being the position, we find that what the assessee is seeking, at the most, is rectification of mistake made by the assessee in the return of income for which separate procedure / remedy has been provided in the Act. The calculation made by assessee as well as AO were made as per the formulae prescribed u/r 8D(2)(iii) @0.5% of average investments. Even on merits, we find that the investment made by the assessee during impugned AY substantially rose from ₹ 0.22 crores as on 31/03/2010 to ₹ 52.24 Crores as on 31/03/2011 and it is hard to accept that such huge investments did not entail even a single rupee of expenses in terms of manpower / administrative resources. No distinction has been made between strategic and non-strategic investments. The Ld. AR has contested that the disallowance could not be made as the assessee did not earn any dividend and secondly, the investments were strategic and placed reliance various judicial pronouncements in this regard placed in the paper book. However, we have already noted that Rule 8D(2)(iii) uses the expression shall not form which shows that the factum of actual receipt of dividend is not material so as to attract this disallowance. - Decided against assessee. Computation of book profit u/s 115JB - Held that - Since, we have already dismissed the assessee appeal on the issue of disallowance u/r 8D(2)(iii), the same being, consequential in nature, also gets dismissed. To summarize, whatever disallowance has been suffered by assessee u/s 14A read with Rule 8D, corresponding adjustment thereof shall also be made in Book Profit u/s 115JB.

Summary

Issues:
Challenge to addition u/s 14A read with rule 8D and computation of book profit u/s 115JB for AY 2011-12.

Analysis:
1. The assessee contested the addition u/s 14A for investments in equity shares amounting to ?52.24 Crores, claiming no interest-bearing funds were used for the investments. The AO disallowed interest and administrative expenses u/r 8D(2)(ii) and (iii) amounting to ?14.49 Lacs and ?13.62 Lacs, respectively. The CIT(A) upheld the administrative expenses disallowance but deleted the interest disallowance, considering the assessee's sufficient interest-free funds to cover the investments.

2. The dispute centered on the disallowance u/r 8D(2)(iii) made suo-moto by the assessee at 0.5% of average investments. The assessee argued against the disallowance, citing no exempt income earned and investments in associated concerns. The revenue contended that the disallowance was justified, emphasizing the substantial increase in investments during the AY. The AR argued that strategic investments for business purposes should not attract disallowance, but the Tribunal noted Rule 8D(2)(iii) did not distinguish between strategic and non-strategic investments.

3. The Tribunal observed that the disallowance under Rule 8D(2)(iii) was made as per the prescribed formula, and the substantial rise in investments indicated incurring administrative expenses. The AR's reliance on judicial pronouncements was deemed inconclusive as each case's facts and circumstances differed. The Tribunal concluded that the disallowance was warranted under Rule 8D(2)(iii) despite the absence of dividend income or strategic investments.

4. The Tribunal dismissed the appeal, upholding the disallowance u/r 8D(2)(iii) and the consequential adjustment in book profit u/s 115JB. The decision was based on the factual matrix, the formula prescribed under Rule 8D(2)(iii), and the substantial increase in investments during the AY, indicating administrative expenses incurred. The Tribunal emphasized the lack of distinction between strategic and non-strategic investments under Rule 8D(2)(iii) and rejected the AR's contentions based on judicial pronouncements.

By summarizing the detailed analysis for each issue involved, the judgment's key aspects and the Tribunal's reasoning have been preserved.