2017 (9) TMI 108 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - interest towards investments made in the Fund - Held that - As balance sheet indicates the assessee s net worth at ₹ 70.85 crore. As against the shareholders fund of this magnitude, the assessee made investment in the Fund, yielding exempt dividend income, only to the tune of ₹ 1.00 crore and odd. This shows that investment in Funds is much less than the assessee s shareholder s fund. The Hon ble Karnataka High Court in CIT & Anr vs. Microlabs (2016 (4) TMI 219 - KARNATAKA HIGH COURT) has held that when investments are made from common pool and non-interest bearing funds are more than the investment in tax free securities no disallowance of interest expenditure u/s 14A can be made. Disallowance being % of the average value of investment - Held that - As the assessee suo motu offered disallowance of ₹ 25,003/- u/s 14A in its return of income. This factual finding recorded on page 19 of the impugned order has not been controverted by the ld. DR. If the assessee offered disallowance of this magnitude, then naturally the total amount of disallowance u/s 14A ought to have been reduced with the amount already offered by the assessee. In the given circumstances, we sustain the disallowance u/s 14A read with Rule 8D(2)(iii) for a sum of ₹ 46,361/- (Rs.71,364/- (-) ₹ 25,003/-). Addition on account of downward sales adjustment - As in the immediately preceding year tribunal upheld the deletion of addition except for reconciliation difference, which, in the preceding year, was ₹ 1.15 crore and in the current year is ₹ 7.45 lac. In the absence of any distinguishing facts having been brought to our notice either by the assessee or by the Department, respectfully following the precedent, we order for the deletion of addition of ₹ 3.20 crore and remit the matter to the Assessing Officer as regards reconciliation difference amounting to ₹ 7.45 lac to be decided in conformity with the view canvassed in the preceding year pursuant to the order passed by the Tribunal. Addition on account of interest - Held that - AR has brought to our notice that such amount was suo motu added by the assessee in its computation of total income for the immediately succeeding year, namely, A.Y. 2011-12. It was submitted that a direction may be given to delete such suo motu addition. In view of the fact that we have upheld the addition of ₹ 55,92,096/- and ₹ 12,828/- in the instant year, if these amounts were, in fact, suo motu added by the assessee in the computation of total income for succeeding year, then, the same should be deleted. We direct the Assessing Officer to verify the assessee s contention in this regard and, if the same is found to be true, then, the corresponding relief should be given in the assessment of the succeeding year.

Summary

Issues:
1. Disallowance u/s 14A of the Income-tax Act, 1961
2. Addition on account of downward sales adjustment
3. Addition of interest

Issue 1: Disallowance u/s 14A of the Income-tax Act, 1961:
The appeals by both the assessee and the Revenue pertain to disallowance u/s 14A. The Assessing Officer disallowed amounts under Rule 8D(2) related to investments made by the assessee in a fund, leading to exempt dividend income. The CIT(A) deleted the disallowance of interest under Rule 8D(2)(ii) based on the assessee's net worth and the proportion of investments. Citing relevant case laws, the Tribunal upheld the deletion of interest disallowance. Regarding the disallowance under Rule 8D(2)(iii), the Tribunal sustained a reduced amount based on the assessee's voluntary offer of disallowance.

Issue 2: Addition on account of downward sales adjustment:
The Revenue contested the deletion of an addition made by the Assessing Officer due to a downward sales adjustment. The assessee's business involved supplying components to a company with a price agreement subject to revision based on costs. The Assessing Officer added an amount to the income, alleging tax liability reduction. The CIT(A) deleted the addition based on details submitted by the assessee. The Tribunal upheld the deletion, following the precedent from a previous year's decision, except for a minor reconciliation difference.

Issue 3: Addition of interest:
The assessee challenged the confirmation of additions made by the Assessing Officer on account of interest. The interest claimed as a deduction was disallowed by the Assessing Officer, and the CIT(A) upheld the disallowance, deeming it capital in nature. The Tribunal approved the disallowance, as the interest related to lands purchased for a new plant. The Tribunal directed the Assessing Officer to verify if the same amounts were added in the succeeding year's income computation and delete them if found to be true.

In conclusion, the Tribunal partly allowed the Revenue's appeal for statistical purposes and partly allowed the assessee's appeal. The judgment provided detailed analysis and application of legal principles to resolve the issues raised by both parties, ensuring a fair and reasoned decision.