2020 (5) TMI 553 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - determining the disallowance under rule 8D(2)(ii) of the I.T.Rules AO took the gross interest as against the net interest - Whether AO ought to take net interest for the purpose of computation of disallowance under Rule 8D(2) (ii) of the Rules? - HELD THAT - We note that this issue is no longer res integra. There are plethora of precedents wherein it was held that only net interest should be taken for the purpose of computation of disallowance under Rule 8D(2) (ii) of the Rules. See M/S UNIVERSAL INDUSTRIAL FUND LTD. 2018 (3) TMI 207 - ITAT KOLKATA and M/S. SUHAMI POWER FINANCE CORPORATION VERSUS ACIT, RANGE -17 (3) , MUMBAI 2019 (7) TMI 1621 - ITAT MUMBAI We direct the AO to compute the disallowance under rule 8D(2) (ii) only after taking net interest (interest received minus interest paid). The assessee is also directed to furnish the details of interest received/paid, before the assessing officer along with documentary evidence, if any. Therefore, we allow the issue of computation of disallowance under rule 8D(2) (ii) of the Rules for statistical purposes. Average value of stock-in-trade will not be taken in determining the disallowance under section 14A read with rule 8D - Counsel submits that the value of investment will not include the value of shares held as stock-in-trade, as the main object of the assessee is to purchase and sale of shares - HELD THAT - In the light of the above stated judgment of the Hon ble Supreme Court in the case of Maxopp Investment 2018 (3) TMI 805 - SUPREME COURT it is abundantly clear that the expenditure incurred in acquiring those shares, which is held in stock-in-trade will have to be apportioned. Therefore, section 14A read with rule 8D will be applicable in a situation when the assessee keeps shares in stock-in-trade . Whether all shares held in stock-in-trade should be considered for disallowance under section 14A or only those shares which yielded the dividend income? - HELD THAT - As respectfully following the judgment of Hon ble Supreme Court, in the case of Maxopp Investment (supra) and respectfully following the judgment of the Coordinate Bench of Kolkata in the case of REI Agro Ltd 2013 (9) TMI 156 - ITAT KOLKATA we direct AO to compute the disallowance under section 14A read with rule 8D in respect of shares held in stock-in -trade by applying the theory of apportionment of expenditure and taking into account only those shares which yielded dividend income.For statistical purposes, the second issue raised by the assessee is allowed. Order being pronounced after the 90 days of hearing - Covid-19 pandemic - HELD THAT - Taking note of the extraordinary situation in the light of the Covid-19 pandemic and lockdown, the period of lockdown days need to be excluded. For coming to such a conclusion, we rely upon the decision of the Co- ordinate Bench of the Mumbai Tribunal in the case of DCIT vs. JCB Limited 2020 (5) TMI 359 - ITAT MUMBAI

Summary

Issues Involved:
1. Determination of disallowance under Rule 8D(2)(ii) of the I.T. Rules using gross interest versus net interest.
2. Inclusion of the average value of stock-in-trade in determining disallowance under section 14A read with Rule 8D of the Rules.

Detailed Analysis:

Issue 1: Determination of Disallowance under Rule 8D(2)(ii) Using Gross Interest versus Net Interest
The primary contention of the assessee was that the Assessing Officer (AO) incorrectly used the gross interest amount of ?3,46,48,556/- instead of the net interest amount of ?83,50,170/- (gross interest minus interest received) for computing disallowance under Rule 8D(2)(ii). The assessee argued that only net interest should be considered for this computation.

Legal Precedents and Tribunal's Decision:
- The Tribunal referenced multiple precedents, including the case of DCIT vs. Universal Industrial Fund Ltd., where it was held that net interest should be used for disallowance computation under Rule 8D(2)(ii).
- Similarly, in M/s Suhami Power & Finance Corporation vs. ACIT, it was confirmed that net interest should be considered.
- The Tribunal concluded that the AO should compute the disallowance using net interest (interest received minus interest paid). The AO was directed to recompute the disallowance under Rule 8D(2)(ii) accordingly.

Issue 2: Inclusion of Average Value of Stock-in-Trade in Determining Disallowance under Section 14A Read with Rule 8D
The assessee contended that the average value of stock-in-trade should not be included in the calculation of disallowance under section 14A read with Rule 8D, as the shares were held as stock-in-trade and not as investments.

Legal Precedents and Tribunal's Decision:
- The Tribunal did not accept the assessee's argument, referencing the Supreme Court's judgment in Maxopp Investment Ltd. vs. CIT, which held that even shares held as stock-in-trade would be subject to disallowance under section 14A based on the theory of apportionment of expenditure.
- The Tribunal also considered the judgment of the Coordinate Bench of ITAT Kolkata in REI Agro Ltd. vs. DCIT, which stated that only investments yielding dividend income during the previous year should be considered for the average value of investments under Rule 8D(2)(ii) and (iii).
- The Tribunal directed the AO to compute the disallowance under section 14A read with Rule 8D by applying the theory of apportionment of expenditure and considering only those shares which yielded dividend income.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to:
1. Compute disallowance under Rule 8D(2)(ii) using net interest (interest received minus interest paid).
2. Recompute disallowance under section 14A read with Rule 8D for shares held as stock-in-trade by applying the theory of apportionment of expenditure and considering only those shares which yielded dividend income.