2018 (4) TMI 262 - AT - Income Tax

Disallowance u/s 14A of the Act r.w.r. 8D(2)(iii) - Contention of the AR was that the assessee earned dividend from two companies which yielded exempt income of ₹ 53,20,226/- and the average investment connected thereto is ₹ 2,10,48,250/- but, not ₹ 12,81,95,222/- as determined by the AO - Held that - In the present case, the AO found that the assessee earned dividend of ₹ 53,20,226/- and has taken average value of investments as appeared in the balance sheet, which, according to ld. AR is wrong in pursuance of the decision of this Tribunal in the case of REI Agro Ltd 2013 (5) TMI 582 - ITAT KOLKATA . We find force in the arguments of ld. AR and no infirmity in the order of CIT(A). Ground no.2 raised by the revenue is dismissed.

Summary

Issues:
1. Sales tax remission - Whether capital or revenue receipt?
2. Disallowance u/s 14A of the Act r.w.r. 8D(2)(iii) - Expenditure on interest-bearing funds.

Sales Tax Remission - Capital or Revenue Receipt?
The appeal by the Revenue was against the order passed by C.I.T-(A)-17, Kolkata for A.Y. 2011-12 regarding the treatment of sales tax remission. The assessee, a company engaged in manufacturing and marketing food items, initially declared total income of &8377; 2,86,30,720/-, later revised to &8377; 36,71,210/-. The AO determined income at &8377; 10,47,36,353/- under MAT proceedings, disallowing amounts on account of sales tax remission and u/s 14A. The CIT(A) deleted the addition related to sales tax remission based on previous decisions. The Tribunal confirmed this decision, stating that the sales tax remission was a capital receipt under the West Bengal Incentive Scheme, promoting industries in the state, and thus not for business operations. Citing precedents, the Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

Disallowance u/s 14A of the Act r.w.r. 8D(2)(iii) - Expenditure on Interest-Bearing Funds
The second issue was the disallowance under section 14A of the Act with reference to Rule 8D(2)(iii). The AO disallowed expenditure under Rule 8D(ii) & (iii), which the CIT(A) confirmed after examining the cash flow statement. The CIT(A), following a Co-ordinate Bench decision, directed the AO to consider investments yielding dividends for computing disallowances under Rule 8D(2)(iii). The Tribunal upheld the CIT(A)'s decision, noting that the AO's determination of average investments was incorrect. Citing the decision in the REI Agro Ltd case, the Tribunal agreed with the CIT(A) that only investments giving rise to income not forming part of the total income should be considered for disallowance under section 14A. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order.

In conclusion, the Tribunal dismissed the Revenue's appeal concerning both issues, affirming the CIT(A)'s decisions on the treatment of sales tax remission as a capital receipt and the disallowance under section 14A of the Act.