2020 (10) TMI 743 - AT - Income Tax

Disallowance u/s 14A r.w.Rule 8D - Mandation of Recording of satisfaction as required u/s 14A(2) - AO has disallowed interest expenditure under Rule 8D(2)(ii) and other expenses @0.5% of average value of investments under Rule 8D(2)(iii) - HELD THAT - It is very clear from the assessment order that there are no suo- moto disallowances from the assesee and when, this was brought to the notice of the ld. AR for the assessee, the assessee stated that there is no application of section 14A or interest income earned from head office, but not explained how provisions of Rule 8D are not applicable - AO, on the basis of information furnished by the assesse has noted that the explanation furnished by the assessee is not acceptable - findings recorded by the Ld. AO is sufficient and a clear indication of his compliance of the procedure prescribed u/s 14A(2) and hence, we are of the considered view that there is no merit in argument taken by the Ld. AR for the assessee regarding satisfaction as required u/s 14A(2 - Hence, an argument of assessee is rejected. Interest disallowances - It is a settled position of law that only net interest expenditure needs to be considered for computing disallowances u/s 14A. This principle is supported by the decision of CIT vs Jubiliant Enterprises Pvt.Ltd 2017 (2) TMI 1219 - BOMBAY HIGH COURT . We direct the Ld. AO to consider net interest expenditure for the purpose of working out disallowances of interest under Rule 8D(2)(ii) of I.T.Rules, 1962. Addition of other expenditure - Although the assessee has requested for disallowances of 1% to 2% of exempt income, but from AY 2008-09 onwards disallowances contemplated u/s 14A shall be computed in accordance with Rule 8D, where the procedure has been laid down for determination of disallowances of expenditure and this principle is supported by the decision of CIT vs Godrej and Boyce Manufacturing Co.Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT . Therefore, we are of the considered view that there is no merit in arguments taken by the assesee and hence, we are inclined to uphold the computation of other expenses as per Rule 8D(2)(iii) AO has determined the disallowances of ₹ 88,551/-, which is more than amount of exempt income, which cannot be the case. It is a settled principle of law that disallowances of expenditure u/s 14A shall not shallow entire exempt income of the assessee - we direct the Ld. AO to restrict disallowances of expenditure computed u/s 14A to the extent of exempt income of the assessee for the year under consideration. - Decided partly in favour of assessee.

Summary

Issues:
1. Applicability of section 14A of the Income Tax Act on interest received by the branch from its head office.
2. Applicability of transfer pricing provisions for transactions between the branch and its head office.
3. Adjustment made by the Transfer Pricing Officer (TPO) on interest paid by the Indian branch to its head office.
4. Disallowances under section 14A of the Act, read with Rule 8D of the Income Tax Rules, 1962.

Issue 1 - Section 14A Applicability on Interest Received:
The appeal challenged the applicability of section 14A on interest received by the branch from its head office, arguing it is not exempt income. The tribunal upheld the CIT(A)'s decision based on earlier rulings. The assessee did not press this ground during the hearing.

Issue 2 - Transfer Pricing Provisions Applicability:
The appeal contested the application of transfer pricing provisions for transactions between the branch and its head office, arguing they are not separate entities. The tribunal dismissed this ground as not pressed by the assessee.

Issue 3 - TPO Adjustment on Interest Paid:
The appeal challenged the TPO's adjustment on interest paid by the Indian branch to its head office, claiming the transactions were at arm's length. The tribunal dismissed this ground as not pressed by the assessee.

Issue 4 - Disallowances under Section 14A:
The main issue was the disallowances under section 14A read with Rule 8D. The AO disallowed interest expenditure and other expenses. The assessee argued that since the bank did not incur any expenditure to earn interest, section 14A should not apply. The tribunal ruled that satisfaction under section 14A(2) is required only if there are suo-moto disallowances by the assessee. The tribunal directed the AO to consider net interest expenditure and limit disallowances to the extent of exempt income earned by the assessee.

In conclusion, the tribunal partly allowed the appeal, emphasizing the necessity for satisfaction under section 14A(2) and limiting disallowances to the amount of exempt income earned. The judgment provided detailed reasoning based on legal principles and precedents, addressing each issue raised by the assessee comprehensively.