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2017 (12) TMI 47 - AT - Income TaxDisallowance u/s 14A - Held that - The assessee has invested its own interest free funds for making investments. There is no infirmity in the appellate order of learned CIT(A) deleting the addition u/r 8D(2)(ii) r.w.s. 14A, keeping in view factual matrix of the case as firstly the funds were borrowed from bank by the assessee for export credit limits on which interest was paid and hence interest on borrowings have direct nexus with export credit facilities granted by the bank, secondly own interest free funds available with the assessee are much higher than investments and hence presumption will apply. The Revenue fails on this ground. We order accordingly. Disallowance of administrative and other expenses u/r 8D(2)(iii) r.w.s. 14A - Held that - We find merit in the contention of the assessee but the claim raised by the assessee need verification and the matter is restored to the file of the AO to verify the HO expenses incurred which are to be taken cognisance for making disallowance u/r 8D(2)(iii). The AO shall also verify the contention of the assessee that only HO is involved in making investments and other divisions/factories have no role to play in making, controlling, managing and/or monitoring investments. The onus is on the assessee to prove its contentions to get relief. We order accordingly. Only those investments should be considered for inclusion for computing average investments for computing disallowance u/s 14A r.w.r. 8D(2)(iii) which have actually yielded exempt income during year under consideration - Held that - We direct the AO to decide this issue in the light of decision of Special Bench in the case of Vireet Investment Private Limited (2017 (6) TMI 1124 - ITAT DELHI) wherein only those instruments/securities which yielded exempt income during the previous year relevant to the impugned assessment year shall be considered for computing disallowance u/s 14A r.w.r. 8D. The Special Bench in para 11.16 held that only those investments are to be considered for computing average value of investment which yielded exempt income during the year. We are bound by decision of Special Bench and Respectfully following the same, we direct the AO to compute disallowance u/s 14A r.w.r. 8D(2)(iii) in accordance with the ratio of law laid down by Special Bench ITAT, Delhi in the case of Vireet Investment Private Limited(supra). We order accordingly. Whether the disallowance u/s 14A can fall below disallowance suo motu voluntarily made by the assessee in the return of income filed with the Revenue? - Held that - The mandate of the 1961 Act is to tax real income and not an income which was never the income chargeable to tax in the hands of the assesseee but was declared under a wrong belief or notion . The mandate of the 1961 Act is to tax real income and tax can only be levied under the authority of law. Thus, if after verifications and following the ratio of law decided by the tribunal in the instant case, if the disallowance falls below the disallowance u/s 14A offered by the assessee in return of income, be it may the Revenue cannot charge tax on income which never was the income of the assessee chargeable to tax within the mandate and provisions of the 1961 Act as the tax can only be levied by the authority of law.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962. 2. Computation of book profits under Section 115JB for determining Minimum Alternate Tax (MAT). 3. Inclusion of investments for computing average investments under Rule 8D(2)(iii). 4. Verification of Head Office (HO) expenses for disallowance under Rule 8D(2)(iii). 5. Exclusion of certain Mutual Funds from disallowance computation. 6. Consideration of only those investments yielding exempt income for disallowance computation. 7. Whether disallowance under Section 14A can fall below the voluntary disallowance made by the assessee. Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The assessee, engaged in manufacturing and export of dyes, claimed dividend income of ?1,60,62,485/- as exempt and voluntarily disallowed ?37,55,126/- under Rule 8D(2)(iii). The AO disallowed ?84,47,344/- under Section 14A, leading to an addition of ?46,92,218/-. The CIT(A) deleted the disallowance under Rule 8D(2)(ii) based on the assessee's use of borrowed funds for export credit, supported by the presumption that own funds were used for investments, as held by the Bombay High Court in Reliance Utilities and Power Limited and HDFC Bank Limited. The tribunal upheld the CIT(A)'s deletion, noting that the assessee's own funds exceeded the investments, and the borrowed funds were used for export credit. 2. Computation of Book Profits under Section 115JB: The AO's disallowance under Section 14A was also applied to compute book profits under Section 115JB for MAT purposes. The CIT(A) and the tribunal directed the AO to follow the decision of the Special Bench in Vireet Investment Private Limited, which mandates considering only those investments yielding exempt income for disallowance computation under Section 14A. 3. Inclusion of Investments for Computing Average Investments under Rule 8D(2)(iii): The CIT(A) excluded mutual funds, quoted and unquoted investments, and investments in subsidiary companies from the average investment computation, as these were subject to capital gains tax. The tribunal upheld this exclusion, directing the AO to verify and include only those investments which yielded exempt income during the year. 4. Verification of Head Office (HO) Expenses for Disallowance under Rule 8D(2)(iii): The assessee argued that only HO expenses should be considered for disallowance, as investments were managed solely by the HO. The tribunal found merit in this claim and restored the matter to the AO for verification, directing the AO to consider only HO expenses if the assessee's contention is verified. 5. Exclusion of Certain Mutual Funds from Disallowance Computation: The assessee contended that certain mutual funds, which did not declare dividends and were subject to capital gains tax, should be excluded from disallowance computation. The tribunal agreed and directed the AO to verify and exclude such mutual funds if they indeed do not yield exempt income. 6. Consideration of Only Investments Yielding Exempt Income for Disallowance Computation: The tribunal directed the AO to consider only those investments that yielded exempt income during the year for disallowance computation, in line with the Special Bench decision in Vireet Investment Private Limited. 7. Disallowance Below Voluntary Disallowance: The assessee argued that disallowance under Section 14A could fall below the voluntary disallowance made in the return of income. The tribunal agreed, stating that the mandate of the Income Tax Act is to tax real income and not income declared under a wrong belief. The tribunal cited decisions from the Gujarat High Court and Andhra Pradesh High Court, supporting the view that assessed income can fall below returned income in regular assessment proceedings. Conclusion: The appeals for AY 2011-12 and AY 2012-13 were partly allowed for both the assessee and the revenue, with directions for verification and recomputation by the AO as per the tribunal's findings and legal precedents. The tribunal emphasized the need for accurate disallowance computation under Section 14A, considering only relevant investments and expenses.
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