2022 (6) TMI 257 - AT - Income Tax

Disallowance u/s 14A - interest disallowance - HELD THAT - We find that in the audited balance-sheet placed at page 10 of the paper book dated 22.08.2014, shareholders funds comprising of share capital and Reserves Surplus as on 31.03.2013 is Rs.386.60 crores (approx.) and as on 31.03.2014 is Rs.441.78 crores. The shareholders fund is interest-free fund. Now looking towards the investment fetching exempt income, the same are shown in Schedule 14 under the head Non-Current Assets . As on 31.03.2013 it is Rs.161.76 crores and as on 31.03.2014 it is Rs.193.42 crores It is further brought to our notice that out of the non-current assets of Rs.193.42 crores as on 31.03.2014, a sum of Rs.168.62 crores is investment in unquoted shares of subsidiary companies. So the investment in other/ listed equity shares are to the tune of Rs.24.8 crores. As against this figure of Rs.24.8 crores of the investment, the assessee has interest-free fund of Rs.441.78 crores, which is more than sufficient to cover up the investments giving rise to exempt income. Therefore, the ratio laid down by the Hon ble Bombay High Court in the case of Reliance Utilities Power Limited 2009 (1) TMI 4 - BOMBAY HIGH COURT is squarely applicable on the facts and circumstances of the case. We are, therefore, inclined to hold that no interest disallowance is called for as per Rule 8D(2)(ii) of the Act for computing the disallowance under section 14A of the Act. To this extent, the relevant grounds raised in Grounds No. 2.1 to 2.4 are allowed. Disallowance u/s 14A determining the book profit under section 115JB - HELD THAT - We find merit in the assessee s contention. Special Bench of Delhi Tribunal in the case of ACIT vs.- Vireet Investment Pvt. Limited. 2017 (6) TMI 1124 - ITAT DELHI as well as the judgment of Sobha Developers Ltd. vs.- DCIT 2021 (1) TMI 378 - KARNATAKA HIGH COURT , wherein it has been held that adjustment of disallowance under section 14A could not be made while computing book profit under section 115JB of the Act. Therefore, under the given facts and settled judicial precedence as referred above, we direct the Assessing Officer to compute the book profit without considering disallowance under section 14A of the Act. Thus Ground No. 3 raised by the assessee is allowed.

Summary

Issues involved:
1. Corporate guarantee computation for loans
2. Disallowance under section 14A read with Rule 8D
3. Addition of disallowance under section 14A for book profit under section 115JB

Corporate guarantee computation for loans:
The appeal concerns the computation of a charge payable by the appellant for a corporate guarantee provided to Tega Holdings Pte Limited, Singapore, for loans taken from Axis Bank. The appellant argued that the guarantee structure benefited them and was a shareholder service. They also cited a Kolkata Tribunal order supporting their position. The appellant contended that the provision of the guarantee was a shareholder activity and should reduce total income as per CBDT Circular No. 14. However, the appellant withdrew these grounds during the hearing, leading to their dismissal.

Disallowance under section 14A read with Rule 8D:
The appellant challenged the disallowance under section 14A of the Act read with Rule 8D. The appellant argued that they had sufficient owned funds to cover investments producing exempt income, and the invocation of Rule 8D should not be automatic. They highlighted errors in the computation, such as not considering interest expenditure on a net basis and not excluding certain investments. The tribunal examined the facts and held that no interest disallowance was warranted as the appellant's interest-free funds exceeded their investments generating exempt income. Consequently, the tribunal allowed the relevant grounds raised by the appellant.

Addition of disallowance under section 14A for book profit under section 115JB:
The appellant contested the addition of the disallowance under section 14A while determining the book profit under section 115JB. They argued that these sections are mutually exclusive and that no automatic disallowance should occur without specific expenditure related to earning exempt income. The tribunal referred to judicial precedents and directed the Assessing Officer to compute the book profit without considering the disallowance under section 14A. As a result, the tribunal allowed this ground raised by the appellant.

In conclusion, the appellate tribunal partially allowed the appellant's appeal concerning the disallowance under section 14A and the addition of disallowance for book profit under section 115JB. The tribunal dismissed the grounds related to the corporate guarantee computation as the appellant withdrew them during the hearing.