2020 (12) TMI 262 - HC - Income Tax

Disallowance u/s 14A r/w Rule 8D(2)(iii) - expenditure incurred in relation to income not includible in the total income - CIT (A) restricted to 0.5% of the average investment income - HELD THAT - CIT(A) deleted the disallowance of interest under Section 14 A r/w Rule 8D (2)(ii), considering the factual position and the fact that the Respondent-Assessee had interest-free funds in the form of share capital and reserves surplus. As regards the disallowance under Rule 8D(2)(iii), it was observed that Respondent-Assessee s claim that no expenditure was incurred is not correct - expenditure was to be estimated under Rule 8D(2)(iii) being 0.5% of the average investment income which is exempt. It was noticed that value of average investment had been calculated as the average of total investments, mentioned in Schedule F. CIT (A) noted that since all the investments mentioned in Schedule F do not yield exempt income, disallowance under Section 14A read with Rule 8D(2)(iii) has been restricted only to 0.5% of the average investment income which is exempt, irrespective of whether such exempt income was received during AY 2011-12. This approach has been upheld by the learned ITAT. We do not find any perversity in the same or find any reason to entertain the present appeal to interfere with this finding that is based on facts. Addition with respect to the prior period income - HELD THAT - As noticed that the profit and loss account of the Respondent-Assessee shows that it has neither taken the prior period income in its taxable profit, nor has considered the prior period expenses i.e. the prior period adjustments have been made by the Respondent-Assessee on below the line profit. On this issue, since factual aspects have to be verified, the learned ITAT has remanded back this issue with a direction to the AO to net off prior period income and the prior period expenditure and tax only the net income. This direction calls for no interference by this Court. No substantial question of law.

Summary

Issues Involved:
1. Condonation of delay in re-filing the appeal.
2. Appeal under Section 260A of the Income Tax Act, 1961 against the ITAT order.
3. Disallowance under Section 14A r/w Rule 8D(2)(iii) in relation to expenditure incurred for income not included in total income.
4. Addition of prior period income and expenses.

Analysis:

1. Condonation of Delay:
The delay of 74 days in re-filing the appeal was condoned by the Court for reasons stated in the application, allowing the application.

2. Appeal Against ITAT Order:
The appeal was directed against the ITAT's common order dated 12.06.2019, where issues in favor of the Respondent-Assessee were decided. The factual background involved the Respondent-Assessee, a public sector undertaking, declaring a total loss for AY 2011-12. The AO framed the assessment under Section 143(3) of the Act, determining the total loss. The CIT(A) partly allowed the appeal, leading to the appeal before the ITAT, where issues were decided in favor of the Respondent-Assessee.

3. Disallowance under Section 14A r/w Rule 8D(2)(iii):
The Appellant-Revenue challenged the ITAT's decision to restrict disallowance to 0.5% of average investment income instead of the higher amount disallowed earlier. The Court upheld the ITAT's decision, emphasizing the need to estimate expenditure under Rule 8D(2)(iii) for exempt income. The CIT(A) had rightly restricted the disallowance based on factual considerations, which the ITAT upheld.

4. Addition of Prior Period Income and Expenses:
The Appellant-Revenue contested the deletion of the addition made by the AO on account of prior period income. The ITAT observed that the Respondent-Assessee had not included prior period income in taxable profit and had not considered prior period expenses. The Court found no reason to interfere with the ITAT's decision to remand the issue back to the AO for netting off prior period income and expenses, taxing only the net income.

In conclusion, the Court dismissed the appeal as no substantial question of law was raised, finding no grounds for interference in the decisions made by the ITAT regarding the disallowance under Section 14A and the addition of prior period income and expenses.