2020 (4) TMI 251 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Whether appellant has sufficient interest free ftinds and not incurred any expenditure for earning tax free income - whether the investments which have yielded the exempted income in the year under consideration should only be considered for the purpose of the disallowance under rule 8D (2)(iii) of income tax rule? - HELD THAT - We find support and guidance from the order of Calcutta Tribunal in the case of REI Agro Limited Vs. DCIT 2013 (9) TMI 156 - ITAT KOLKATA wherein it was held not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income In the case of ACIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI passed recently wherein it was held that the disallowances u/s 14A of the Act read with rule 8D of Income Tax Rules for the administrative expenses will be determined considering only those investments which yielded exempt income during the year. We direct the Assessing Officer to compute the disallowance as per Rule 8D by taking into consideration only those shares/investments which have yielded exempted income in the year under consideration. Hence the ground of appeal of the assessee is partly allowed. Addition of the disallowance made u/s 14A of the Act while computing book profit u/s 115JB - HELD THAT - It is settled law that the amount of disallowance made by the AO u/s 14A of the Act cannot be imported while determining the profit u/s 115JB of the Act. In this regard we rely on the judgment cited by the Ld. AR for the assessee in the case of Alembic Ltd. 2017 (1) TMI 513 - GUJARAT HIGH COURT Also note that in the recent judgment of ACIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI that the disallowances made u/s 14A of the Act r.w.r. 8D cannot be the subject matter of disallowances while determining the book profit u/s 115JB. Disallowance needs to be made in terms of the provisions of clause (f) to section 115JB of the Act while determining the book profit. In holding so we draw our support from the judgment of Hon ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. 2014 (11) TMI 1169 - CALCUTTA HIGH COURT wherein it was held that the disallowance about exempted income needs to be made as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently Determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently - HELD THAT - There is no mechanism given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/determine the disallowance. Therefore in the given facts circumstances we feel that adhoc disallowance will service the justice to the Revenue and assessee. We therefore are directing for the ad-hoc disallowance to avoid the multiple proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance at 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB - We also find to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. But now 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 of the Act. Thus the ground of appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Addition of disallowance made under Section 14A while computing book profit under Section 115JB.
3. Levy of interest under Sections 234A, 234B, and 234D.
4. Initiation of penalty proceedings under Section 271(1)(c).
5. Deletion of additions made by the AO on account of liquidated damages.
6. Deletion of disallowance made under Section 40(a)(i).

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee contested the disallowance of Rs. 8,04,294 under Section 14A read with Rule 8D(2)(iii). The assessee argued that only investments yielding exempt income should be considered for disallowance. The Tribunal referred to the Calcutta Tribunal's decision in REI Agro Limited Vs. DCIT and the Special Bench of the Delhi Tribunal in ACIT vs. Vireet Investment Pvt. Ltd., which support the assessee's contention. Consequently, the Tribunal directed the AO to recompute the disallowance by considering only those investments that yielded exempt income during the year. This ground of appeal was partly allowed.

2. Addition of Disallowance under Section 14A while Computing Book Profit under Section 115JB:
The assessee challenged the addition of disallowance made under Section 14A while computing book profit under Section 115JB. The Tribunal noted that disallowances under Section 14A cannot be imported into the computation of book profit under Section 115JB, as established by the Delhi Tribunal in ACIT vs. Vireet Investment Pvt. Ltd. and the Gujarat High Court in Alembic Ltd. However, the Tribunal also acknowledged that disallowance should be made independently under clause (f) to Explanation-1 of Section 115JB. The Tribunal directed an ad-hoc disallowance of 1% of the exempted income under clause (f) to avoid unnecessary litigation. This ground of appeal was partly allowed.

3. Levy of Interest under Sections 234A, 234B, and 234D:
The issue of levy of interest under Sections 234A, 234B, and 234D was deemed consequential and thus dismissed.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The initiation of penalty proceedings under Section 271(1)(c) was considered premature and thus dismissed.

5. Deletion of Additions made by the AO on Account of Liquidated Damages:
The Revenue's appeal against the deletion of additions made by the AO on account of liquidated damages amounting to Rs. 10,21,707 was dismissed. The Tribunal noted that the tax effect was below Rs. 20 lakhs, as per CBDT Circular No. 3/2018, which restricts the filing of appeals by the Revenue below this threshold. The Tribunal dismissed the appeal but allowed the Revenue to re-approach if the tax effect exceeded the prescribed limit upon re-verification.

6. Deletion of Disallowance made under Section 40(a)(i):
Similarly, the Revenue's appeal against the deletion of disallowance made under Section 40(a)(i) amounting to Rs. 23,28,587 was also dismissed due to the tax effect being below Rs. 20 lakhs, in line with the same CBDT Circular. The Tribunal provided the same liberty to the Revenue to re-approach if necessary.

Conclusion:
- The appeal filed by the assessee was partly allowed.
- The appeal filed by the Revenue was dismissed due to the tax effect being below the prescribed limit.
- The Tribunal provided directions for recomputation and ad-hoc disallowance to avoid further litigation.