2024 (3) TMI 1402 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D(2)(iii) - expenditure attributable to exempt dividend income - interest on loans raised by erstwhile GEB for the purpose of disallowance - HELD THAT - As in assessee s own case for A.Y. 2015-16 2022 (12) TMI 1495 - ITAT AHMEDABAD matter is set aside to the file of Assessing Officer to examine the facts and figures of the case in the light of our observations made above in order to arrive at a final conclusion as to whether disallowance u/s 14A is to be made and if so then the amount thereof which in no case should exceed the exempted income earned by assessee during the year under appeal. It is needless to mention that ld. Assessing Officer shall allow reasonable and sufficient opportunity of hearing to the assessee before adjudicating the same. These grounds allowed for statistical purposes. Treatment of interest income from staff loans and advances interest income from other loans and advances and miscellaneous income - HELD THAT - Though interest on other loans and advances has been contended as was of business exigencies on the assessee it has not been able to demonstrate by the assessee that the nature of this income is from business activities particularly when separate head for interest income in the return of income has been shown which is to be included in other income. Neither the miscellaneous income has been able to be shown from routine business activities of the assessee. Asessee failed to demonstrate that the income which is not revenue from operations as required to be treated in the other heads which includes income from other sources and capital gain. Impugned amount on account of interest income from other loans and advances and miscellaneous income are rightly been treated as income from other sources. We therefore quash the order passed by the Ld. CIT(A) in granting relief to the assessee and confirm the order passed by the AO. Hence this ground of appeal raised by the Revenue is allowed. Adjustment made to the Book Profit computed u/s 115JB on account of disallowance u/s 14A - As relying on the case for A.Y. 2010-11 2020 (3) TMI 232 - GUJARAT HIGH COURT ground raised by the Revenue to include the disallowance u/s. 14A for the purpose of computation of book profit u/s. 115JB of the Act is hereby deleted.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the disallowance under Section 14A of the Income Tax Act, 1961, in relation to expenditure incurred for earning exempt income, was justified.
• Whether the interest income from staff loans and advances, other loans and advances, and miscellaneous income should be treated as "business income" or "income from other sources."
• Whether the adjustment made to the Book Profit under Section 115JB of the Act on account of disallowance under Section 14A was appropriate.

2. ISSUE-WISE DETAILED ANALYSIS

Disallowance under Section 14A of the Act

• Relevant Legal Framework and Precedents: Section 14A of the Income Tax Act, 1961, disallows expenditure incurred in relation to income not includible in the total income. Rule 8D provides a method for determining the amount of such expenditure. The Tribunal relied on precedents, including the assessee's own case for earlier years, where similar issues were remanded to the Assessing Officer for fresh adjudication.
• Court's Interpretation and Reasoning: The Tribunal observed that the Assessing Officer had made disallowances without thoroughly examining the facts and figures of the case. The Tribunal emphasized the need for the Assessing Officer to reassess the disallowance by considering the assessee's financials and the provisions of Rule 8D.
• Application of Law to Facts: The Tribunal noted that the disallowance should not exceed the exempt income earned during the year. The matter was remanded to the Assessing Officer for fresh adjudication.
• Treatment of Competing Arguments: The Tribunal acknowledged the arguments presented by both parties and relied on the precedent set in the assessee's own case to remand the matter for fresh consideration.
• Conclusions: The Tribunal allowed the ground for statistical purposes, remanding the issue to the Assessing Officer for fresh adjudication.

Treatment of Interest and Miscellaneous Income

• Relevant Legal Framework and Precedents: The treatment of interest income from staff loans and advances, other loans and advances, and miscellaneous income was contested. The Tribunal referred to previous judgments, including the assessee's own case, where such income was treated as "business income."
• Court's Interpretation and Reasoning: The Tribunal found that the interest income from staff loans and advances should be treated as "business income" based on precedents. However, the interest on other loans and advances and miscellaneous income was not demonstrated to be from business activities and was treated as "income from other sources."
• Key Evidence and Findings: The Tribunal noted that the assessee failed to demonstrate the business nature of the interest income from other loans and advances and miscellaneous income.
• Conclusions: The Tribunal upheld the treatment of interest income from staff loans as "business income" but reversed the CIT(A)'s decision on other interest income and miscellaneous income, treating them as "income from other sources."

Adjustment to Book Profit under Section 115JB

• Relevant Legal Framework and Precedents: Section 115JB of the Income Tax Act deals with the computation of book profit for Minimum Alternate Tax (MAT) purposes. The Tribunal referred to the jurisdictional High Court's decision, which held that disallowance under Section 14A should not be added to book profit.
• Court's Interpretation and Reasoning: The Tribunal relied on the High Court's judgment, which stated that Section 14A disallowances should not affect the computation of book profit under Section 115JB.
• Application of Law to Facts: The Tribunal found that the addition made by the Assessing Officer to the book profit under Section 115JB was not justified and should be deleted.
• Conclusions: The Tribunal dismissed the Revenue's appeal on this ground, upholding the CIT(A)'s decision to delete the addition to book profit.

3. SIGNIFICANT HOLDINGS

• Core Principles Established: The Tribunal reinforced the principle that disallowance under Section 14A should not exceed the exempt income and should not be added to book profit under Section 115JB. The treatment of income as "business income" or "income from other sources" should be based on the nature of the income and its relation to business activities.
• Final Determinations on Each Issue: The disallowance under Section 14A was remanded for fresh adjudication. Interest income from staff loans was treated as "business income," while other interest income and miscellaneous income were treated as "income from other sources." The addition to book profit under Section 115JB was deleted.