2019 (11) TMI 702 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - HELD THAT - In the case of Pr. CIT vs. Nirma Credit Capital (P.) Limited 2017 (9) TMI 485 - GUJARAT HIGH COURT as held that amount of expenditure by way of interest would be interest paid by assessee on borrowings minus taxable interest earned during the financial year, for the purposes of applying factors in Clause (ii) of Sub Rule (2) of Rule 8D where assessee pays interest on borrowings, as also earns taxable interest on investments. Same view has also taken by Coordinate Benches of ITAT in the case of DCIT vs. DLF Asset Pvt. Ltd. 2018 (9) TMI 1624 - ITAT DELHI , DCIT vs. Machino Finance Limited 2016 (9) TMI 1541 - ITAT KOLKATA and DCIT vs. Trade Apartment Limited 2012 (3) TMI 421 - ITAT KOLKATA copies of these precedents were filed by the learned counsel for the assessee, and are placed on record. We decide the issue in dispute in favour of the assessee and direct the AO to complete disallowance under Rule 8D of I.T. Rules r.w.s. 14A of the I.T. Act by considering net interest (interest paid by the assessee on borrowings minus taxable interest earned during the year) for purpose of Clause (ii) of Sub Rule (2) of Rule 8D. Disallowance of deduction u/s 80-IC - HELD THAT - CIT(A) on this issue is just and fair and in accordance with law, having regard to the facts and circumstances of the case the learned counsel for the assessee has also not brought any further materials for our consideration to persuade as to take a view different from the view taken by the learned CIT(A). The order of the learned CIT(A) is well reasoned, detailed and speaking order. No such infirmity in the order of ld. CIT(A) has been brought to our notice by ld. Counsel of the assessee, warranting any interference by us. In fact, no specific submissions were made by the ld. Counsel for the assessee, except that this ground of appeal was consequential to ground no. 2 of appeal.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Disallowance of deduction under Section 80-IC.
3. Non-allowance of deductions under Section 80-IC on disallowed amount under Section 14A.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee challenged the disallowance of ?13,72,440/- under Section 14A read with Rule 8D, which was upheld by the CIT(A). The assessee argued that the disallowance should be computed based on the net interest expenditure (interest paid minus taxable interest earned) rather than the gross interest expenditure. The Tribunal referenced multiple precedents, including the Gujarat High Court's decision in PCIT vs. Nirma Credit & Capital (P.) Ltd., which supported the assessee's stance that net interest should be considered. Consequently, the Tribunal directed the AO to recompute the disallowance under Rule 8D by considering the net interest for the purpose of Clause (ii) of Sub Rule (2) of Rule 8D.

2. Disallowance of deduction under Section 80-IC:
The assessee contested the disallowance of ?28,81,388/- claimed under Section 80-IC for interest income earned from fixed deposits. The CIT(A) upheld the AO's view that interest income should be taxed under "Income from Other Sources" and not qualify for deduction under Section 80-IC, referencing the Supreme Court's decision in Pandian Chemicals Ltd. vs. CIT. The Tribunal agreed with the CIT(A), noting that the interest income was incidental to the business and not inextricably linked to the industrial undertaking. Thus, the Tribunal dismissed the assessee's appeal on this ground.

3. Non-allowance of deductions under Section 80-IC on disallowed amount under Section 14A:
The assessee claimed that expenses disallowed under Section 14A should be considered for deduction under Section 80-IC. The CIT(A) rejected this claim, stating that expenses disallowed under Section 14A pertain to earning exempt income and cannot be considered for deduction under Section 80-IC. The Tribunal found the CIT(A)'s order to be well-reasoned and in accordance with the law, and thus dismissed the assessee's appeal on this ground as well.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO to recompute the disallowance under Section 14A by considering net interest expenditure, while upholding the disallowances related to Section 80-IC. The detailed and reasoned orders of the CIT(A) were found appropriate and required no interference.