2019 (9) TMI 759 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D - HELD THAT - Contention of the assessee that the provisions of section 14A of the Act are not applicable to share of profit from partnership firm since the same is subject to tax in the hands of partnership firm is decided by the Special Bench of Ahmadabad Tribunal in the case of Shri Vishnu Anant Mahajan v. ACIT 2012 (6) TMI 297 - ITAT, AHMEDABAD in favour of the Revenue holding that provisions of section 14A applies to the share of profit earned from partnership firm, following the said decision reject the contentions of the assessee. Contention of the assessee that provisions of section 14A have no application to strategic investments is also now settled by the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT 2018 (3) TMI 805 - SUPREME COURT . Contention of the assessee that investments were made in the M/s. Minal International FZE Sharjha an overseas company, and therefore, the provisions of section 14A would not apply to such investments - Contention of the assessee has to be examined by the AO as to whether the dividends from M/s.Minal International FZE Sharjha are taxable or tax free and accordingly the provisions have to be applied. Assessing Officer shall also decide the issue keeping in the case of Maxopp Investment Ltd. v. CIT 2018 (3) TMI 805 - SUPREME COURT and ACIT v. Vireet Investments Private Limited 2017 (6) TMI 1124 - ITAT DELHI . Thus, this issue of disallowance u/s. 14A r.w. Rule 8D is restored to the file of the Assessing Officer to decide in view of the above observations, after providing adequate opportunity of being heard to the assessee. Deduction u/s. 10AA by allocation of expenses between SEZ and non-SEZ units of the assessee - contention of the assessee that assessee maintains separate Books of Accounts and the expenditure have been recorded on actual basis for both SEZ unit and non-SEZ unit - HELD THAT - Observation of the Assessing Officer was that the assessee could not produce any evidences to show that assessee has actually incurred expenses for the particular unit. It was also the submission of the assessee that in none of the Assessment Years later to this assessment year, even in scrutiny assessments no such allocation was made restricting the disallowance u/s. 10AA. Assessee and also the observations of the Assessing Officer in the Assessment Order this issue has to be examined afresh by the Assessing Officer especially when separate Books of Accounts were maintained by the assessee for both the units. Thus, this issue is restored to the file of the AO for denovo adjudication in accordance with law.

Summary

Issues:
1. Addition of interest rate on loans to associated enterprises
2. Disallowance under section 14A read with Rule 8D
3. Reduction in deduction under section 10AA by allocating expenses between SEZ and non-SEZ units

Analysis:

Issue 1: Addition of interest rate on loans to associated enterprises
The assessee challenged the addition of interest by the AO at 10.50% instead of the 5% charged by the appellant. The contention was that the interest rate of 5.23% was accepted by the department for the next assessment year, and the same should be adopted for the current year. However, the CIT(A) confirmed the addition based on the interest rate applied by the AO and TPO. The Tribunal dismissed this ground as not pressed during the hearing.

Issue 2: Disallowance under section 14A read with Rule 8D
The AO made a disallowance under Rule 8D of the IT Rules, which was upheld by the CIT(A). The assessee argued that section 14A should not apply to the share of profit from a partnership firm. However, following precedents, the Tribunal rejected this contention. The Tribunal also directed the AO to re-examine the disallowance concerning investments in an overseas company, considering relevant court decisions.

Issue 3: Reduction in deduction under section 10AA by allocating expenses
The AO restricted the deduction under section 10AA by allocating expenses between SEZ and non-SEZ units. The CIT(A) upheld this action but directed the exclusion of certain expenses. The assessee argued that expenses were allocated based on actuals, not turnover, and separate books were maintained for both units. The Tribunal found discrepancies in the AO's observations and directed a fresh examination by the AO, considering the separate accounting maintained by the assessee.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, directing the AO to re-evaluate the issues related to the disallowances and allocation of expenses.