2020 (12) TMI 929 - AT - Income Tax

Disallowance u/s.14A - assessee had earned dividend income and claimed the same as exempt in the return of income - HELD THAT - Even if the expenses are to be disallowed as attributable to the said investment activity, it could be disallowed on a proportionate basis only for 9 days and not for the whole year. Hence, in this regard, the computation mechanism provided in Rule 8D(2)(iii) of the Rules would only result in absurdity if it is followed. We find that the ld. AR at the time of hearing had placed reliance on the decision in the case of Lee and Muirhead Pvt. Ltd. 2019 (4) TMI 1871 - BOMBAY HIGH COURT and the same, in our considered opinion, would come to rescue of the assessee wherein it had been held that Rule 8D cannot be applied blindly when the assessee had hardly incurred any expenses in relation to dividend earned and substantial investments were made temporarily in order to park idle funds. At the same time, some disallowance of expenses need to be made u/s.14A even though the investment was held for 9 days. In these peculiar facts and circumstances, we direct the ld. AO to adopt the disallowance workings given by the assessee during the course of assessment proceedings computing disallowance u/s.14A of the Act at ₹ 99,600/-. The disallowance of ₹ 99,600 could be treated as expenses incurred for 9 days attributable to investment activity and that would meet the ends of justice in the peculiar facts and circumstances of the instant case. Disallowance u/s.14A while computing book profit u/s.115JB of the Act - HELD THAT - We find that the Special Bench of Delhi Tribunal in the case of Vireet Investments 2017 (6) TMI 1124 - ITAT DELHI had already held that the computation mechanism provided in Rule 8D(2) of the Rules cannot be applied for the purpose of disallowance of expenses under Clause f of Explanation to Section 115JB (2) of the Act. However, certain expenses need to be disallowed as per Clause f of Explanation to Section 115JB (2) of the Act. Hence, we hold that the disallowance computed by the assessee on rationale basis at ₹ 99,600/- be disallowed under Clause f of Explanation to Section 115JB(2) of the Act. The ld. AO is directed accordingly. Depreciation of revised written Down Value (WDV) of the assets acquired by the assessee from its holding company - whether the transaction would be covered by the provisions of Section 47(iv) and the actual cost as per Explanation 6 to Section 43(1) r.w.Explanation 2 to Section 43(6) ? - HELD THAT - As decided in own case for A.Y.2007-08 in the case of the transferor company, the income is to be treated as income of the year in which the transfer has taken place. This shows that the subsequent event has the effect of withdrawing the exemption granted under section 47 and the income goes back to the date of transfer. Thus, provisions of section 47 are withdrawn on occurrence of the events mentioned under section 47A and the transaction has to be treated as a transfer under section 47(v) or (vi) of the Act as the case may be and the transferor company is liable to pay the capital gains tax. In the present case due to seizure of the assessee-company being a subsidiary of the transferor company, the provisions of section 47(iv) have ceased to apply, and the transaction has to be considered as a transfer. Section 47A provides for withdrawal of exemption and the resultant treatment to be given to income in the hands of the transferor company. Thus issue decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance under Section 14A while computing book profit under Section 115JB.
3. Depreciation on revised Written Down Value (WDV) of assets acquired from the holding company.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The primary issue in the assessee's appeal (ITA No.1198/Mum/2019) was the disallowance made under Section 14A of the Income Tax Act. The assessee earned dividend income of ?14,16,742, which was claimed as exempt. However, no disallowance of expenses incurred to earn this exempt income was made in the return. During the assessment proceedings, the assessee submitted a working of ?99,600 as disallowance, attributing part of the salary costs of employees involved in investment activities. The Assessing Officer (AO) disregarded this and computed the disallowance as ?12,55,853 under Rule 8D(2)(iii).

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the assessee's allocation of expenses was ad hoc and lacked supporting documents. However, the Tribunal found that the investment yielding the dividend was held only for nine days. Applying Rule 8D(2)(iii) would result in an absurdity. Citing the jurisdictional High Court's decision in Pr. Commissioner of Income Tax vs. Lee and Muirhead Pvt. Ltd., the Tribunal directed the AO to adopt the disallowance workings of ?99,600 submitted by the assessee, attributing it proportionately to the nine days the investment was held.

2. Disallowance under Section 14A while computing book profit under Section 115JB:
In the Revenue's appeal (ITA No.1442/Mum/2019), the issue was the disallowance of ?12,55,853 under Section 14A while computing book profit under Section 115JB. The AO had applied the same disallowance computed under Rule 8D(2)(iii) for normal provisions.

The Tribunal referenced the Special Bench of the Delhi Tribunal in Vireet Investments, which held that Rule 8D(2) cannot be applied for disallowance under Clause 'f' of Explanation to Section 115JB(2). However, some expenses must be disallowed under this clause. The Tribunal directed the AO to disallow ?99,600, as computed by the assessee, under Clause 'f' of Explanation to Section 115JB(2).

3. Depreciation on revised Written Down Value (WDV) of assets acquired from the holding company:
The second ground in the Revenue's appeal concerned the depreciation on the revised WDV of assets acquired from the holding company. The assessee had purchased second-hand plant and machinery from its holding company and initially capitalized them at the WDV appearing in the holding company's books. Due to a change in shareholding, the assessee revalued the WDV and claimed depreciation on the higher actual cost.

The Tribunal noted that this issue was adjudicated in the assessee's favor in ITA No.6020/Mum/2011 for A.Y. 2007-08, where it was held that the cost of acquisition should be the actual price paid by the assessee. This decision was upheld by the Hon'ble Bombay High Court. The Tribunal also referenced a similar decision for A.Y. 2008-09, where the High Court dismissed the Revenue's appeal. Following these precedents, the Tribunal dismissed the Revenue's ground on this issue.

Conclusion:
Both the assessee's and the Revenue's appeals were partly allowed. The Tribunal directed the AO to adopt the disallowance workings of ?99,600 for both Section 14A and Section 115JB computations and upheld the assessee's claim for depreciation on the revised WDV of assets acquired from the holding company.