2018 (2) TMI 1082 - AT - Income Tax

Disallowance made under Rule 8D2(ii) r.w.s. 14A - sufficiency of own funds - Held that - AS the assessee has demonstrated that the interest paid was totally for sugar trading business or for loans on Plant & Machinery and no interest was paid for investment in assets which earned exempt income and also since the assessee is having its own funds many times more than the investments made, no disallowance is required to be made under Rule 8D2(ii) in view of the decision in the case of HDFC Bank v. DCIT (2016 (3) TMI 755 - BOMBAY HIGH COURT) and CIT v. Reliance Utilities & Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT) we do not see any infirmity in the order passed by the Ld.CIT(A) in deleting the disallowance under Rule 8D2(ii) of the Act. Eligibility to claim u/s. 80IA - initial Assessment Year - profit earned during the Assessment Year entitled for deduction under Section 80IA(5 without deducting the losses, which were absorbed in the earlier years? - Held that - This issue in appeal is now squarely covered by the decision of the Hon ble Jurisdictional High Court in the case of CIT v. Hercules Hoist Ltd. 2017 (6) TMI 1125 - BOMBAY HIGH COURT wherein the Hon ble Jurisdictional High Court taking note of the decision in the case of Vellayudhaswamy Spinning Mills P. Ltd 2010 (3) TMI 860 - Madras High Court held that profit from the eligible business for the purpose of determining the quantum of deduction under section 80IA has to be computed before deduction of the notionally brought forward losses and depreciation of eligible business as they have to be allowed to be setoff other income in earlier years. - Decided against revenue Disallowance made under Rule 8D2(iii) - as per assessee only dividend earning investment is from Rajaram Solvex Ltd and the assessee has computed the suomoto disallowance at 0.5% of the investment made in such company as the expenditure attributable for earning such dividend income - Held that - Accepting the contentions of the assessee, we hold that the disallowance under Rule 8D2(iii) of the Act could not be more than ₹.9,200/- since the calculation appears to be in consonance with the decision of the Special Bench in the case of ACIT v. Vireet Investments Private Limited 2017 (6) TMI 1124 - ITAT DELHI , wherein it has been held that only those investments which yielded dividend income should be considered for disallowance under Rule 8D2(iii) of the Act. Thus we direct the Assessing Officer to delete the disallowance made under Rule 8D2(iii) of the Act. - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of disallowance under Rule 8D2(ii) read with Section 14A of the Income Tax Act.
2. Deduction under Section 80IA and interpretation of "initial assessment year."
3. Disallowance under Rule 8D2(iii) for strategic investments.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Rule 8D2(ii) r.w.s. 14A of the Act:
The Assessing Officer (AO) noticed that the assessee earned dividend income of ?2,94,750/- and claimed it as exempt. The AO computed a disallowance of ?22,40,269/- under Rule 8D, which included ?20,16,757/- as interest under Rule 8D2(ii). The Ld.CIT(A) deleted this disallowance, reasoning that the interest paid was for the sugar trading business or loans on Plant & Machinery, not for investments that earned exempt income. Additionally, the assessee had sufficient own funds exceeding the investments. This decision was supported by the Hon'ble Jurisdictional High Court in HDFC Bank v. DCIT and CIT v. Reliance Utilities & Power Ltd. The Tribunal upheld the Ld.CIT(A)’s decision, finding no infirmity in the deletion of the disallowance under Rule 8D2(ii).

2. Deduction under Section 80IA and Interpretation of "Initial Assessment Year":
The Revenue challenged the Ld.CIT(A)'s decision allowing the assessee's claim under Section 80IA based on decisions from Karnataka High Court and Mumbai Tribunal. The Ld.CIT(A) allowed the claim, noting that the assessee opted for A.Y. 2010-11 as the initial assessment year, with no carried forward losses to set off against the windmill income. The Tribunal referenced the Hon'ble Jurisdictional High Court in CIT v. Hercules Hoist Ltd., which held that losses and depreciation of eligible business already set off against other income in earlier years should not be deducted again for determining the quantum of deduction under Section 80IA. The Tribunal affirmed the Ld.CIT(A)'s order, rejecting the Revenue's grounds.

3. Disallowance under Rule 8D2(iii) for Strategic Investments:
The assessee filed a Cross Objection regarding the sustained disallowance under Rule 8D2(iii). The assessee argued that all investments were strategic in group/associate companies, and no expenses were incurred for these investments in the current year. The Tribunal noted that in the assessee’s own case for A.Y. 2013-14, the disallowance was limited to 0.5% of the dividend earning investment, which was ?9,200/-. The Tribunal accepted the assessee's computation and directed the AO to delete the disallowance exceeding ?9,200/- under Rule 8D2(iii), aligning with the Special Bench decision in ACIT v. Vireet Investments Private Limited.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's Cross Objection, confirming the deletion of disallowance under Rule 8D2(ii), upholding the Section 80IA deduction, and limiting the disallowance under Rule 8D2(iii) to ?9,200/-. The order was pronounced on February 7, 2018.