2019 (4) TMI 1501 - AT - Income Tax

Disallowance u/s 14A - assessee s own funds are more than total investment, which gives rise to exempt income and in that case it is presumed that the assessee had used own funds for investment which earned exempt income - HELD THAT - No disallowance can be made under Rule 8D(ii) on account of interest - the assessee drew our attention to the balance sheet of the assessee, wherein, share capital reserve to the tune of ₹ 40,84 cores is available and total investment is ₹ 17.73 crores, which is invested to earn exempt income. There are mixed funds and the AO has not proved any nexus with the earning of exempt income and the invested funds. Once this is the position, the presumption is that the assessee has invested in the investment which gives rise to the exempt income out of own funds in view of HDFC Bank 2014 (8) TMI 119 - BOMBAY HIGH COURT . MAT - Applicability of provisions of section 115 JB in respect to disallowance of expenditure relatable to exempt income under section.14A r.w Rule 8D - HELD THAT - The issue is squarely covered by the decision of ITAT Delhi, Special Bench in the case of Vireet Investment Pvt Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein, it is held that while applying the provisions of sect ion 115 JB the computation under Clause (f ) of Explanation (1) to sect ion 115 JB(2), the disallowance is to be made without resorting to the computation as contemplated u/s 14A r.w. Rule 8D of the Rules thereby the CIT(A) relying on the decision of ITAT Delhi SB in the case of Vireet Investment (supra) deleted the disallowance. - Decided against revenue.

Summary

Issues:
1. Disallowance of expenses relatable to exempt income under section 14A read with Rule 8D.
2. Applicability of provisions of section 115JB in respect to disallowance of expenditure relatable to exempt income under section 14A read with Rule 8D.

Issue 1: Disallowance of expenses relatable to exempt income under section 14A read with Rule 8D:
The first issue in this appeal pertains to the disallowance of expenses relatable to exempt income under section 14A read with Rule 8D. The Assessing Officer disallowed interest expenditure and administrative expenses under Rule 8D(ii) and Rule 8D(iii) respectively. The CIT(A) upheld the disallowance of administrative expenses but deleted the disallowance of interest expenditure by relying on the decision of the Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank. The assessee argued that no disallowance should be made under Rule 8D(ii) as the own funds of the assessee exceeded the total investment giving rise to exempt income. The ITAT affirmed the CIT(A)'s order based on the presumption that the assessee used own funds for investments earning exempt income, following the decision in the case of HDFC Bank.

Issue 2: Applicability of provisions of section 115JB in respect to disallowance of expenditure relatable to exempt income under section 14A read with Rule 8D:
The second issue in this appeal concerns the applicability of provisions of section 115JB in respect to the disallowance of expenditure relatable to exempt income under section 14A read with Rule 8D. The revenue contended that the disallowance under section 14A should be added to the book profit under section 115JB. However, the CIT(A) directed the AO not to add the disallowance under section 14A to the book profit under section 115JB, relying on the decision of the Special Bench of ITAT Delhi in the case of Vireet Investment Pvt Ltd. The ITAT confirmed the CIT(A)'s order, stating that the disallowance under section 14A should be made without resorting to the computation as contemplated under section 115JB, in line with the decision in the case of Vireet Investment Pvt Ltd.

In conclusion, the ITAT dismissed the appeal of the revenue, upholding the decisions of the CIT(A) on both issues. The judgment provides clarity on the disallowance of expenses relatable to exempt income under section 14A read with Rule 8D and the interaction between the provisions of section 115JB in such cases.