2020 (4) TMI 564 - AT - Income Tax

Disallowance u/s 14A r.w.r 8D - assessee offered suo-moto disallowance u/s 14A - HELD THAT - As assessee s own funds far exceeded the investments held by the assessee which is evident from the fact that the assessee has year-end share capital and free reserves aggregating to ₹ 17.25 Crores as against investments of ₹ 9.16 Crores held by the assessee - incremental reserves during the year far exceeds the incremental investments made by the assessee during the year - unless nexus of borrowed funds vis- -vis investments made by the assessee was established by Ld. AO, a presumption was to be drawn in assessee s favor that the investments were out of own funds - interest disallowance u/r 8D(2)(ii) would not be warranted. Therefore, we delete the same. Direct expenditure u/r 8D(2)(i) - Disallowance u/s 14A made while computing Book Profits u/s 115JB - Assessee has identified direct expenditure in the shape of demat charges and securities transactions charges and offered suo-moto disallowance of the same in its computation of income. These expenses are directly relatable to earning of exempt income and the same has already been disallowed by the assessee while computing its income under normal provisions. However, the same has not been added back while computing Book Profits u/s115JB. Keeping in view the clause (f) to explanation-1 to Section 115JB (2), the same would be added back while computing Book Profits u/s 115JB. The Ld.AO is directed to add back the same while making computations u/s 115JB. Disallowance of indirect expenditure u/r 8D(2)(iii) - AO is directed to consider only those investments which have yielded exempt income during the year and add back the same while computing income under normal provisions. However, the same would not be added back while making computations u/s 115JB as held by Delhi Tribunal (Special Bench) in ACIT Vs. Vireet Investment (P.) Ltd. 2017 (6) TMI 1124 - ITAT DELHI

Summary

Issues:
- Disallowance under Section 14A of the Income Tax Act, 1961 for Assessment Years 2013-14 and 2014-15.

Analysis:

Issue 1: Disallowance under Section 14A for AY 2013-14
- The appeal contested the disallowance made under Section 14A of the Income Tax Act, 1961 for exempted income earned, totaling ?23,56,611.
- The assessee, a resident corporate entity engaged in financing and trading of fabrics, had its income determined at ?113.51 Lacs under normal provisions after a disallowance of ?25.10 Lacs under Section 14A.
- The assessee earned exempt dividend income of ?24.10 Lacs and offered a suo-moto disallowance of ?0.54 Lacs under Section 14A.
- The CIT(A) directed the Assessing Officer (AO) to restrict the disallowance to ?24.10 Lacs, being the exempt income earned by the assessee.
- The Tribunal held that interest disallowance under Rule 8D(2)(ii) was not warranted as the assessee's own funds exceeded investments, following precedents and case laws. Therefore, the interest disallowance was deleted.
- Direct expenditure was allowed to be added back while computing Book Profits under Section 115JB, and indirect expenditure was to be considered only for investments yielding exempt income during the year.

Issue 2: Disallowance under Section 14A for AY 2014-15
- The assessee earned exempt income of ?32.7 Lacs and offered a suo-moto disallowance of ?26,416. However, the AO computed a disallowance of ?38.07 Lacs under Rule 8D.
- The CIT(A) directed the AO to restrict the disallowance to the extent of exempt income earned by the assessee.
- The Tribunal directed the AO to recompute the income under normal provisions and under Section 115JB in line with the orders for AY 2013-14.

Conclusion:
- Both appeals were partly allowed concerning the disallowance under Section 14A for the respective Assessment Years 2013-14 and 2014-15. The Tribunal's order was pronounced on 10th February 2020.