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2019 (10) TMI 126 - AT - Income TaxDisallowance u/s.14A r.w. rule 8D - Whether in a mixed system of accounting the identification of money employed towards exempted and non-exempted income cannot be made? - CIT (A) deleted the interest expenses by observing that the own fund of the assessee exceeds the investment but confirmed the addition of the administrative expenses calculated in the manner as provided under rule 8D of Income Tax Rule against the exempted /dividend income - HELD THAT - There is no ambiguity that the own fund of the assessee exceeds the amount of investment. Therefore, we are of the view that there cannot be any disallowance on account of interest expenses under section 14A read with rule 8D of Income Tax Rule. See RELIANCE UTILITIES POWER LTD. 2009 (1) TMI 4 - BOMBAY HIGH COURT - we hold that no disallowance of interest expense claimed by the assessee can be made on account of investments Administrative expenses disallowance - ITAT in the own case of the assessee has directed to restrict the disallowance to the tune of ₹20,000 only. Thus we restrict the disallowance of the administrative expenses to the extent of ₹ 20000.00 only. Hence the ground of appeal of the Revenue is dismissed and the ground of appeal of the assessee is partly allowed. TDS u/s 194H - addition u/s 40(a)(ia) - HELD THAT - Identical issue pertaining to the assessment year 2011-12 decided issue in favour of the assessee Addition u/s 14A read with rule 8D as per clause(f) of explanation 1 to section 115JB - HELD THAT Disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. 2014 (11) TMI 1169 - CALCUTTA HIGH COURT Determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB - we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB Addition on notional interest on account of investment made in the subsidiary companies - HELD THAT - As decided in own case for assessment year 2007-08 investment made by the assessee company for purchase of shares in the subsidiary company was not a legitimate business activity, was in fact, an expansion beyond what the Assessing Officer had himself envisaged. It was not even the case of the Revenue that investment made by the assessee in subsidiary company was for some illegitimate purpose or a mere device to divert its tax bearing income. Treating the interest as capital in nature - whether there was any extension in the existing business of the assessee on account of the purchase of the machineries? - HELD THAT - The proviso to sec. 36(1)(iii) specifically deals with two situations, firstly, there should be acquisition of an asset and secondly such acquisition is for extension of existing business. Admittedly, in the instant case interest expenditure has been incurred for the acquisition of the machines out of the borrowed funds. As per the ld. CIT-A, the borrowed fund was used for the extension of the existing business as well as for establishing the new business being electricity generation unit. However, we note that there is no such breakup available in the order of the authorities below regarding the acquisition of machineries for the existing business and electricity generation unit. Similarly, the authorities below have not brought anything on record suggesting there was expansion in the production capacity or in the sphere of market area. Thus merely acquisition of the machinery does not ipso facto refer to the extension of the business. There is new activity of electricity generation unit and there was no interlacing of the fund utilized in the acquisition of machineries.Therefore, taking all facts and circumstances into consideration, we are of the opinion that the issue needs to be re-examined by the AO
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of Income Tax Rules. 2. Non-deduction of TDS under Section 194H read with Section 40(a)(ia) of the Income Tax Act. 3. Treatment of notional interest on investment in subsidiary companies under Section 36(1)(iii). 4. Treatment of interest paid on term loans for capital assets under Section 36(1)(iii). 5. Inclusion of disallowance under Section 14A in the computation of book profit under Section 115JB. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D of Income Tax Rules: The Revenue challenged the deletion of ?46,44,832 out of ?79,09,770 disallowed under Section 14A read with Rule 8D. The assessee had claimed exempt income but did not disallow any expenses. The AO made a disallowance which was partly confirmed by CIT(A). The Tribunal noted that the assessee's own funds exceeded the investments, thus no disallowance of interest expenses was warranted. The Tribunal relied on precedents from the Bombay High Court and Gujarat High Court, holding that if interest-free funds exceed investments, no disallowance under Section 14A can be made. For administrative expenses, the Tribunal restricted the disallowance to ?20,000, following its own earlier decisions in the assessee’s case. 2. Non-deduction of TDS under Section 194H read with Section 40(a)(ia): The AO disallowed ?2,01,87,000 for non-deduction of TDS on discounts given to dealers, treating it as commission under Section 194H. CIT(A) deleted the addition, and the Tribunal upheld this decision, referring to its earlier ruling in the assessee's favor for AY 2011-12, where it was held that such discounts did not attract TDS under Section 194H. 3. Treatment of notional interest on investment in subsidiary companies under Section 36(1)(iii): The AO added notional interest of ?1,24,43,195 on investments in subsidiary companies. CIT(A) confirmed the addition. The Tribunal, however, deleted the addition, citing its own earlier decisions and the Gujarat High Court’s ruling in the assessee’s favor, which held that investments in subsidiaries were for business purposes and did not warrant disallowance of interest. 4. Treatment of interest paid on term loans for capital assets under Section 36(1)(iii): The AO capitalized ?18,86,101 of interest paid on term loans for machinery, considering it as capital expenditure. CIT(A) upheld this, stating the machinery purchase was for business extension. The Tribunal remanded the issue back to the AO for re-examination, noting that the authorities did not provide a clear breakup of machinery for existing business and new ventures, and there was no evidence of business expansion. 5. Inclusion of disallowance under Section 14A in the computation of book profit under Section 115JB: The AO included the disallowance under Section 14A in the book profit computation under Section 115JB. CIT(A) directed the AO to exclude this. The Tribunal held that disallowance under Section 14A cannot be imported into Section 115JB computation but directed an ad-hoc disallowance of 1% of exempt income for book profit computation, following the Delhi Tribunal’s Special Bench decision. Conclusion: The Tribunal’s consolidated order resulted in partly allowing the appeals of both the Revenue and the assessee, with specific directions for re-examination and adjustments based on established legal precedents. The detailed analysis addressed each issue comprehensively, ensuring adherence to legal principles and judicial consistency.
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