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2014 (10) TMI 616 - AT - Income TaxDisallowance u/s 14A r.w Rule 8D Claim of exemption u/s 10(34) and 10(35) Held that - There is no scope for either inclusion or exclusion of any expenses - which method the assessee adopts, while applying rule 8D, estimation per which is based on the volume of investment yielding (or liable to yield) income not forming part of total income held during the year, i.e., is investment based (though of course would have to be capped at the total amount of expenditure incurred), rather than expense based - the law does not circumscribe the estimation of the expenditure incurred by the assessee in relation to - implying a proximate nexus therewith, income not forming part of the total income, to any particular or one method or formulae - When it is said that rule 8D is mandatory (i.e., AY 2008-09 onwards), all that is meant is where the said expenditure cannot be reasonably ascertained with reference to the assessee s accounts, toward which the AO is to issue his satisfaction or, as the case may be, dissatisfaction, he has no discretion in case of the latter in formulating a method of his own, nor indeed has the assessee, and is bound to adopt the prescription of rule 8D. The assessee has in restricting the disallowance to ₹ 4 lacs, i.e., the interest on borrowed capital availed to fund its investments made during the year, confused between the interest cost directly relatable to such investment, which is a subject matter of rule 8D(2)(i), and that indirectly relatable to such investment, estimation of which is governed by rule 8D(2)(ii) relying upon The Commissioner of Income Tax Versus Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY - there was no basis to the Revenue s claim as made before it, so that the Revenue s appeal was dismissed. The assessee has also earned interest income the income is on long term investments and on loans forming part of current assets - The entire interest income is offered as, and admittedly, business income - the fact of earning of interest income would in our view be by itself of little consequence - There is no claim, which would, where so, though need to be established, of the interest being on borrowings which stood relent on interest - no nexus had been established between borrowed funds and investments by the assessee in dividend yielding shares/income yielding mutual funds - the assessee had utilized its own funds for the purpose of making the investments - the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee had incurred expenditure in relation to the earning of such income - Even if the assessee has utilized its own funds for making investments which have resulted in income which does not form part of the total income under the Act, the expenditure which is incurred in the earning of that income would have to be disallowed. Adjustment of amount disallowed u/s 14A Computation of book profits u/s 115JB Hedl that - The disallowance u/s.14A is not qua notional, but actual expenditure - The only adjustment is that the expenditure shall have to be valued at the amount as per the assessee s books, so that where there is a difference, as in the case of depreciation, or the loss on the sale of assets, etc., it is the latter, i.e., the book value, which shall prevail - The expenditure disallowed u/s.14A is only that incurred and claimed by the assessee in respect of dividend income, exempt u/s 10 - the amount disallowed u/s.14A provides a ready basis for determining the amount of such expenditure is another matter. Loss on write off as receivable Allowable u/s 36(1)(vii) or section 37(1) Held that - What the assessee in effect claims is the loss, on perceiving the amount as no longer receivable in view of the ceasure of some business/es, on reorganization, so that the same would henceforth be carried on by another group concern/s - The claim is u/s.28 and not either u/s. 36(1)(vii) or section 37(1) - What all therefore the assessee has to demonstrate is an honesty of its intent in effecting the write off - nothing more and nothing less it could not be viewed as to how the write off does not represent a honest assessment by the management of the amount being no longer receivable, so that the write off would qualify for deduction on the ground of prudence - It may well be that circumstances may arise in future making available the credit of input available to the assessee; there being no time bar for the claim of the same - If and when claimed, the same would stand to be brought to tax as income for the relevant year - the assessee is bound to maintain accounts so as to reflect the true and fair view of its affairs, and any future adjustment, if any, would therefore find due reflection therein thus, the contention of the assessee is upheld. Computation of book profits u/s 115JB Held that - The write off to be in pursuance to an accounting policy which is in conformity with the fundamental accounting principles as advocated by the Accounting Standards issued by the ICAI (so that it is in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956) as well as by CBDT there was no merit in confirming the adjustment in computing the book profit u/s 115JB Decided partly in favour of assessee.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961. 2. Adjustment of disallowance under Section 14A in computing book profit under Section 115JB. 3. Allowance of loss on write-off of a receivable under Section 36(1)(vii) or Section 37(1). 4. Corresponding addition of write-off in computing book profit under Section 115JB. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A: The principal issue in the assessee's appeal and ground no. 1 of the Revenue's appeal relates to the disallowance under Section 14A. The assessee earned dividend income exempt under Sections 10(34) and 10(35) and initially disallowed Rs. 92.44 lacs suo motu, while the AO computed the disallowance at Rs. 4,17,18,434 using Rule 8D. The CIT(A) partly accepted the assessee's method by excluding certain expenditures, but both parties appealed. The tribunal found the CIT(A)'s order unsustainable as it was self-contradictory. The law does not mandate a single method for estimating expenditure related to tax-exempt income. Rule 8D is mandatory when the AO is dissatisfied with the assessee's method. The assessee's method of estimating 10% of administrative costs was rejected as arbitrary and unsupported by accounts. The tribunal upheld the disallowance of indirect administrative expenditure at Rs. 220.74 lacs under Rule 8D(2)(iii). Regarding interest, the assessee claimed surplus funds, but the tribunal found the claim partly correct. The tribunal restored the matter to the AO to verify if the borrowed capital financed specific assets or activities, confirming the disallowance of Rs. 3,97,260 and excluding unclaimed interest cost of Rs. 19.68 lacs. 2. Adjustment of Disallowance under Section 14A in Computing Book Profit under Section 115JB: The assessee argued that the disallowance under Section 14A should not affect the computation of book profit under Section 115JB. However, Explanation 1(f) to Section 115JB(2) mandates adding back expenditure related to exempt income. The tribunal confirmed the adjustment, noting that the disallowance under Section 14A is actual expenditure debited to the profit and loss account. The tribunal cited several decisions supporting this view and clarified that only the book value of expenditure should be considered. 3. Allowance of Loss on Write-off of a Receivable: The assessee wrote off Rs. 50 lacs as a service tax receivable, claiming the deduction under Section 36(1)(vii) or Section 37(1). The CIT(A) allowed the claim, stating it was not an additional deduction but a realization of paid service tax. The tribunal upheld the CIT(A)'s decision, emphasizing the write-off was in line with prudent accounting principles and represented an honest assessment of non-receivable amounts due to business cessation. 4. Corresponding Addition of Write-off in Computing Book Profit under Section 115JB: The tribunal observed that the write-off was in accordance with fundamental accounting principles and confirmed the adjustment in computing book profit under Section 115JB. The tribunal found no merit in the Revenue's objection and dismissed the ground. Conclusion: The assessee's appeal was partly allowed for statistical purposes, and the Revenue's appeal was dismissed. The tribunal's order was pronounced on October 17, 2014.
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