2020 (1) TMI 989 - AT - Income Tax

Addition u/s 14A r.w. Rule 8D - assessee argued that the assessee s own funds is more than investment - HELD THAT - Where the interest free funds available with the assessee was sufficient to make the advance to its sister concern then such investment should be presumed to be made from interest free funds available and not out of borrowed funds and in the said circumstances disallowance of interest paid on loan taken would be justified. Thus we are of the view that the no disallowance is required in view of the provisions u/s 14A r.w. Rule 8D(2) of the Act. So far as the disallowance in view of the provisions u/s 8D(2)(3) is concerned, the AO took into consideration of 0.5% of the total value of the investment to the tune of ₹ 4,70,58,853/- which comes to the tune of ₹ 3,66,23,909/-. The assessee nowhere disallowed the expenditure to earn the exempt income. We nowhere found any illegality and infirmity while deciding the issue in pursuance of Section 14A r.w. Rule 8D(3) of the Rules. But it is also quite correct that the disallowance is not required to exceed more than the exempt income in view of the decision of Cheminvest Ltd. Vs. CIT 2015 (9) TMI 238 - DELHI HIGH COURT and CIT Vs. Holcin India Pvt. Ltd. 2014 (9) TMI 434 - DELHI HIGH COURT . Accordingly, we restrict the disallowance to the extent of exempt income i.e. to the tune of ₹ 94,00,147/-. Accordingly, this issue is decided in favour of the assessee against the revenue. Addition u/s 14A r.w. Rule 8D of the Rules on account of Explanaton-1 to Section 115JB - HELD THAT - The provisions of Section 14A of the Act is confines to the nowhere provisions of Chapter IV of the Act and the said Section 14A cannot be extended and read into section 115JB falling under Chapter XII-B of the Act. Accordingly, no addition is required u/s 14A and Section 115JB of the Act, hence, we delete the addition and allowed the claim of the assessee.

Summary

Issues Involved:
1. Confirmation and enhancement of disallowance under Section 14A read with Rule 8D.
2. Inclusion of disallowance under Section 14A in the computation of book profit under Section 115JB.
3. Levy of interest under Sections 234B and 234C.
4. Initiation of penalty proceedings under Section 271(1)(c).

Issue-wise Detailed Analysis:

Issue No. 1: Confirmation and enhancement of disallowance under Section 14A read with Rule 8D
The assessee challenged the confirmation of an addition of ?6,00,40,820/- made by the AO under Section 14A read with Rule 8D and further enhancement by ?27,63,67,637/- by the CIT(A). The assessee argued that it had sufficient own funds to cover the investments, citing the case of CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). The assessee also referred to the provisions of Section 36(1)(iii) and decisions in CIT-III Pune Vs. Sharda Erectors P. Ltd. (2016) 76 taxmann.com 107 (Bom) and M/s. Vardhman Polytex Ltd. Vs. DCIT dated 21.06.2019. The Tribunal observed that the assessee had sufficient surplus funds and investments generating exempt income amounted to ?801,92,49,583/-. It concluded that no disallowance was required under Section 14A read with Rule 8D(ii) based on the presumption that investments were made from interest-free funds. However, for disallowance under Rule 8D(iii), the AO considered 0.5% of the total investment value, amounting to ?4,70,58,853/-. The Tribunal restricted the disallowance to the extent of the exempt income, i.e., ?94,00,147/-, citing Cheminvest Ltd. Vs. CIT 378 ITR 33 (Delhi) and CIT Vs. Holcin India Pvt. Ltd. 486 of 2014 dated 05.09.2014.

Issue No. 2: Inclusion of disallowance under Section 14A in the computation of book profit under Section 115JB
The assessee challenged the addition of ?33,64,08,457/- under Section 14A read with Rule 8D in the computation of book profit under Section 115JB. The Tribunal referred to the decision in ACIT Vs. Vireet Investment P. Ltd. (2017) 82 taxmann.com 415 (Del) and noted that Section 14A pertains to Chapter IV and cannot be extended to Section 115JB under Chapter XII-B. The Tribunal emphasized that Section 14A disallowance is confined to computation under the normal provisions and cannot be incorporated into Section 115JB. The Tribunal concluded that no addition under Section 14A should be made in the book profit computation under Section 115JB and deleted the addition.

Issue No. 3: Levy of interest under Sections 234B and 234C
The CIT(A) held that the levy of interest under Sections 234B and 234C of the Income Tax Act, 1961, is mandatory. The appellant denied liability for such interest. However, the judgment does not provide further details or analysis on this issue.

Issue No. 4: Initiation of penalty proceedings under Section 271(1)(c)
The CIT(A) held that the ground raised disputing the initiation of penalty proceedings under Section 271(1)(c) is premature. The appellant denied liability for such penalty. Similar to the previous issue, the judgment does not provide further details or analysis on this matter.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal restricted the disallowance under Section 14A read with Rule 8D to the extent of the exempt income and deleted the addition under Section 14A in the computation of book profit under Section 115JB. The levy of interest and initiation of penalty proceedings were not elaborated upon in the judgment.