2018 (5) TMI 1084 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - non recording of satisfaction by AO - Held that - The issue of investments in group companies, subsidiary companies, strategic investments etc vis a vis the applicability of provisions of section 14A of the Act are now settled in favour of the revenue by the recent decision of the Hon ble Supreme Court in the case of Maxopp Investment Ltd vs CIT reported in (2018 (3) TMI 805 - SUPREME COURT OF INDIA). Applicability of computation mechanism provided in Rule 8D of the Rules cannot be ruled out in the instant case. But we find that the total dividend earned by the assessee was only ₹ 88,75,687/- and hence the disallowance u/s 14A cannot exceed the dividend income. Reliance on the case of Joint Investments (P) Ltd vs CIT reported in (2015 (3) TMI 155 - DELHI HIGH COURT). Since the assessee itself had voluntarily disallowed a sum of ₹ 1,37,25,202/-, we direct the ld AO not to make further disallowance beyond that amount under normal provisions of the Act. Accordingly, the grounds 1 to 2 raised by the assessee on non-recording of satisfaction by the ld AO are dismissed. The Grounds 3 and 4 raised by the assessee are allowed. Disallowance u/s 14A while computing the book profits u/s 115JB - Held that - As relying on ACIT vs Vireet Investment (P) Ltd 2017 (6) TMI 1124 - ITAT DELHI 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 8D of the Income-tax Rules, 1962. We find that the assessee had worked out the disallowance u/s 14A based on the actual figures from its profit and loss account. By respectfully following the special bench decision supra, we direct the ld AO to make disallowance of ₹ 1,37,25,202/- while computing the book profits u/s 115JB of the Act. Accordingly, the grounds raised by the revenue are partly allowed. Addition towards liabilities written back - scheme of amalgamation seeked - Held that - Though the deduction was claimed by the amalgamating company in the earlier years, now pursuant to the merger, the entire assets and liabilities of amalgamating company got merged at book values with the amalgamated company. This issue of claiming deduction in earlier years had already been duly factored in the scheme of amalgamation and the consideration fixed accordingly. The scheme of amalgamation has been approved by the Hon ble Calcutta High Court. In these circumstances, if the assessee having written back the liabilities brought forward from amalgamating company as no longer payable and by crediting the same to its profit and loss account, cannot have any escape route from offering the same to tax in its hands. Authorities below had rightly brought the same to tax in the hands of the assessee company during the year under appeal. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance u/s 14A of the Act
2. Addition of ?11,64,086/- towards liabilities written back

Issue-wise Detailed Analysis:

1. Disallowance u/s 14A of the Act:

The assessee, a Non-Banking Finance Company (NBFC), filed its return of income for the Assessment Year 2012-13, declaring a total income of Rs Nil under normal provisions and a Book Loss of ?2,81,56,974/- u/s 115JB of the Act. The assessee earned dividend income of ?88,75,687/- from group companies and claimed it as exempt. It suo moto disallowed ?1,37,25,202/- as expenditure related to the earning of exempt income under section 14A of the Act but did not make any disallowance while computing book profits u/s 115JB.

The Assessing Officer (AO) applied Rule 8D of the Rules, disallowing ?6,76,71,844/-, which included ?6,52,89,596/- under Rule 8D(2)(ii) and ?23,82,248/- under Rule 8D(2)(iii). The AO also added ?6,76,71,844/- u/s 14A while computing book profits u/s 115JB.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's action but deleted the disallowance u/s 14A while computing book profits u/s 115JB. Both the assessee and the revenue appealed.

The Tribunal, referencing the Supreme Court in Maxopp Investment Ltd vs CIT (2018) 402 ITR 640 (SC) and the Delhi High Court in Joint Investments (P) Ltd vs CIT 372 ITR 694 (Del), concluded that disallowance u/s 14A cannot exceed the dividend income. Since the assessee had already disallowed ?1,37,25,202/-, no further disallowance was warranted under normal provisions. However, for computing book profits u/s 115JB, the Tribunal followed the Special Bench decision in ACIT vs Vireet Investment (P) Ltd 165 ITD 27 (Delhi)(Special Bench), directing the AO to disallow ?1,37,25,202/-. Thus, the grounds raised by the assessee were partly allowed and those by the revenue were partly allowed.

2. Addition of ?11,64,086/- towards liabilities written back:

The assessee wrote back ?11,64,086/- as liabilities no longer required and disclosed it as 'other income' in its profit and loss account. The assessee argued that these liabilities were from the amalgamating company, International Development Engineering Associates Limited, and should not be taxed again.

The AO brought this amount to tax, noting no evidence that the liabilities were offered to tax by the amalgamating company. The CIT(A) upheld this action.

The Tribunal held that the liabilities written back by the assessee, pursuant to the merger, automatically became income u/s 41(1) of the Act, even though the deduction was not claimed by the assessee in earlier years. The scheme of amalgamation, approved by the Calcutta High Court, factored in these liabilities. Hence, the Tribunal upheld the authorities' actions, dismissing the assessee's grounds on this issue.

Conclusion:

Both the appeals of the assessee and the revenue were partly allowed. The Tribunal directed specific disallowances under sections 14A and 115JB, and upheld the addition of liabilities written back as income. The order was pronounced in the Court on 15.05.2018.