2022 (9) TMI 1139 - AT - Income Tax

Disallowance u/s. 14A r.w.r. 8D - upward adjustment u/s. 115JB of disallowance under Rule 8D(ii) and 8D(iii) - Whether interest cost includes finance charges? - suo-moto disallowance u/s. 14A by assessee - Contention of the ld. AR that as per definition of interest u/s. 2(28A) of the Act, interest means interest payable in any manner in respect of any money borrowed and includes any service fees or other charges in respect of the money borrowed - HELD THAT - Commissioner has already held that disallowance to that extent needs to be adjusted for u/s. 115JB of the Act and consequently directed to Assessing Officer to recompute the disallowance u/s. 14A, hence no interference is warranted. In view of the judgments of Joint Investments Pvt. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT and Caraf Builders Constructions (P) Ltd. 2018 (12) TMI 410 - DELHI HIGH COURT and in order to cutshort the litigation and for just decision of the case, we are allowing the alternative claim of the Assessee to the effects that disallowance, if at all, cannot exceed exempt income earned during the relevant assessment year and therefore, directing the Assessing Officer to restrict the disallowance u/s. 14A of the Act, only to the extent of the exempt income earned during the year. Adjustment on account of subsidy(ies) received to the tune to the books profit of the Assessee computed u/s 11JB - HELD THAT - We find that in the instant case the Assessee treated the Subsidies/Incentives referred to above as capital in nature and directly incorporated to its reserves, without incorporating in its profit and loss account and inter-alia claimed that such subsidies received were credited to the capital reserves in accordance with the applicable accounting principles/standards as the accounts of the Assessee are correct being duly audited. We observe that both the authorities below without going into the treatment adopted by the Assessee, and without determining/testing the purpose of scheme of the subsidies/incentives and the status of the said subsidies whether the same are capital or revenue in nature as mandated in the case of Sahney Steel and Press works 1997 (9) TMI 3 - SUPREME COURT decided the tax liability of the Assessee u/s 115JB of the Act. In our considered view, the authorities below should have first determined as to whether Subsidies/Incentives received by the Assessee are revenue or capital in nature and after determination of the same, should have decided the tax liability u/s 115JB of the Act, but not otherwise. Hence considering the peculiar facts and circumstances, we deem it appropriate to set aside the decisions of the authorities below on this issue and to remit the said issue to the file of the Assessing officer for decision afresh, by taking into consideration the observations made above. Order accordingly.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules.
2. Upward adjustment on account of subsidies received to the book profit under Section 115JB of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The Assessee declared total income and claimed exemption of dividend income while also disallowing a certain amount suo moto. The Assessing Officer (AO) questioned the disallowance and suggested further disallowance under Section 14A read with Rule 8D, as the Assessee did not maintain separate accounts for exempt and taxable income. The AO added Rs. 9,45,54,006 as interest expenses for calculation of disallowance and ultimately disallowed Rs. 5,29,35,164, subtracting the Assessee's disallowed amount, resulting in an addition of Rs. 4,83,36,424 to the Assessee's income.

The Commissioner, relying on the High Court judgments in ACB India Ltd. vs. ACIT and Pr. CIT vs. Caraf Builders & Constructions Pvt. Ltd., directed the AO to recompute the disallowance considering only those investments which yielded exempt income. However, the Commissioner upheld the AO's consideration of finance charges as interest expenses. The Assessee contested this, arguing that finance charges were related to business operations and not interest expenses for acquiring dividend-yielding investments.

The Tribunal, considering the jurisdictional High Court judgments, directed the AO to restrict the disallowance under Section 14A to the extent of exempt income earned during the year, partly allowing the Assessee's appeal.

2. Upward Adjustment on Account of Subsidies Received:

The AO added Rs. 61,31,52,671 to the Assessee's book profit under Section 115JB, considering the subsidies received as capital reserves not incorporated in the profit and loss account. The Assessee argued that the subsidies were for public interest and industrial development, treated as promoters' contribution, and credited to capital reserves as per AS-12. The AO, not satisfied, held that the subsidies should be disclosed in the profit and loss account as per the Companies Act and Accounting Standards, and treated the direct credit to capital reserves as a device to mitigate tax liability.

The Commissioner upheld the AO's addition, explaining that any reserve other than specified under Section 33AC should be added to the book profit under Section 115JB.

The Tribunal observed that both authorities did not determine whether the subsidies were capital or revenue in nature. The Tribunal set aside the decisions and remitted the issue back to the AO to decide afresh, considering the nature of the subsidies.

Revenue Department's Appeal:

The Revenue Department contested the Commissioner's direction to recompute disallowance under Section 14A and Rule 8D. The Tribunal dismissed this appeal, aligning with its decision in the Assessee's appeal.

Conclusion:

The Assessee's appeal was partly allowed for statistical purposes, and the Revenue Department's appeal was dismissed. The Tribunal directed the AO to restrict the disallowance under Section 14A to the exempt income earned and to reassess the nature of the subsidies received before making adjustments under Section 115JB.