2017 (8) TMI 113 - AT - Income Tax

Disallowance u/s 14A(2) read with Rule-8D - Held that - We are of the view that at best if any disallowance could be made that cannot exceed the exempt income. The Tribunal in the case of Nimbus Communication Ltd. (2016 (5) TMI 166 - ITAT MUMBAI) has made an elaborate discussion and thereafter reached to a particular conclusion thus the ratio laid down in the cases mentioned by the ld. Counsel for the assessee clearly supports the case of the assessee. So far as the case of Baba Global Ltd. vs DCIT (2016 (7) TMI 247 - ITAT DELHI) relied upon by ld. DR is concerned even in that case in para-26 there is categorical finding that the disallowance cannot exceed the exempt income. The ratio laid down in Joint Investment Pvt. Ltd. vs CIT (2015 (3) TMI 155 - DELHI HIGH COURT) clearly supports the case of the assessee thus the case relied upon by ld. DR is of not much help to the Revenue. Thus the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A(2) of the Income Tax Act, 1961 read with Rule 8D.
2. Validity of assessment framed under Section 153A of the Income Tax Act.
3. Addition of notional interest on foreign currency loans advanced to wholly-owned foreign subsidiaries.
4. Rate of interest applicable to foreign currency loans.
5. Conversion of loans to share application money and its implications.
6. Recording of satisfaction by the Assessing Officer (AO) for invoking Rule 8D.
7. Limitation of disallowance to the extent of exempt income.

Detailed Analysis:

1. Disallowance under Section 14A(2) of the Income Tax Act, 1961 read with Rule 8D:
The assessee challenged the disallowance of ?27,19,404/- made under Section 14A(2) read with Rule 8D. The Tribunal noted that the disallowance under Section 14A cannot exceed the exempt income, citing the case of Joint Investment Pvt. Ltd. vs CIT (2015) 372 ITR 694 (Del). The Tribunal concluded that the disallowance should be restricted to the exempt income, supporting the assessee's contention.

2. Validity of assessment framed under Section 153A of the Income Tax Act:
The Tribunal examined whether the AO could make additions in assessment years that had not abated consequent to a search, in the absence of any incriminating material. Referring to the Delhi High Court's judgment in CIT (Central) – III vs. Kabul Chawla [2016] 380 ITR 573 (Del), the Tribunal held that additions cannot be made without incriminating material. Consequently, the additions made for assessment years 2006-07, 2007-08, and 2008-09 were deleted.

3. Addition of notional interest on foreign currency loans advanced to wholly-owned foreign subsidiaries:
The AO added notional interest on foreign currency loans advanced by the assessee to its subsidiaries. The Tribunal agreed that the arm’s length price must be evaluated for such loans, but the interest rate should be based on the currency in which the loan was advanced, not the Indian Rupee.

4. Rate of interest applicable to foreign currency loans:
The Tribunal held that the interest rate applicable should be the market-determined rate for the currency in which the loan was advanced, following the Delhi High Court's judgment in CIT vs. Cotton Naturals (P) P Ltd. (2015) 276 CTR 0445 (Del). The interest rate should be LIBOR for US Dollar loans, EURIBOR for Euro loans, etc.

5. Conversion of loans to share application money and its implications:
For assessment year 2011-12, the Tribunal noted that the loans to subsidiaries were converted into share application money. It held that once loans are converted into share application money, they cannot be treated as loans for the purpose of charging interest. This view was supported by the ITAT's judgment in Bharti Airtel Ltd. vs. ACIT, [2014] 161 TTJ 0283 (Del).

6. Recording of satisfaction by the Assessing Officer (AO) for invoking Rule 8D:
The assessee argued that the AO did not record satisfaction before invoking Rule 8D. The Tribunal observed that the AO had considered the assessee’s explanation and then invoked Rule 8D, indicating that satisfaction was recorded.

7. Limitation of disallowance to the extent of exempt income:
The Tribunal agreed with the assessee's contention that disallowance under Section 14A cannot exceed the exempt income, citing the case of Joint Investment Pvt. Ltd. vs CIT (2015) 372 ITR 694 (Del). The AO was directed to restrict the disallowance to the exempt income.

Conclusion:
The Tribunal allowed the assessee's appeal, directing that the disallowance under Section 14A be restricted to the exempt income and deleting the additions made under Section 153A for the assessment years 2006-07, 2007-08, and 2008-09. The interest on foreign currency loans was to be based on the relevant foreign currency rates, and no interest was to be charged on amounts converted to share application money.