2021 (12) TMI 96 - AT - Income Tax

Disallowance u/s 14A - Suo moto disallowance made by assessee - AO has recorded the primary facts regarding the investment made by the assessee in the shares/mutual funds as on 31.03.2013 - AO noted that the working of suo moto disallowance by the assessee u/s 14A was considered but no basis was explained by the assessee to arrive at the said figure - excluding the investment made in the subsidiary company while computing the average investment for the purpose of disallowing the indirect administrative expenses under Rule 8D(2)(iii) - HELD THAT - No substance or merits in the objection of the assessee regarding non recording of satisfaction by the AO while making the disallowance u/s 14A. Excluding the investment made in the subsidiary company while computing the average investment for the purpose of disallowing the indirect administrative expenses under Rule 8D(2)(iii) of the Income Tax Rules the issue is now covered by the decision of Hon ble Supreme Court in the case of Maxopp Investment Vs. CIT 2018 (3) TMI 805 - SUPREME COURT AND own case 2021 (3) TMI 157 - ITAT DELHI Accordingly, this issue is decided against the assessee and in favour of the Revenue and to that extent the order of the CIT(A) is set aside. The AO is directed to re-compute the disallowance by including the investment made in the subsidiary company. Disallowance made on account of interest expenditure - Revenue has not disputed the fact that the assessee has taken the loans for specific purpose and the AO has not brought any material or fact on record to say that the assessee has diverted the loan to the investment made in the shares and mutual funds. Further, during the year under consideration, though there is a change in the investment portfolio, however, the total investment as on 31.03.2013 is less than the investment as on 31.03.2012. Accordingly, there is no extra fund utilized by the assessee during the year for making the investment in shares or securities but the sale proceeds of the existing investment is more than the purchases, if any made during the year. AO has not made any disallowance on account of interest expenditure u/s 14A of the I.T. Act in the preceding years. Therefore, when no fresh investment is made other than the proceeds of the sale of existing investment then the disallowance of interest expenditure is not warranted. Hence, we do not find any error or illegality in the impugned order of the CIT(A) qua this issue of deleting the disallowance made by the AO u/s 14A of the Act on account of interest. Deduction in respect of Education Cess and Secondary and Higher Education Cess - HELD THAT - We follow the earlier order of this Tribunal in assessee s own case for the AY 2012-13 2021 (3) TMI 157 - ITAT DELHI - AO is directed to consider the claim of deduction of Education Cess as per law in the same terms as directed by this Tribunal in the earlier decision.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Computation of book profit under Section 115JB of the Income Tax Act.
3. Satisfaction recording by Assessing Officer (AO) while rejecting suo moto disallowance.
4. Exclusion of investment in subsidiary companies for disallowance computation.
5. Deduction of Education Cess and Secondary and Higher Education Cess.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The primary issue in these cross appeals is the disallowance made by the AO under Section 14A while computing the income under normal provisions of the Income Tax Act and the adjustment while computing book profit under Section 115JB. The AO noted that the assessee made investments in shares and mutual funds and earned exempt dividend income. The AO was dissatisfied with the assessee's suo moto disallowance of ?9,75,000/- and proceeded to compute the disallowance as per Rule 8D, resulting in a total disallowance of ?3,05,36,092/-. The CIT(A) reduced this disallowance to ?13.71 lacs, leading to appeals from both the Revenue and the Assessee.

2. Computation of book profit under Section 115JB of the Income Tax Act:
The CIT(A) also addressed the computation of book profit under Section 115JB, aligning it with the revised disallowance under Section 14A, limiting the adjustment to ?13.71 lacs. This decision was contested by both parties.

3. Satisfaction recording by Assessing Officer (AO) while rejecting suo moto disallowance:
The assessee argued that the AO did not record any satisfaction while rejecting the suo moto disallowance, rendering the AO's disallowance invalid. The Tribunal, however, found that the AO had sufficiently discussed the issue and recorded the primary facts regarding the investments, thereby satisfying the requirements under Section 14A(2) and Rule 8D.

4. Exclusion of investment in subsidiary companies for disallowance computation:
The CIT(A) excluded the investment in the subsidiary company while computing the average investment for disallowing administrative expenses under Rule 8D(2)(iii). The Tribunal, following the decision of the Hon’ble Supreme Court in Maxopp Investment Ltd. Vs. CIT and the Delhi High Court in the assessee's own case, held that the investment in the subsidiary company should be included in the computation. Consequently, the AO was directed to re-compute the disallowance by including the investment in the subsidiary company.

5. Deduction of Education Cess and Secondary and Higher Education Cess:
The assessee raised an additional ground seeking deduction of Education Cess and Secondary and Higher Education Cess. The Tribunal, following its earlier order for AY 2012-13, admitted the additional ground and directed the AO to consider the claim as per law.

Conclusion:
The Tribunal upheld the AO's initiation of proceedings under Section 14A, finding that the AO had recorded sufficient satisfaction. The Tribunal directed the AO to re-compute the disallowance by including the investment in the subsidiary company, aligning with the Supreme Court's and Delhi High Court's decisions. The Tribunal also directed the AO to consider the assessee's claim for deduction of Education Cess as per law. The assessee's appeal was partly allowed for statistical purposes, and the Revenue's appeal was partly allowed.