2018 (3) TMI 662 - AT - Income Tax

Disallowance made under section 14A r/w rule 8D(2)(iii) - Held that - Investments not giving rise to exempt income during the relevant financial year have to be excluded from the average value of investment. We direct the Assessing Officer to verify the assessee s claim that it has not received any exempt income on the aforesaid investments and if assessee s claim is found to be correct, the aforesaid investment should be excluded from the average value of investment for computing disallowance under rule 8D(2)(iii). Grounds raised are allowed for statistical purposes. Addition of service tax to the trading receipt by invoking provisions of section 145A - Held that - The Tribunal, while deciding identical issue in assessee s own case for assessment year 2007 08 followed another decision of the same Bench, wherein, it is held that since the assessee is a service provider, the provisions of section 145A cannot be made applicable as such provisions were specifically introduced for the purpose of manufacture segment of business.

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D(2)(iii).
2. Addition of service tax to trading receipts under Section 145A.
3. Disallowance of professional/consultancy fees under Section 37(1).

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D(2)(iii):

The only issue arising in the present appeal relates to disallowance made under section 14A r/w rule 8D(2)(iii).

For the assessment year under dispute, the assessee filed its return of income on 29th September 2008, declaring income of ?76,02,02,481. The Assessing Officer (AO) noticed that the assessee earned exempt income and disallowed ?27,78,869 under section 14A. However, the AO computed disallowance applying rule 8D(2) at ?1,88,00,242, comprising ?87,96,002 as proportionate interest expenditure and ?1,00,04,240 as administrative expenditure. The Commissioner (Appeals) deleted the interest expenditure disallowance, noting sufficient interest-free funds for investments, a decision not contested by the Department. The Commissioner (Appeals) partially agreed with excluding strategic investments from the average value of investment for computing disallowance under rule 8D(2)(iii), but only for old investments, not incremental ones. The assessee argued that incremental strategic investments and share application money should also be excluded, citing various judicial precedents.

The Tribunal agreed with the assessee, directing the AO to verify if the incremental investments were strategic and exclude them from the average value of investments for disallowance computation. It also agreed that share application money, not yielding exempt income, should be excluded. The Tribunal emphasized that investments not generating exempt income during the relevant financial year should be excluded from the average value of investments for disallowance under rule 8D(2)(iii), as supported by decisions from the Delhi High Court and the Tribunal's Special Bench.

In the result, assessee’s appeal was allowed for statistical purposes.

2. Addition of service tax to trading receipts under Section 145A:

In grounds no.2 and 3, the Revenue challenged the decision of the learned Commissioner (Appeals) in deleting the addition of service tax to the trading receipt by invoking provisions of section 145A of the Act.

The AO added ?2,45,57,686 to the trading receipts, treating service tax as part of the trading receipt. The Commissioner (Appeals) deleted this addition, referencing the Tribunal's decision in the assessee's favor for the previous year, upheld by the Jurisdictional High Court. The Tribunal found the Revenue's reliance on the Supreme Court's decision in CIT v/s Thirumalai Swamy Naidu and Sons distinguishable, as it pertained to CST refund as revenue receipt, not service tax as part of trading receipts. The Tribunal upheld the Commissioner (Appeals)'s decision, dismissing the Revenue's grounds.

In the result, Revenue’s appeal was dismissed.

3. Disallowance of professional/consultancy fees under Section 37(1):

In ground no.4, the assessee challenged disallowance of expenditure amounting to ?1,77,99,929.

The AO disallowed ?1,77,99,929 paid to Kotak Mahindra Bank for raising funds for Met Life India Insurance Co., not related to the assessee's business. The Commissioner (Appeals) upheld this disallowance. The assessee argued that investment in other companies was part of its business objects, relying on judicial precedents. The Tribunal noted the need to examine the primary objects of the assessee company as per its memorandum and articles of association to decide the allowability of the expenditure. The Tribunal restored the issue to the AO for fresh examination, considering the company's primary objects and judicial precedents.

In the result, assessee’s appeal was allowed for statistical purposes.

Summary of Appeals:

Assessee’s Appeal in ITA no.3739/Mum./2015 is allowed for statistical purposes; Revenue’s Appeal in ITA no.3523/ Mum./2015 is dismissed; Assessee’s Appeal in ITA no.3740/Mum./ 2015 is allowed for statistical purposes; Revenue’s Appeal in ITA no. 3524/Mum./2015 is dismissed; Assessee’s Appeal in ITA no.3741/ Mum./2015 is allowed for statistical purposes; Revenue’s Appeal in ITA no.3525/Mum./2015 is dismissed.

Order pronounced in the open Court on 28.02.2018

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