2022 (1) TMI 823 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D(2) both under the normal provisions as well as u/s 115JB of the Act - HELD THAT - On careful reading of first appellate authority s order clearly reveals that he never directed the assessing officer to exclude strategic investments from the total investments for computing disallowance under rule 8D(2)(iii). He has only directed the assessing officer to exclude those investments which have not given rise to tax free income as well as the investments on which the assessee had not earned any exempt income during the year. Thus in our considered opinion ground 1 does not arise out of the order of learned Commissioner (Appeals) hence, does not merit consideration. Accordingly dismissed. Disallowance under section 14A r.w.r. 8D(2) while computing book profit under section 115JB - We fully subscribe to the view expressed by the learned Commissioner (Appeals) as it is in consonance with the ratio laid down in case of ACIT vs Vireet Investments Pvt Ltd 2017 (6) TMI 1124 - ITAT DELHI . In any case of the matter learned Commissioner (Appeals) has held that expenses directly relatable to earning of exempt income can be disallowed under Explanation 1(f) to section 115JB(2) of the Act. In view of the aforesaid we uphold the decision of the learned Commissioner (Appeals) by dismissing the ground raised. Disallowance of legal and professional fees - HELD THAT - The nature of new business is not a decisive test for determining whether or not there is an expansion of an existing business. What is important is that the control of all business the existing one as well as the new venture must be in the hands of one establishment or management or administration. The funds utilized for such business activities must have come from the common source as reflected in the balance-sheet of the company. Therefore if separate business activities are under common management and funds utilized have come from the common management the pre-operative expenditure is allowable. In case of CIT vs Euro India Ltd 2013 (10) TMI 429 - DELHI HIGH COURT has observed where the feasibility report is procured for expansion of existing business and where there is unity of control and common funds then such expenditure would be treated as business expenditure. Thus in our view assessee s claim of deduction of legal and professional fee paid has to be considered by applying the parameters/guidelines laid down in the decisions referred to above. Accordingly we restore the issue to the assessing officer for fresh adjudication after due opportunity of being heard to the assessee. This ground is allowed for statistical purpose. Write off of value of investment - assessee submitted that it has made investment in the subsidiary which is treated as capital investment in the books and represented long term investment - book profit under section 115JB assessee has not added back the amount. - HELD THAT - the language of the provision is very clear and it speaks of an amount set aside as provision for diminution in the value of asset. Whereas it is the specific contention of the assessee that the amount written off has not been set aside as a provision in the books. The entries in assessee s books and as reflected in the profit and loss account of course show the amount as having been written off. However it is a fairly well settled principle that accounting entries are not conclusive. At this stage we may observe that in case of PCIT vs Torrent Private Ltd 2019 (6) TMI 709 - GUJARAT HIGH COURT as held that if provision for diminution in value of investment is actually written off it cannot be added to book profit under section 115JB. Admittedly the aforesaid decision of the Hon ble Gujarat High Court was not available either before the assessing officer or before the first appellate authority. The assessee has stated that the equity investment written off related to offset business undertaken by the subsidiary which ran into heavy loss and was subsequently discontinued. Whereas the shares still held by the assessee aggregating to 4, 12, 95, 000/- represents equity investment in e-retail business conducted by the subsidiary in the name and style of Tata Unistores Limited. This factual aspect needs to be verified. Further the corresponding entries in the books of the subsidiary as regards write off of the investment has to be examined by the departmental authorities. We are inclined to restore the issue to the assessing officer for fresh adjudication after examining various aspects as discussed hereinbefore. The assessing officer must also examine the applicability of ratio laid down by the Hon ble Gujarat High Court in case of PCIT vs Torrent Private Ltd (supra). assessee s appeal is allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance under section 14A of the Income Tax Act, 1961 r.w.r. 8D(2) both under normal provisions and section 115JB.
2. Disallowance of legal and professional fees.
3. Write off of value of investment in a subsidiary.

Issue-wise Detailed Analysis:

1. Disallowance under section 14A r.w.r. 8D(2) both under normal provisions and section 115JB:

The revenue's appeal contested the decision of the Commissioner of Income-tax (Appeals) [CIT(A)] regarding the exclusion of certain investments from the calculation of disallowance under section 14A. The CIT(A) had directed the Assessing Officer (AO) to exclude investments that did not generate tax-free income and those on which the assessee did not earn any exempt income during the relevant year. The appellate tribunal upheld this direction, clarifying that the CIT(A) did not direct the exclusion of strategic investments, making the revenue's ground 1 "totally misconceived" and dismissing it.

Regarding the disallowance under section 14A while computing book profit under section 115JB, the tribunal supported the CIT(A)'s view, which aligned with the Special Bench of ITAT in ACIT vs Vireet Investments Pvt Ltd. The CIT(A) had held that only expenses directly related to earning exempt income should be disallowed under Explanation 1(f) to section 115JB(2). Thus, the tribunal dismissed the revenue's ground 2, upholding the CIT(A)'s decision.

2. Disallowance of legal and professional fees:

The assessee's appeal challenged the disallowance of legal and professional fees amounting to ?68,79,915. The AO had disallowed this expense, considering it as pre-operative and capital in nature, since the project feasibility study for which the expense was incurred had not commenced. The CIT(A) upheld this disallowance.

The tribunal examined the nature of the assessee's business, which included promoting new companies, and referenced judicial precedents that allow such expenses as revenue expenditure if they relate to the expansion of existing business under common management and funds. The tribunal restored the issue to the AO for fresh adjudication, applying the guidelines from the cited precedents and providing the assessee an opportunity to be heard.

3. Write off of value of investment in a subsidiary:

The assessee's appeal also contested the addition of ?39,70,12,410 to the book profit under section 115JB, which was written off as investment in a subsidiary. The AO and CIT(A) considered this write-off as a provision for diminution in value, falling under Explanation 1(i) to section 115JB(2).

The tribunal noted that the write-off was not a provision but an actual write-off in the books, referencing the Gujarat High Court's decision in PCIT vs Torrent Private Limited, which held that actual write-offs are not covered under Explanation 1(i) to section 115JB(2). The tribunal restored the issue to the AO to verify the factual aspects, including the corresponding entries in the subsidiary’s books, and to reconsider the applicability of the Gujarat High Court's decision, providing the assessee an opportunity to present their case.

Conclusion:

The revenue's appeal was dismissed, and the assessee's appeal was allowed for statistical purposes, with specific issues remanded to the AO for fresh adjudication. The tribunal emphasized the need for a thorough examination of facts and adherence to judicial precedents in determining the allowability of expenses and write-offs.