2022 (3) TMI 1277 - AT - Income Tax

Disallowance u/s 14A - assessee had suo moto disallowed a sum on account of expenses pertaining to this exempt income - HELD THAT - We find that while restricting the disallowance of expenses u/s. 14A to the extent of exempt income earned, the Ld. CIT(A) followed the decision of Corrtech Energy Pvt. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT and also Chhetinad Logistics Pvt. Ltd. 2017 (4) TMI 298 - MADRAS HIGH COURT which decision he noted was upheld by the Hon ble Supreme Court on merits 2018 (7) TMI 567 - SC ORDER . Thus we see no reason to interfere in the order of the Ld. CIT(A) restricting the disallowance of expenses u/s. 14A to the extent of exempt income earned. Addition u/s 14A made by the AO to the book profit of the assessee u/s 115JB - HELD THAT - The issue was covered in favour of the assessee by the decision of Special Bench of ITAT in the case of ACIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI . Disallowance of Forex Gain - HELD THAT - CIT(A) correctly deleted the addition finding that in identical set of facts in the case of assessee itself, the ITAT had in earlier years i.e A.Y 2009-10 2010-11 held that no addition on account of notional gain or loss on account of foreign exchange fluctuation was warranted as per the provisions of Section 43A of the Act. - Assessee appeal allowed.

Issues Involved:
1. Disallowance of expenses under Section 14A of the Income Tax Act, 1961.
2. Addition of disallowed expenses under Section 14A to book profits under Section 115JB.
3. Disallowance of Forex Gain.

Detailed Analysis:

1. Disallowance of Expenses under Section 14A:

The primary issue pertains to the disallowance of expenses incurred for earning exempt income under Section 14A of the Income Tax Act, 1961. The assessee had earned a dividend income of ?33,220, which was claimed as exempt under Section 10(34). The assessee had suo moto disallowed ?775 as expenses related to this exempt income. However, the Assessing Officer (A.O.) was not satisfied and computed the disallowance as per Rule 8D of the Income Tax Rules, 1962, amounting to ?33,40,84,101.

The Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance to the extent of the exempt income earned, i.e., ?33,220, citing various judicial precedents. The CIT(A) relied on decisions from the Hon’ble High Courts of Gujarat, Madras, and Punjab & Haryana, which held that the disallowance under Section 14A could not exceed the exempt income earned. The CIT(A)’s decision was based on the proposition of law affirmed by the Hon’ble Supreme Court.

The Tribunal upheld the CIT(A)’s decision, noting that the CIT(A) had correctly applied the law laid down by various High Courts and affirmed by the Supreme Court. The Tribunal found no reason to interfere with the CIT(A)’s order, thereby dismissing the Revenue’s appeal on this ground.

2. Addition of Disallowed Expenses under Section 14A to Book Profits under Section 115JB:

The second issue involved the addition of disallowed expenses under Section 14A to the book profits for the purposes of Minimum Alternate Tax (MAT) under Section 115JB. The A.O. had added the disallowed amount of ?33,40,84,101 to the book profits. The CIT(A) deleted this addition, following the decision of the ITAT Ahmedabad Bench in the case of Torrent Cables Ltd. vs. ACIT.

The Tribunal noted that the Special Bench of the ITAT in the case of ACIT vs. Vireet Investment Pvt. Ltd. had categorically held that for calculating book profits under Section 115JB, no adjustment of expenses disallowed under Section 14A is warranted. Since the Departmental Representative (D.R.) could not provide any contrary judgment, the Tribunal upheld the CIT(A)’s order, thereby dismissing the Revenue’s appeal on this ground as well.

3. Disallowance of Forex Gain:

The third issue was the disallowance of Forex Gain amounting to ?1,08,61,686. The A.O. had disallowed this gain, which arose from the revaluation of an outstanding foreign currency loan (FCCB) used for investment in a subsidiary, on the grounds that it was notional. The assessee argued that as per Section 43A, only actual gain or loss should be considered for tax purposes.

The CIT(A) deleted the addition, noting that the ITAT had dismissed the Department’s appeal on this issue in earlier years (A.Y. 2009-10 and 2010-11) and had allowed the assessee’s appeal in subsequent years (A.Y. 2011-12 and 2014-15). The Tribunal found that the CIT(A) had correctly followed the ITAT’s earlier decisions in the assessee’s own case, and the D.R. could not distinguish the facts or law. Therefore, the Tribunal upheld the CIT(A)’s order, dismissing the Revenue’s appeal on this ground.

Conclusion:

The Tribunal dismissed the Revenue’s appeals on all grounds, upholding the CIT(A)’s decisions regarding the disallowance under Section 14A, the non-addition of disallowed expenses to book profits under Section 115JB, and the deletion of the Forex Gain disallowance. The judgments were pronounced in the open court on 25-03-2022.

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