2015 (7) TMI 834 - AT - Income Tax

Disallowance made under section 14A assessee has agitated the action of the Ld. CIT(A) in sustaining the disallowance on account of administrative expenses at the rate of 0.5% of the average value of investment as per Rule 8D(2)(iii) as against the suo-moto disallowance of ₹ 2 lakh offered by the assessee - Held that - Considering the nature of investments of the assessee during the year under consideration, we do not find any justification on the part of the AO in straightway applying Rule 8D and without recording any dissatisfaction in relation to the suo-moto working made by the assessee. Even otherwise, facts for the year under consideration are squarely cover with the decision of the Tribunal in the own case of the assessee in the subsequent year. We therefore do not find any justification for the Ld. CIT(A) to confirm the disallowance under Rule 8D(2)(iii) of the Income Tax Rules without considering the working/computation offered by the assessee and also without ignoring the nature of investments made by the assessee. The order of the Ld. CIT(A) confirmed the disallowance under Rule 8D(2)(iii) is therefore set aside. In view of our observations made above, the disallowance under section 14A is restricted to the suo-moto disallowance of ₹ 2 lakh offered by the assessee and the remaining disallowance over and above the disallowance offered by the assessee himself is therefore ordered to be deleted. - Decided in favour of assessee. Remission of loan liability - CIT(A) in holding it as capital receipt and not chargeable to tax - Held that - CIT(A) has discussed the nature of the loan amount and has held that the waiver was not in respect of any benefit in kind or of any perquisite. The waiver was of the principle loan amount in cash. The assessee had not claimed any deduction in respect of loss, expenditure or trading liability in relation to the loan amount. The waiver was of the principle amount of loan for capital asset. He, thereafter, relying upon the decision of the Hon ble Jurisdictional High Court, in the case of Mahindra & Mahindra Ltd. vs. CIT 2003 (1) TMI 71 - BOMBAY High Court held that the waiver of the loan amount was a capital receipt not taxable as business income of the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Remission of loan liability as capital receipt.
3. Computation of book profit under Section 115JB.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee contested the disallowance of administrative expenses at 0.5% of the average value of investment under Rule 8D(2)(iii), preferring its suo-moto disallowance of Rs. 2 lakh. The AO observed that the assessee earned dividend income of Rs. 3,13,15,384/- exempt under Section 10(34) and disallowed Rs. 61,45,777/- for interest expenditure and Rs. 18,32,980/- for administrative expenses under Rule 8D. The CIT(A) deleted the interest expenditure disallowance but upheld the administrative expenses disallowance. The Tribunal found that the AO did not record dissatisfaction with the assessee's disallowance and incorrectly applied Rule 8D without considering the assessee's computations. The Tribunal restricted the disallowance to Rs. 2 lakh, observing that the assessee had sufficient surplus funds for investments and no direct or indirect expenses were incurred for earning exempt income.

2. Remission of Loan Liability as Capital Receipt:
The Revenue challenged the CIT(A)'s decision to treat the remission of loan liability of Rs. 2,10,73,487/- as a capital receipt, not taxable. The assessee received a rebate on loan liability, including a waiver of the principal amount, which was credited to the P&L account but later claimed as non-taxable. The AO disallowed the claim, citing the requirement for a revised return per the Supreme Court's decision in "Goetze (India) Ltd." The CIT(A) held the waiver as a capital receipt, relying on the Tribunal's decision in "CIT vs. Chicago Pneumatics Ltd." and the Bombay High Court's ruling in "Mahindra & Mahindra Ltd. vs. CIT." The Tribunal upheld the CIT(A)'s view, noting that appellate authorities could entertain claims not made before the AO, as supported by the Bombay High Court in "Pruthvi Brokers & Shareholders Pvt. Ltd."

3. Computation of Book Profit under Section 115JB:
The Revenue also disputed the CIT(A)'s direction to restrict the disallowance of expenses under Section 14A to 0.5% of the average investment for computing book profit under Section 115JB, instead of the total disallowance amount. Given the Tribunal's decision to limit the Section 14A disallowance to Rs. 2 lakh, this ground was dismissed.

Conclusion:
The Tribunal allowed the assessee's appeal, restricting the Section 14A disallowance to Rs. 2 lakh and upheld the CIT(A)'s treatment of the loan waiver as a non-taxable capital receipt. The Revenue's appeal was dismissed. The Tribunal emphasized the necessity for the AO to record dissatisfaction with the assessee's disallowance computations before applying Rule 8D, aligning with the Bombay High Court's guidance in "Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT."

Order Pronounced:
The judgment was pronounced in the open court on 17.6.2015.