2019 (10) TMI 1164 - AT - Income Tax

Disallowance of dividend income u/s. 14A by invoking Rule 8D - computing Book Profits u/s 115JB - HELD THAT - Upon perusal of financial statements as placed on record, it is also observed that the assessee has sufficient own funds in the shape of Share Capital Reserves amounting to ₹ 101.61 Crores as against investment of ₹ 12.85 Crores and therefore, unless it is shown that the investments were made out of borrowed funds and the nexus between the two was brought on record, a presumption was to be drawn in assessee s favour that own funds were used to make the investments. However, no such exercise emanates from quantum assessment order. Therefore, upon careful perusal of facts and circumstances, we find that matter of disallowance u/s 14A has not been properly addressed by lower authorities. Therefore deem it fit to remit the matter of disallowance u/s 14A while computing income under normal provisions as well as while computing Book Profits u/s 115JB to the file of AO for adjudication de-novo after considering the issue in correct perspective. AO is directed to appreciate the suo-moto disallowance offered by the assessee and if not satisfied, recompute the disallowance keeping in view the ratio of binding judicial pronouncements and principals laid down regarding the same. The adjustment of disallowance u/s 14A while computing Book Profits u/s 115JB, in terms of clause (f) to explanation-1 to Sec 115JB(2), would be attracted only in case it is established that the assessee has actually debited any expenditure in profit loss account relatable to earning of any exempt. Resultantly, the ground stand allowed for statistical purposes. Treatment of lease rental income - HELD THAT - Matter may be restored back to the file of Ld. AO on same lines as done by the Tribunal in assessee s own case for AY 2011-12. Therefore, following the earlier view of Tribunal for AY 2011-12, this matter stand restored back to the file of Ld. AO for fresh adjudication on similar lines as directed by Tribunal vide paras 4 to 6 of the stated order. This ground also stand allowed for statistical purposes. Interest disallowance u/s 36(1)(iii) - HELD THAT - For this the Ld. AR has relied upon the recent decision of Hon ble Supreme Court rendered in CIT V/s Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT for the submission that in case of mixed use of funds, a presumption was to be drawn that capital advances were out of free funds available with the assessee. CIT(A) has directed AO to recompute the disallowance based on number of days for which funds were actually utilized for capital advances. However, respectfully following the cited decision, we modify the directions by directing AO to ascertain the nexus of borrowed funds vis- -vis capital advances made by the assessee and until nexus is established between the two, a presumption would be drawn in assessee s favour that capital advances were out of free funds available with the assessee as per the cited decision of Hon ble Supreme Court as well as the decision of jurisdictional High Court rendered in CIT Vs. Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT . This ground also stand allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Adjustment of disallowance under Section 14A while computing book profit under Section 115JB.
3. Treatment of lease rental income as 'Income from Other Sources'.
4. Disallowance of interest under Section 36(1)(iii).

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee contested the disallowance of ?31,34,247/- under Section 14A, arguing that the Assessing Officer (AO) did not establish how the claim was incorrect and failed to record satisfaction before invoking Rule 8D. The assessee also claimed that sufficient interest-free funds were available for investments, negating the need for disallowance. Despite these claims, the CIT(A) upheld the AO's decision, noting that similar issues were decided against the assessee in the prior year. Upon further appeal, it was observed that the CIT(A) had wrongly assumed facts from the previous year, where the issue was actually decided in the assessee's favor. The Tribunal found that the assessee had sufficient own funds and that the AO did not properly establish a nexus between borrowed funds and investments. Consequently, the matter was remitted back to the AO for a fresh adjudication, directing the AO to consider the suo-moto disallowance offered by the assessee and recompute the disallowance if necessary.

2. Adjustment of Disallowance under Section 14A while Computing Book Profit under Section 115JB:
The assessee argued that Sections 115JB and 14A are mutually exclusive and should not overlap. However, the CIT(A) dismissed this claim, referencing a Mumbai Tribunal decision that disallowance under Section 14A is covered under clause (f) to explanation 1 of Section 115JB(2). The Tribunal noted that the adjustment under Section 115JB would apply only if it is established that the assessee actually debited any expenditure in the profit and loss account related to earning exempt income. This issue was also remitted back to the AO for fresh adjudication.

3. Treatment of Lease Rental Income as 'Income from Other Sources':
The assessee contended that the lease rental income from plant and machinery should be treated as business income, arguing that the assets were commercial and part of an ongoing business activity. The CIT(A) upheld the AO's stand that the income should be classified as 'Income from Other Sources', following the precedent set in previous years. The Tribunal restored this issue back to the AO for fresh adjudication, following the same approach as in the assessee's case for AY 2011-12.

4. Disallowance of Interest under Section 36(1)(iii):
The AO disallowed ?30,82,204/- under Section 36(1)(iii), arguing that the assessee had borrowed funds and was paying interest, which was debited to the profit and loss account. The assessee contended that no borrowings were made to acquire fixed assets and that sufficient interest-free funds were available. The CIT(A) directed the AO to recompute the disallowance based on the actual usage of funds for capital advances. The Tribunal, referencing a Supreme Court decision, directed the AO to ascertain the nexus between borrowed funds and capital advances. If no nexus is established, it should be presumed that the capital advances were made from free funds available with the assessee.

Conclusion:
The appeal was allowed for statistical purposes, with all issues remitted back to the AO for fresh adjudication based on the directions and observations made by the Tribunal. The AO is directed to consider the relevant judicial pronouncements and principles while recomputing the disallowances and adjustments.