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2017 (11) TMI 963 - AT - Income TaxAddition made u/s 14A - computation of claim - Held that - As in the case of CIT v. Srishti Securities Private Limited 2009 (1) TMI 408 - BOMBAY HIGH COURT held that interest on funds borrowed by an investment company for making investment in shares which may be held as investment or stock in trade or for the purposes of controlling interest in other companies shall be allowed as deduction u/s 36(1)(iii). The assessee has voluntarily suo motu disallowed an interest expenditure on ICD to the tune of ₹ 3,64,34,451/- u/s 14A which disallowance was raised by the AO to ₹ 4,10,78,401/-, wherein administrative expenses were also considered by the AO for making disallowance u/s 14A r.w.r. 8D which was not considered earlier by the assessee. The matter need to be set aside and restored to the file of the AO for computing disallowance u/s 14A afresh and the ratio of aforesaid decisions of Hon‟ble Courts read with provisions of Section 14A and 36(1)(iii) shall be applied by the A.O. to factual matrix of the case while computing disallowance u/s 14A keeping also in view the claim of the assessee that it is an investment company holding more than 99% investments in subsidiaries companies/strategic investments and also that the assessee is a single segment company being an investor and dealer in shares & securities and consequently all the business expenses ought to have been incurred towards this segment under normal circumstances unless otherwise shown, which shall also be kept in view by the AO while computing disallowance. Disallowance computed under section 14A cannot be added to book profits u/s 115JB for computing Minimum alternative tax - Held that - We answer the question referred to us in favour of assessee by holding that the computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with Rule SD of the Income-tax Rules, 1962. See ACIT v. Vireet Investment P Ltd. 2017 (6) TMI 1124 - ITAT DELHI Addition u/s 14A - A.O invoked Rule 8D r.w.s. 14A which led to disallowance of expenses which was higher than actual expenses incurred by the assessee as debited to Profit and Loss Account which disallowance was later restricted by learned CIT(A) to actual expenditure - Held that - The assessee is a single segment company being an investor and dealer in shares & securities and consequently all the business expenses ought to have been incurred towards this segment under normal circumstances unless otherwise shown, which shall also be kept in view by the AO while computing disallowance. The issue of disallowance u/s 14A and manner of computing disallowance is discussed by Hon ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd 2017 (5) TMI 403 - SUPREME COURT OF INDIA wherein held Sub-sections (2)and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Exclusion of diminution in the value of investments for the purposes of computation of disallowance u/s 14A - Held that - As observed that the AO has also included diminution in the value of investments for the purpose of computing disallowance u/s. 14A, which loss has arisen because of the restructuring/amalgamation owing to loss written off of in the investment in subsidiary namely Vantech Investments Limited, which stood merged with the assessee. In our considered view, said losses being diminution in the value of investment being written off cannot be considered as an expenditure incurred for earning of exempt income for the purposes of disallowance under Section 14A as the mandate is to disallow expenditure incurred in relation to earning of an exempt income and it cannot be stretched to include losses arising due to diminution in the value of the investments due to merger/amalgamation, that certainly is not the mandate of Section 14A. We affirm the order of learned CIT(A) on this ground and dismiss the appeal of the Revenue.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Computation of book profits under Section 115JB for Minimum Alternate Tax (MAT). Issue-wise Detailed Analysis: 1. Disallowance under Section 14A: - Facts and Background: The assessee, an investor and dealer in shares and securities, earned dividend income claimed as exempt under Section 10(34). The assessee disallowed a portion of the expenditure under Section 14A but excluded administrative expenses. The Assessing Officer (AO) included administrative expenses and recalculated the disallowance using Rule 8D, resulting in a higher disallowance. - CIT(A) Decision: The CIT(A) directed the AO to determine a reasonable amount of disallowance under Section 14A, following the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd., which mandates a reasonable basis for such disallowance even before Rule 8D's applicability. - ITAT Decision: The ITAT referred to its previous rulings in the assessee's own cases for earlier years, where it was held that strategic investments made for controlling interest should not attract disallowance under Section 14A. The ITAT also considered the recent decisions of the Supreme Court and High Courts, emphasizing that only investments yielding exempt income should be considered for disallowance calculations. The matter was remanded to the AO for fresh computation, excluding strategic investments and adhering to the principles laid down in the cited judicial precedents. 2. Computation of Book Profits under Section 115JB: - Facts and Background: The assessee contended that disallowance computed under Section 14A should not be added to book profits for MAT computation under Section 115JB. - CIT(A) Decision: The CIT(A upheld the AO's inclusion of the Section 14A disallowance in the book profits for MAT computation. - ITAT Decision: The ITAT directed the AO to follow the Special Bench decision in ACIT v. Vireet Investment P Ltd., which held that disallowance under Section 14A should not be added to book profits for MAT purposes. The ITAT remanded the matter to the AO to recompute the book profits accordingly. Separate Judgments and Application to Other Assessment Years: - AY 2007-08: The ITAT applied its decision for AY 2006-07 mutatis mutandis to AY 2007-08, allowing the appeal for statistical purposes. - AY 2009-10: The ITAT observed that the AO's disallowance under Rule 8D exceeded the total expenses claimed by the assessee. The ITAT directed the AO to compute the disallowance afresh, considering only those investments that yielded exempt income and excluding strategic investments. - AY 2010-11: The ITAT reiterated its stance on excluding stock-in-trade from disallowance calculations under Section 14A and upheld the CIT(A)'s exclusion of diminution in investment value from such disallowance. - AY 2011-12: The ITAT applied its decision for AY 2010-11 to AY 2011-12, allowing the appeal for statistical purposes. Conclusion: The ITAT's comprehensive analysis emphasizes the need for a reasonable and fact-specific approach in computing disallowances under Section 14A and their impact on book profits under Section 115JB, ensuring adherence to judicial precedents and statutory provisions. The matters were largely remanded to the AO for fresh computations in line with the ITAT's directions.
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