2022 (6) TMI 18 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - Where the assessee mentioned that the dividend income earned was Rs.4.88 crores from small time investments in mutual funds and claimed exempted U/sec 10(34) - the assessee s own funds are higher than the investments and the disallowance u/s 14A r.w.r 8D(2)(ii) has to be worked out on the net interest expenditure. A.O has erred in not considering the facts and own funds available with the assessee. Alternative plea of the assessee that the disallowance u/s 14A of the Act should be restricted to exempt income and relied on the judicial decisions. CIT(A) observed that there is no clarity of own funds available with the assessee and is of the opinion that they are mixed funds and some interest portion is attributed to the investments. CIT(A) relied on the decision of the coordinate bench of the Hon ble Tribunal in the case of Morgan Stanely Security Pvt Ltd 2014 (1) TMI 1412 - ITAT MUMBAI and observed that the net interest debited to profit and loss account should be considered for the purpose of computation under Rule 8D(2)(ii) of I T Rules and the A.O is directed accordingly and partly allowed this ground of appeal. Disallowance u/s 14A r.w.r 8D(2)(iii) being the third limb where the A.O has made the addition based on the average value of investment @ 0.5% - The main claim of the assessee that if any disallowance is computed it should be restricted to the exempted income and relied on the financial statements, judicial decisions and the assessee own case for the A.Y.2014-15. Further, we find that there is no specific mention in the assessment order, whether the A.O has considered only the investments which yield dividend income for calculation of average value of investments. In the present case the assessee has suo moto made disallowance of Rs.62,65,593/- and further the assessee prayed that the disallowance u/sec14A r.w.r 8D(2) of the I T rules should be restricted to exempt income. We rely on the ratio of decision of Hon ble Tribunal special bench in ACIT Vs Vireet Investments Pvt Ltd 2017 (6) TMI 1124 - ITAT DELHI (i) That only those investments which yield exempt income should be considered for computing average value of investments and (ii) while computing book profits u/s 115JB of the Act, the disallowance u/s 14A r.w.r 8D(2) of the I T rules are not to be considered.- Accordingly, we direct the Assessing officer to restrict the disallowance u/s 14A r.w.r 8D(2) of the I T rules to the extent of exempt income earned by the assessee and partly allow the ground of appeal of the assessee. Disallowance of 50% of the payments/reimbursements to Lodha Developers UK Ltd - agreement and bills provided by the appellant are not sufficient evidence of providing the services. - CIT(A) has confirmed the addition and dismissed the ground of appeal - HELD THAT - On further appeal before the Hon ble Tribunal, the Ld. AR submitted that the assessee has appointed agents as per the agreement and there is increase in the revenue due to NRI customers investments in properties in India. AR for the first time has filed the details of payments, marketing selling expenses incurred by the Lodha Developers U K Ltd, sample invoices of marketing expenses incurred in UK, and statement of sale of properties in India to NRI customers in the F.Y.2012-13 and prayed for allowing the claim based on the substantial evidence filed. DR submitted that the A.O. should be provided an opportunity to verify and examine the additional evidence filed by the assessee. Further on perusal of the assessment order, we find that the assessee could not substantiate the claim with proper evidences for various reasons. Accordingly, to meet the ends of justice and the principles of natural justice, we restore the disputed issue for limited purpose to the file of the Assessing officer to verify and examine the claim and grant the relief and the assessee should be provided adequate opportunity of hearing and shall cooperate in submitting the information and we allow this ground of appeal of the assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Capitalization of interest under Section 36(1)(iii).
3. Setoff of carry-forward long-term capital losses.
4. Payments/reimbursements to Lodha Developers UK Ltd.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The primary issue was the disallowance of Rs. 1,68,56,525/- under Section 14A, being 0.5% of the average value of investment. The assessee contended that its own funds exceeded the investments capable of generating exempt income, thus no additional disallowance under Section 14A was warranted. The Assessing Officer (A.O.) computed disallowance under Rule 8D(2)(ii) & (iii) of Rs. 20,47,49,126/-. The CIT(A) partially allowed the appeal, directing the A.O. to recompute the disallowance considering net interest debited to the profit and loss account. The Tribunal upheld the CIT(A)'s decision, restricting disallowance to the extent of exempt income earned by the assessee, following the precedent set by the Hon'ble Tribunal in ACIT Vs Vireet Investments Pvt Ltd.

2. Capitalization of Interest under Section 36(1)(iii):
The A.O. disallowed the interest expenditure of Rs. 66,45,26,655/- claimed by the assessee under Section 36(1)(iii), treating it as capital expenditure. The CIT(A) deleted the addition, relying on the decision of the jurisdictional High Court in the case of Lokhandwala Constructions Ind Ltd. The Tribunal upheld the CIT(A)'s decision, noting that the interest paid on loans obtained for stock-in-trade is an allowable deduction under Section 36(1)(iii), irrespective of whether the assessee follows the project completion method or percentage completion method.

3. Setoff of Carry-Forward Long-Term Capital Losses:
The A.O. denied the setoff of brought forward long-term capital losses against the capital gains of Rs. 11,11,89,976/-. The CIT(A) accepted the assessee's contentions and directed the A.O. to verify the assessment record and allow the setoff. The Tribunal upheld the CIT(A)'s decision, noting that the directions were based on the Income Tax Settlement Commission's order and the factual matrix of the case.

4. Payments/Reimbursements to Lodha Developers UK Ltd:
The A.O. disallowed 50% of the payments/reimbursements amounting to Rs. 43,89,154/- due to insufficient evidence of services provided. The CIT(A) confirmed the disallowance. The Tribunal, considering the additional evidence submitted by the assessee, restored the issue to the A.O. for verification and examination of the claim, directing the A.O. to grant relief based on the substantiated evidence.

Conclusion:
The Tribunal's judgment addressed multiple issues, providing clarity on the application of Section 14A, the treatment of interest under Section 36(1)(iii), the setoff of long-term capital losses, and the verification of payments to related entities. The decisions were grounded in legal precedents and factual examinations, ensuring a fair and just resolution of the disputes.