2013 (9) TMI 531 - AT - Income Tax

Disallowance u/s 14A - Whether CIT(A) erred in deleting the disallowance made by the AO u/s 14A of the IT Act, 1961 without appreciating the fact that the assessee failed to prove that all the expenses debited to Profit & Loss Account were incurred for earning other than the income exempt from tax - Held that - The Tribunal had not gone into merits of the case and remitted the issue to the record of the Assessing Officer because Rule 8D was not applicable as held by the Hon ble jurisdictional High Court in the case of Godrej & Boyce Ltd v ACIT 2010 (8) TMI 77 - BOMBAY HIGH COURT . Because the most of the investments were already made in the earlier years; however, for the Assessment Years 2002-03 to 2004-05, the issue of disallowance u/s 14A was pending before the Assessing Officer as it was remanded by the Tribunal - Therefore, to this extent, the issue for the year under consideration was remitted to the record of the Assessing Officer to work out the availability of assessee s own funds, even if it is put into the common pool as held by the Hon ble jurisdictional High Court in the case of Commissioner of Income-tax v. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY . During the year under consideration, half of the total investments of Rs.23.81 crores made by the assessee from the total sales of investment; therefore, issue of disallowance u/s 14A on account of interest expenditure had to be decided after taking into consideration the available funds from sale of investments and other own funds - As we have already made it clear that upto the Assessment Year 2001-02, the issue had been allowed by the Tribunal and therefore, no disallowance can be made for the investments made upto Assessment Year 2001-02. Disallowance of Interest Expenses - Whether CIT(A) erred in deleting the disallowance out of interest expenses in respect of interest free advances to subsidy company without appreciating that the issue of business expediency was not proved by the assessee - Held that - The assessee made interest free advance to its subsidiary company which was incorporated for doing life insurance business - The assessee s group was carrying general insurance business and the main activity of the assessee was that of financing - The Hon ble Supreme Court in the case of S.A.Builders Ltd. Vs. CIT 2006 (12) TMI 82 - SUPREME COURT - wherein interest bearing funds were lent to the sister concern without interest, the A.O. needed to examine the purpose of loan - If the loan was advanced for commercial expediency and not utilized by the Directors of the sister concern for their personal benefit, then the deduction of interest had to be allowed - the learned CIT(A) had rightly relied on this judgement in deleting this addition. Addition to the Book Profits computed u/s 115JB being the Expenses Disallowed u/s 14A Held that - The principle of apportionment as provided u/s 14A cannot be applied while computing the book profit u/s 115JB - However, the Assessing Officer had power and jurisdiction to make the adjustment as provided under Explanation 1 - Accordingly, in our view the amount of expenditure which is directly relatable to the income, which was exempted u/s 10, 11 and 12 shall be adjusted for the purpose of computing the book profit - Hence, this issue was required to be examined and considered afresh for making the adjustment only to the extent of actual expenditure incurred in respect of the earning of income claimed as exempt.

Summary

Issues Involved:
1. Disallowance under Section 14A of the IT Act.
2. Disallowance of interest expenses in respect of interest-free advances to a subsidiary company.
3. Disallowance of administrative expenses under Section 14A.
4. Addition to book profits computed under Section 115JB.

Detailed Analysis:

1. Disallowance under Section 14A of the IT Act:
- The revenue challenged the deletion of disallowance of Rs. 37,33,00,000 made by the Assessing Officer (AO) under Section 14A. The AO had disallowed interest expenditure attributing it to the earning of tax-free income under Sections 10(23G) and 10(34) of the IT Act.
- The assessee argued that no borrowed funds were used for investments in shares, mutual funds, and NCDs, as they had sufficient own funds. The AO, however, did not accept this explanation, stating that both borrowed and own funds were pooled together.
- On appeal, the Commissioner of Income Tax (Appeals) deleted the disallowance of interest expenditure, citing the absence of a direct nexus between borrowed funds and investments. However, the disallowance of administrative and other expenses was enhanced to Rs. 2.61 crores.
- The Tribunal considered the rival submissions and relevant material, noting that the AO had taken an average of 53.54% borrowed funds from the total investments and applied an average interest rate of 11.50%. It was observed that most investments were made in earlier years, and the issue was covered by previous Tribunal decisions in the assessee's favor for earlier assessment years.
- The Tribunal remanded the issue to the AO to work out the availability of the assessee's own funds and decide the issue as per law, considering the precedent set by the jurisdictional High Court in the case of Commissioner of Income-tax v. Reliance Utilities and Power Ltd.

2. Disallowance of interest expenses in respect of interest-free advances to a subsidiary company:
- The AO disallowed Rs. 11,36,451/- as proportionate interest on advances made to the subsidiary, arguing that the investment was not for business expediency.
- The Commissioner of Income Tax (Appeals) deleted the disallowance, relying on the Supreme Court decision in S. A. Builders Ltd. v. Commissioner of Income-tax (Appeals).
- The Tribunal upheld the deletion, noting that the issue had been previously decided in favor of the assessee in the assessment year 2004-05, where the advance was deemed for commercial expediency.

3. Disallowance of administrative expenses under Section 14A:
- The assessee challenged the confirmation of disallowance of Rs. 2.61 crores as administrative expenses under Section 14A.
- The Tribunal restored the issue to the AO to decide the quantum of disallowance on a reasonable basis, following the jurisdictional High Court's decision in Godrej and Boyce Mfg. Co. Ltd.

4. Addition to book profits computed under Section 115JB:
- The AO added Rs. 38.90 crores disallowed under Section 14A to the book profits computed under Section 115JB.
- The Commissioner of Income Tax (Appeals) confirmed the adjustment for administrative expenses.
- The Tribunal held that the rule of apportionment under Section 14A cannot be applied to compute book profits under Section 115JB. It restored the issue to the AO to examine and consider the actual expenditure incurred in earning exempt income for adjustments.

Additional Judgments:
- For the assessment year 2006-07, the issues were similar to those of 2005-06. The Tribunal decided these issues in line with the findings for the previous year, remanding them to the AO for reconsideration.

Conclusion:
The Tribunal partly allowed the appeals filed by both the revenue and the assessee, remanding several issues back to the AO for reconsideration and decision as per law, based on the principles established in prior judgments and relevant High Court decisions.