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2013 (7) TMI 111 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - whether net interest expense or gross interest expense be taken for the purpose of computing disallowance - Held that - While making disallowance u/s 14A, the amount of expense is to be considered and in the present case, the amount of expense on account of interest cannot be said to be of gross amount as there is interest income also. Therefore, the assessee can be said to have incurred net interest only. Moreover the interest income was also taxed as business income and not as income from other sources. Therefore, CIT(A) has rightly accepted the contentions of assessee. In favour of assessee. Tax rebate u/s 88E - addition on account of MAT - whether tax under normal provision or as per book profit u/s 115JB is payable by the assessee - Held that - As decided in CIT Versus Horizon Capital Ltd. 2011 (10) TMI 489 - KARNATAKA HIGH COURT if the transaction on which STT is paid is included in the total income of the assessee where the total income is assessed either under the provisions of the Act or under Section 115JB when tax chargeable on such income is arrived at & it is from that tax which is chargeable, the tax paid u/s 88E is given deduction, by way of rebate, u/s 87. This is the legislative intent of giving deduction of the tax already paid - Decided against the Revenue.
Issues Involved:
1. Whether the Ld CIT(A) erred in directing the computation of disallowance under Rule 8D(2)(ii) using net interest expense instead of gross interest expense. 2. Whether the Ld CIT(A) erred in holding that tax rebate under Section 88E should not be considered for computing tax payable under normal provisions while determining the applicability of tax under Section 115JB. Detailed Analysis: Issue 1: Computation of Disallowance under Rule 8D(2)(ii) Using Net Interest Expense The revenue contended that the Ld CIT(A) erred by directing that net interest expense should be used for computing disallowance under Rule 8D(2)(ii), contrary to the rule which does not specify net interest. The Assessing Officer (AO) had calculated the disallowance using gross interest expense, resulting in a higher disallowance amount. However, the Ld CIT(A) found that the correct approach should consider net interest expense, which is gross interest paid minus gross interest earned, and average value of investments excluding trading assets. The Ld CIT(A) reasoned that the assessee's accounts did not establish a clear nexus between investments and interest-free funds, justifying the disallowance. However, it was deemed reasonable to use net interest expense for disallowance calculation, considering the net expense debited to the profit and loss account. This approach was upheld by the Tribunal, which agreed that the net interest expense reflects the actual financial burden on the assessee and found no infirmity in the Ld CIT(A)'s order. Issue 2: Tax Rebate under Section 88E and Computation of Tax under Section 115JB The revenue argued that the Ld CIT(A) erred in holding that the tax rebate under Section 88E should not be considered when determining tax payable under normal provisions versus Section 115JB. The AO had calculated tax under Section 115JB without allowing the rebate, leading to a higher tax liability. The Ld CIT(A) held that the AO's interpretation would result in the assessee paying a higher tax rate than intended by the legislature, as it would combine tax under normal provisions and MAT, leading to an excessive tax burden. The Tribunal supported this view, citing previous decisions, including the Karnataka High Court's ruling in Horizon Capital Ltd., which established that Section 88E rebate applies even when computing tax under Section 115JB. The Tribunal concluded that the rebate should be granted, ensuring the tax liability does not exceed what is prescribed under normal provisions. Conclusion: The Tribunal dismissed the revenue's appeal, confirming that the Ld CIT(A) correctly directed the use of net interest expense for disallowance under Rule 8D(2)(ii) and rightly allowed the Section 88E rebate in the computation of tax under Section 115JB. The decisions were consistent with established legal principles and previous judicial rulings, ensuring a fair and accurate tax computation for the assessee.
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