2019 (11) TMI 1095 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - The perusal of the audited Balance-Sheet of the assessee for year ending 31st March, 2012 which is placed in Paper Book reveals that the availability of interest free funds in the form of Share Capital, Reserves and Surplus as on 31.03.2012 is in excess of ₹ 181 crore as against the closing investments considered by the AO at ₹ 131 crore meaning thereby that the availability of interest free funds to be more than the investments. We therefore relying on the aforesaid decision of Hon ble Bombay High Court in the case of CIT Vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT hold that no disallowance of interest expenses u/s 14A r.w. Rule 8D(2)(ii) of I.T. Rules is called for in the present case. Disallowance of indirect expenses u/s 14A r.w. 8D(2)(iii) - in the case of ACIT Vs. Vireet Investments (P) Ltd 2017 (6) TMI 1124 - ITAT DELHI has held that only those investments are to be considered while computing the average value of the investments which yield exempt income during the year for working out disallowance u/s 14A r.w. Rule 8D. The aforesaid decision of the Special Bench of the Tribunal has also been relied upon by the Co-ordinate Bench of the Tribunal in the case of M/s. Quick Heal Technologies Ltd 2019 (3) TMI 699 - ITAT PUNE . Before us, Revenue has not placed any contrary binding decision in its support. We therefore relying on the aforesaid decisions restore the issue back to the file of AO to re-work the disallowance u/s 14A r.w. Rule 8D(2)(iii) of I.T. Rules in line with the decision of Special Bench of the Tribunal in the case of ACIT Vs. Vireet Investments Pvt Ltd. (supra) Disallowance u/s 14A r.w. 8D - A.Y. 2013-14 - HELD THAT - Disallowance u/s 14A r.w Rule 8D(2)(ii) on account of interest expenses on account of availability of sufficient interest free funds and Rule 8D(2)(iii) with respect to indirect expenses from the investments from which no exempt income being earned respectively is concerned, in view of the submission of both the parties and the fact being similar to A.Y. 2012-13, we for the reasons stated hereinabove while deciding the issue in A.Y. 2012-13 and for similar reasons and directions, restore the issue back to the file of AO to recomputed the disallowance. Excluding the investments which are held as stock-in-trade for working out the disallowance u/s 14A r.w. 8D - HELD THAT - In view of the aforesaid decision of Hon ble Apex Court in the case of Maxopp Investment Ltd., Vs. CIT 2018 (3) TMI 805 - SUPREME COURT , we do not find any reason to interfere with the order of Ld.CIT(A) as far as the disallowance of expenditure u/s 14A r.w. Rule 8D(2)(iii) by considering the shares held as stock-in-trade for working out the disallowance is concerned. However before us, none of the parties have placed any material on record to demonstrate the exempt income earned u/s 10(34) of the Act by the assessee from the shares which are held as stock-in-trade . In such a situation, since on the other aspect of Sec.14A of the Act, we are restoring the issue to the file of AO for determining the disallowance, on this aspect also (where the shares are held as stock-in-trade), the issue is restored to the file of AO

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Application of Rule 8D of the Income Tax Rules.
3. Availability of interest-free funds.
4. Exclusion of certain investments from disallowance calculation.
5. Treatment of shares held as stock-in-trade.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee, engaged in share trading, filed returns for A.Y. 2012-13 and 2013-14, declaring incomes of ?1,73,47,788/- and ?11,64,13,033/-, respectively. The Assessing Officer (AO) disallowed ?58,92,941/- and ?75,92,184/- under Section 14A, which was partially upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Application of Rule 8D of the Income Tax Rules:
The AO applied Rule 8D to compute disallowances, considering the assessee's investments and exempt income. The CIT(A) directed the AO to exclude taxable mutual fund investments, granting partial relief.

3. Availability of Interest-Free Funds:
The assessee argued that its interest-free funds (Share Capital and Reserves) exceeded its investments, citing the Bombay High Court's decision in CIT Vs. HDFC Bank Ltd. The Tribunal agreed, noting that the assessee's interest-free funds were ?181 crore against investments of ?131 crore, thus no disallowance of interest under Rule 8D(2)(ii) was warranted.

4. Exclusion of Certain Investments from Disallowance Calculation:
The assessee contended that only investments yielding exempt income should be considered for disallowance under Rule 8D(2)(iii). The Tribunal, referencing the Special Bench decision in ACIT Vs. Vireet Investments Pvt. Limited, agreed and remitted the matter to the AO to rework the disallowance accordingly.

5. Treatment of Shares Held as Stock-in-Trade:
For A.Y. 2013-14, the assessee argued that shares held as stock-in-trade should be excluded from disallowance calculations. The Tribunal referred to the Supreme Court's decision in Maxopp Investment Ltd. Vs. CIT, which upheld that Section 14A applies even if shares are held as stock-in-trade. The Tribunal remitted the issue to the AO to determine disallowance in line with this decision.

Conclusion:
The Tribunal allowed the appeals partly, directing the AO to rework disallowances under Section 14A, considering interest-free funds and excluding non-exempt income investments, while adhering to the Supreme Court's guidance on shares held as stock-in-trade. The appeals were allowed for statistical purposes, and the order was pronounced on 19th November 2019.