2019 (9) TMI 294 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - HELD THAT - As the issue under consideration is materially identical in TRANSPORT CORPORATION OF INDIA LTD. 2016 (11) TMI 245 - ITAT HYDERABAD following the conclusions drawn therein we direct the AO to recalculate the disallowance as per rule 8D as per the guidelines given as above in the case of Transport Corporation of India and calculate the disallowance of expenditure under rule 8D(2)(ii) (iii) taking the average investment from which the exempt income is received. Interest expenditure incurred by the assessee are towards the secured loans which are secured against the stock and working capital - HELD THAT - AO cannot consider the above interest on secured loans which are committed to the business exclusively. AO may consider the other interest incurred by the assessee for the purpose of disallowance u/s 14A. Accordingly, these grounds are also remitted to the AO for recalculation. We cannot accept the contention of the assessee that investments were made on business expediency. When assessee makes investments and earns exempt income, irrespective of the fact that whether assessee has own funds or not, when the business has mixed funds, rule 8D will apply. Accordingly, this ground raised by the assessee is dismissed.

Summary

Issues:
- Disallowance of expenditure under section 14A of the Income Tax Act, 1961.
- Consideration of interest expenditure on secured loans for disallowance under section 14A.
- Application of rule 8D for calculating disallowance of expenditure.
- Investments made in subsidiary and group companies from shareholder's funds.
- Exclusion of investments that have not generated income from the calculation of disallowance.
- Recalculation of disallowance as per the guidelines provided in a previous case.
- Dismissal of the claim that investments were made on business expediency.

Analysis:
1. Disallowance of Expenditure under Section 14A:
The case involved the disallowance of expenditure under section 14A of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed an amount under section 14A, which was confirmed by the Commissioner of Income Tax (Appeals) (CIT(A)). The assessee contended that the investments were made from shareholder's funds for business expediency. However, the CIT(A) upheld the AO's decision based on the receipt of dividend income by the assessee.

2. Consideration of Interest Expenditure on Secured Loans:
The AO disallowed interest expenditure under section 14A, which the assessee argued was for term loans secured against stock and working capital. The tribunal remitted this issue back to the AO for recalculating the disallowance, excluding interest on secured loans committed exclusively to the business.

3. Application of Rule 8D for Disallowance Calculation:
The tribunal referred to a previous case where it was held that investments generating exempt income should be included in the calculation of disallowance under rule 8D. Following this guidance, the tribunal directed the AO to recalculate the disallowance under rule 8D, considering the average investment from which exempt income was received.

4. Exclusion of Investments Not Generating Income:
It was emphasized that investments not generating exempt income should be excluded from the calculation of disallowance. The tribunal directed the AO to consider only those investments that have yielded exempt income while calculating the disallowance under rule 8D.

5. Recalculation of Disallowance and Previous Case Reference:
The tribunal directed the AO to recalculate the disallowance as per the guidelines provided in a previous case with materially identical issues. The decision in the previous case was followed to ensure consistency in the treatment of similar matters.

6. Dismissal of Business Expediency Claim:
The tribunal dismissed the assessee's claim that investments were made on business expediency. It was clarified that when investments generate exempt income, regardless of the source of funds, rule 8D would apply. Therefore, the ground raised by the assessee on this matter was dismissed.

7. Conclusion:
In conclusion, the tribunal partly allowed all the appeals under consideration, directing the AO to decide the appeals in line with the directions given in a specific appeal. The judgment provided detailed analysis and guidance on the disallowance of expenditure under section 14A and the application of rule 8D for calculating the disallowance, ensuring a fair and consistent approach in similar cases.