2021 (9) TMI 1031 - AT - Income Tax

Addition u/s 14A r.w.s. 8D - assessee has deficit of own funds for application towards investments in income exempt from tax - HELD THAT - Hon ble jurisdictional High Court in the case of Biocon Limited 2021 (2) TMI 112 - KARNATAKA HIGH COURT wherein it was held that when there is exempt income, there cannot be any disallowance u/s 14A of the Act - it means that disallowance u/s 14A of the Act should be limited to the exempt income - we direct the A.O. to disallow the amount made u/s 14A of the Act to the extent of exempted income only as decided by the Tribunal in assessment year 2014-2015.

Summary

Issues Involved:
1. Validity of proceedings under Section 153A of the Income Tax Act.
2. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules.
3. Applicability of Rule 8D(2)(ii) and the reconciliation of interest for disallowance purposes.
4. Consideration of strategic investments for disallowance under Section 14A.
5. Limitation of disallowance under Section 14A to the amount of exempt income.

Issue-wise Detailed Analysis:

1. Validity of Proceedings Under Section 153A:
The assessee contended that the assessment order passed under Section 153A read with Section 143(3) was invalid due to the absence of incriminating materials found during the search. The CIT(A) overlooked the legal objections regarding the non-issuing of notice under Section 143(2) before concluding the assessment. However, during the hearing, the legal grounds challenging the validity of proceedings under Section 153A were not pressed by the assessee and were dismissed as not pressed.

2. Disallowance Under Section 14A Read with Rule 8D:
The assessee had significant investments in partnership firms, mutual funds, and shares, the income from which was exempt from tax. The Assessing Officer (AO) invoked Section 14A read with Rule 8D to disallow expenses related to these investments. The AO computed the disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii). The CIT(A) modified the disallowance, excluding interest on project-specific loans and vehicle loans, and upheld the disallowance related to non-convertible debentures and bank overdraft interest.

3. Applicability of Rule 8D(2)(ii) and Reconciliation of Interest:
The Revenue argued that the CIT(A) was not justified in not applying Rule 8D(2)(ii) after upholding the applicability of Section 14A. The CIT(A) had observed that term loans and vehicle loans were for business purposes and should not be considered for disallowance computation. The CIT(A) included only the interest on non-convertible debentures and bank overdrafts for disallowance under Rule 8D(2)(ii).

4. Consideration of Strategic Investments for Disallowance Under Section 14A:
The assessee argued that investments in subsidiaries and Special Purpose Vehicles (SPVs) were made for business expediency and should not be considered for disallowance under Section 14A. The CIT(A) noted that the assessee had significant investments exceeding non-interest-bearing own funds, justifying the disallowance under Section 14A.

5. Limitation of Disallowance Under Section 14A to the Amount of Exempt Income:
The Tribunal referred to previous decisions, including the Karnataka High Court's ruling in the case of Biocon Limited, which held that disallowance under Section 14A should be limited to the amount of exempt income. The Tribunal directed the AO to restrict the disallowance to the extent of the exempted income, aligning with the jurisdictional High Court's judgment.

Conclusion:
The Tribunal partly allowed the assessee's appeal for the assessment year 2011-2012, directing the AO to limit the disallowance under Section 14A to the amount of exempt income. The assessee's appeal for the assessment year 2010-2011, the Revenue's appeal for 2011-2012, and the Cross Objection by the assessee were dismissed. The order was pronounced on September 22, 2021.