2019 (9) TMI 803 - AT - Income Tax

Disallowance u/s.14A r.w. Rule 8D in respect of exempt income - suo motto disallowance is made by the assessee on account of expenses relatable to exempt income - HELD THAT - We noted that the CIT(A) has categorically given a finding that whatever the investments made by assessee out of own funds are the interest free funds available with the assessee in the instruments giving rise to exempt income, the same should not be disallowed. This view has support of Hon ble Bombay High Court in the case of CIT Vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT Clearly, the available interest free funds with the assessee i.e. the own funds are more than the investment made in the instrument giving rise to exempt income and investment is out of mixed funds. Hence, the presumption is in favour of assessee Disallowance of administrative and other expenses under Rule 8D2(iii) - We noted that the assessee has made suo motto disallowance of ₹46,85,029/-, this will meet any anticipated cost that some expenditure was incurred by the company. At best cost of the funding and investment department of the company which has been assigned the task of managing the investment portfolio of the company as one of their many responsibility could possibly be covered. The said funding and investment department is in-charge of the financial activities of the company besides handling strategic function. Hence, we are of the view that the expenditure attributable to the earning of dividend income which has been offered by assessee suo motto for disallowance u/s.14A of the Act r.w.r. 8D2(iii) is reasonable. Order of CIT(A), directing the AO to take the average rate of investment by excluding from the total investments, the investment income from which are subject to tax and the investment in subsidiary companies, excluding investments which are giving rise to income which are subject to tax - We are of the view that the assessee suo motto disallowed a sum which is quite reasonable and AO is directed to restrict to that extent only. This issue of assessee s appeal is allowed and that of Revenue is dismissed. MAT computation - expenses relatable to exempt income u/s.14A r.w.r.8D(2) while computing book profits u/s.115JB - HELD THAT - This issue is squarely covered in favour of assessee and against Revenue by the decision of the Special Bench of this Tribunal in the case of ACIT Vs. Vireet Investment Pvt. Ltd., 2017 (6) TMI 1124 - ITAT DELHI wherein it was held that - the provisions of Section 14A r.w.r.8D(2) of the Rules will not apply wherever book profit is computed u/s.115JB of the Act. Respectfully following the said decision we direct the AO not to make any disallowance under rule 8D(2) while computing book profits u/s.115JB of the Act. This issue of assessee s appeal is allowed. Disallowance of amortization premium paid for Leasehold land - HELD THAT - It is observed that the issue involved therein relating to disallowance amounting made by the A.O. and confirmed by the CIT(A) on account of amortization of premium paid by the assessee for leasehold land is squarely covered against the assessee by the orders of the Tribunal in assessee s own case for earlier years i.e. A.Ys. 2006-07 to 2010-11. Respectfully following the said orders of the Tribunal, we confirm the disallowance made by the A.O. and sustained by the CIT(A) on this issue Addition of un-utilized CENVAT Credit - CIT-A deleted the addition directing the AO to recast the accounts of excise duty and other taxes - HELD THAT - We find that this issue is squarely covered in favour of assessee and against Revenue in assessee s own case by the decision of the Hon'ble Bombay High Court 2019 (1) TMI 1623 - BOMBAY HIGH COURT assessee got credit in the excise duty already paid on the raw materials purchased by it and utilized in the manufacturing of excisable goods. The assessee was adopting the exclusive method, i.e., valuing the raw materials on the purchase price minus (-) the Modvat credit. The same would be permissible. The apex court in the case of Indo Nippon Chemicals Co. Ltd 2003 (1) TMI 8 - SUPREME COURT while affirming the order of the High Court, has observed that the income was not generated to the extent of Modvat credit or unconsumed raw material. Merely because the Modvat credit was irreversible credit offered to manufacturers upon purchase of duty paid raw materials, that would not amount to income which was liable to the taxed under the Act. It is also held that whichever method of accounting is adopted, the net result would be the same - Decided in favour of assessee Depreciation on the opening written down value of the block of assets - HELD THAT - As observed that the issue involved therein relating to assessee s claim for depreciation on the opening written down value of the block of assets as per the appellate order for immediately preceding assessment year is also squarely covered against the assessee by the decision of the Tribunal in assessee s own case for A.Ys. 2003-04 to 2010-11, this has also been affirmed by the ITAT. Respectfully, following the same, we uphold the impugned order of CIT(A) on this issue. This issue of assessee s appeal is dismissed.

Summary

Issues Involved:
1. Disallowance of expenses related to exempt income under Section 14A of the Income Tax Act read with Rule 8D.
2. Disallowance of amortization of premium paid for leasehold land.
3. Addition of un-utilized CENVAT Credit.
4. Depreciation on the opening written down value of the block of assets.

Issue-Wise Detailed Analysis:

1. Disallowance of Expenses Related to Exempt Income under Section 14A r.w. Rule 8D:
The primary issue revolves around the disallowance of expenses related to exempt income by invoking Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules, 1962. The Revenue challenged the deletion of disallowance amounting to ?29,20,10,000/- under Section 14A r.w. Rule 8D. The assessee raised multiple grounds, but only Ground Nos. 4 and 6 were argued, dismissing the rest.

The assessee-company made a suo motto disallowance of ?46,85,029/- on account of expenses relatable to exempt income. The Assessing Officer (AO) was not satisfied and invoked Rule 8D(2), resulting in a disallowance of ?2,966.95 Lakhs, later reduced by the CIT(A) based on certain exclusions.

The Tribunal upheld the CIT(A)'s approach, noting that investments made out of the assessee's own funds, which are interest-free, should not be disallowed. This view aligns with the Bombay High Court's decision in CIT Vs. HDFC Bank Ltd. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal on this issue.

Regarding administrative and other expenses under Rule 8D(2)(iii), the Tribunal accepted the assessee's suo motto disallowance of ?46.85 Lakhs as reasonable. The Tribunal also directed the AO to exclude investments that generate taxable income and investments in subsidiary companies from the total investments while calculating the disallowance.

For computing book profits under Section 115JB, the Tribunal cited the Special Bench decision in ACIT Vs. Vireet Investment Pvt. Ltd., stating that provisions of Section 14A r.w. Rule 8D(2) do not apply. Thus, the AO was directed not to make any disallowance under Rule 8D(2) while computing book profits under Section 115JB.

2. Disallowance of Amortization of Premium Paid for Leasehold Land:
The assessee contested the disallowance of ?1,16,125/- for amortization of the premium paid for leasehold land. The Tribunal noted that this issue was consistently decided against the assessee in earlier years (A.Ys. 2006-07 to 2010-11). Respectfully following the earlier orders, the Tribunal confirmed the disallowance and dismissed the assessee's appeal on this ground.

3. Addition of Un-utilized CENVAT Credit:
The assessee challenged the addition of un-utilized CENVAT Credit of ?2,17,32,640/-, while the Revenue contested its deletion. The CIT(A) had directed the AO to recast the accounts by considering excise duty and other taxes in the opening stock, purchases, sales, and inventory. The Tribunal referred to the Bombay High Court's decision in the assessee's own case for A.Y. 2008-09, which upheld the exclusion of CENVAT credit balance from the closing stock. Respectfully following this decision, the Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal on this issue.

4. Depreciation on the Opening Written Down Value of the Block of Assets:
The assessee contested the CIT(A)'s decision regarding the opening written down value of the block of assets for depreciation purposes. The Tribunal noted that this issue was consistently decided against the assessee in earlier years (A.Ys. 2003-04 to 2010-11). Respectfully following the earlier decisions, the Tribunal upheld the CIT(A)'s order and dismissed the assessee's appeal on this ground.

Conclusion:
The appeal of the assessee is partly allowed, and the appeal of the Revenue is dismissed. The Tribunal's order was pronounced in the open court on 05.07.2019.