2017 (6) TMI 62 - AT - Income Tax

Disallowance u/s 14A - whether the amount of disallowance u/s 14A cannot be exceeded the exempt income? - Held that - As held in the case of Maxopp Investment Ltd. Vs. CIT (2011 (11) TMI 267 - Delhi High Court) it is not the purpose of the expenditure which is relevant. Once exempt income is earned, it means that some expenditure being incurred in relation to the exempt income which should be disallowed by applying formula laid down in rule 8D(2)(iii). Therefore, action of the AO is correct in applying rule 8D(2)(iii) but the amount of disallowance should be restricted to the dividend income. Thus we set aside the order of ld.CIT(A) and direct the AO to restrict the disallowance to ₹ 17,50,000/- i.e. exempt income earned by the Appellant during the year under consideration only. The appeal of the assessee is allowed. Rental income - taxed as income from house property OR business income - Held that - The case of the assessee stands covered in favour of the revenue and against the assessee by a decision of Reliance Infrastructure & Consultants Ltd., V/s ACIT 2012 (10) TMI 1144 - ITAT MUMBAI as relying on Reliance Infrastructure & Consultants Ltd., V/s ACIT 2003 (1) TMI 99 - SUPREME Court as relying on case of Shambhu Investment Pvt Ltd V/s CIT reported (2003 (1) TMI 99 - SUPREME Court ) came to the conclusion that the rental income has to be taxed as income from house property and not business income - Decided against assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Treatment of rental income as "Income from House Property" vs. "Business Income".
3. Computation of Book Profits under Section 115JB.
4. Admission of additional grounds by the assessee.

Detailed Analysis:

1. Disallowance under Section 14A:
The revenue contested the CIT(A)'s reduction of disallowance under Section 14A from ?1,84,75,704/- to ?72,34,402/-. The CIT(A) had determined that the disallowance should consider only those investments that yielded exempt income, following the Special Bench ITAT Delhi decision in Chimenvest Ltd. vs. ITO. The CIT(A) also found that certain investments were incorrectly included by the AO as they were paid for in the next financial year and thus did not incur interest expenditure during the year. Consequently, the CIT(A) recalculated the disallowance to ?72,34,402/-.

The assessee argued that disallowance under Section 14A should not exceed the exempt income earned, which was ?17,50,000/- in this case. The ITAT agreed with the assessee, citing several judicial precedents, including Joint Investments vs. CIT and Daga Global Chemicals vs. ACIT, which held that disallowance under Section 14A cannot exceed the exempt income. Consequently, the ITAT directed the AO to restrict the disallowance to ?17,50,000/-.

2. Treatment of Rental Income:
The assessee argued that rental income of ?36,72,000/- should be taxed as "Business Income" and not "Income from House Property". The AO and CIT(A) treated it as "Income from House Property" based on the Supreme Court decision in Shambhu Investment Pvt Ltd vs. CIT. The ITAT upheld this treatment, referencing a co-ordinate Bench decision in Reliance Infrastructure & Consultants Ltd. vs. ACIT, which followed the Supreme Court's ruling that income derived from letting out property should be assessed as "Income from House Property".

3. Computation of Book Profits under Section 115JB:
The assessee contended that disallowance under Section 14A should not be considered while computing book profits under Section 115JB. The CIT(A) and ITAT did not specifically adjudicate this issue separately, as the main ground regarding disallowance under Section 14A had already been addressed.

4. Admission of Additional Grounds:
The assessee filed an application for admission of additional grounds, arguing that the disallowance under Section 14A should be restricted to the exempt income earned. The ITAT admitted the additional grounds, noting that they arose from legal and judicial pronouncements after the date of the CIT(A)'s order and were of a technical and legal nature. The ITAT then adjudicated the additional grounds, directing the AO to restrict the disallowance to ?17,50,000/-.

Conclusion:
The ITAT partly allowed the assessee's appeal by restricting the disallowance under Section 14A to ?17,50,000/-. The ITAT dismissed the revenue's appeal on the same issue but allowed the revenue's appeal regarding the treatment of rental income, affirming it as "Income from House Property". The ITAT's order was pronounced on April 12, 2017.