2018 (5) TMI 1035 - AT - Income Tax

Disallowance u/s 14A - dividend income earned - Held that - Referring to submission that dividend income earned from domestic companies to an extent of ₹ 8,41,48,000/-has been claimed exempt under section 10(34) and that these dividends have been earned from strategic investments made by assessee, this issue now stands settled against assessee by the decision of Hon ble Supreme Court in the case of Maxopp Investments Ltd vs. CIT (2018 (3) TMI 805 - SUPREME COURT OF INDIA). Accordingly we reject this argument raised by assessee in respect of excluding the investments made in domestic companies which has yielded dividend income under rule 8 D(2) (ii). Coming to the 2nd part of the argument in respect of interest expenditure that is attributed under R 8D (2) (iii) is concerned, it is observed from the financial statements placed in the paper book that assessee does not have bifurcations of interest in the profit and loss account. As the entire interest is kept in a common pool, it is very difficult to bifurcate interest expenditure that is attributable to earning of exempt income. It is observed that assessee during the year has taken loans and advances to the tune of ₹ 59.96 crores. Further in Schedule 18 to the profit and loss account assessee is paying interest on loan of ₹ 118.99 crores, bank charges to an extent of ₹ 265.57 crores and other charges to an extent of ₹ 4.81 crores. As this issue has already been set aside by this Tribunal to be recomputed by Ld.AO, we also set aside this issue back to ld. AO. Assessee shall file all relevant details in order to establish its claim regarding interest expenditure not to be attributable for the purposes of earning the dividend income. Assessee shall furnish all the details in respect of interest expenditure before Ld. AO - Decided partly in favour of assessee as partially remanded.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Application of Rule 8D for disallowance.
3. Consideration of investments yielding exempt income for disallowance.
4. Attribution of interest under Rule 8D (2) (iii) for disallowance.

Analysis:

Issue 1: Disallowance under Section 14A
The assessee challenged the disallowance under Section 14A of the Income Tax Act, 1961, arguing that no expenditure was incurred to earn incomes not forming part of the Total Income. The Tribunal remitted the issue to the assessing officer to examine the average value of investments excluding those on which dividend was not earned, directing the calculation of disallowance under Section 14A and Rule 8D (2) (iii).

Issue 2: Application of Rule 8D for Disallowance
The assessee contended that the application of Rule 8D by the assessing officer without providing cogent reasons for rejecting the claim was erroneous. The Tribunal set aside the order and instructed the AO to reexamine and verify the investments to calculate the disallowance under Rule 8D (2) (iii).

Issue 3: Consideration of Investments Yielding Exempt Income
The assessee argued that investments yielding exempt income were strategic investments for business purposes, not intended to earn dividend income, and should not be considered for disallowance under Section 14A. However, the Tribunal rejected this argument based on the decision of the Supreme Court in Maxopp Investments Ltd vs. CIT.

Issue 4: Attribution of Interest under Rule 8D (2) (iii)
The dispute regarding the attribution of interest under Rule 8D (2) (iii) for disallowance was raised. The Tribunal observed the difficulty in bifurcating interest expenditure attributable to earning exempt income due to the common pool of interest in the financial statements. The issue was set aside to the AO for reevaluation based on the details provided by the assessee.

In conclusion, the appeal filed by the assessee was partly allowed, specifically concerning the issue remanded for further examination. The Tribunal's decision emphasized the need for proper verification and consideration of relevant details in determining disallowances under Section 14A and Rule 8D.