2022 (12) TMI 447 - AT - Income Tax

Disallowance u/s 14A - assessee earned exempt income in the form of dividend income and share in the profit of the partnership firm - AO disallowed proportionate interest on account of interest expenses and on account of administrative cost being 0.5% of average value of investment - HELD THAT - Since the assessee is having substantial interest free funds in the form of its own share capital available with it, accordingly, there is no reason for disallowance on account of interest expenditure incurred for earning exempt income. In the case of Gujarat Narmada Valley Fertilizers Co. Ltd 2014 (3) TMI 847 - GUJARAT HIGH COURT held that where assessee-company received dividend on UTI and shares and investment in same was made in earlier years and interest free funds available with assessee were much larger as compared to investment, disallowance of assessee's claim for interest expenditure by applying section 14A was incorrect. In case of Gujarat Fluoro chemicals Ltd. 2020 (10) TMI 252 - GUJARAT HIGH COURT again reiterated that where interest free funds available with assessee were far more than gross investment, it could safely be harboured that interest bearing funds was not invested by assessee and, thus, no disallowance under section 14A to be made. In view of the above, there is no reason for disallowance so far as proportionate interest expenditure is concerned. So far as administrative expenses is concerned, we observe that the assessee has itself disallowed a sum of ₹ 1.78 lakhs in its return of income, which as per the counsel is adequate to cover disallowance of administrative expenses. The Ahmedabad Tribunal in the case of Axis Bank Ltd. 2017 (3) TMI 1335 - ITAT AHMEDABAD held that administrative expenses need to be disallowed under section 14A of the Act. The law is unanimous on the point that administrative expenses need to be disallowed as per Rule 8D.However, since in the instant facts, the assessee has suo moto disallowed a sum in its return of income while making disallowance under section 14A read with Rule 8D, no further disallowance is called for on account of administrative expenditure. Disallowance u/s 14A while computing income u/s 115 JB - The Karnataka High Court in the case of J.J. Glastronics (P.) Ltd 2022 (4) TMI 1187 - KARNATAKA HIGH COURT held that amounts disallowed under section 14A could not be added to net profit while computing book profit under section 115JB - As in the case of Vishal Export Overseas Ltd 2022 (8) TMI 88 - ITAT AHMEDABAD held that disallowances made under section 14A read with rule 8D could not be applied to provision of section 115JB - ITAT in the case of Vireet Investment (P.) Ltd 2022 (8) TMI 88 - ITAT AHMEDABAD held that computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to computation as contemplated under section 14A read with rule 8D. In view of the consistent position of law on this issue, we are hereby allowing assessee s appeal with respect to ground number 2. Disallowance in respect of closing balance of M/s Jay Metal Industries - HELD THAT - The matter is being set aside to the file of AO for fresh adjudication after allowing due opportunity of hearing to the assessee to produce the necessary documents in support of the reconciliation for this difference.

Summary

Issues:
1. Disallowance of Rs. 15,98,880 under section 14A of the Act.
2. Disallowance of Rs. 17,77,659 under section 14A while computing income under section 115JB of the Act.
3. Disallowance of Rs. 3,17,222 in respect of closing balance of M/s Jay Metal Industries.

Analysis:

Issue 1:
The first ground of appeal concerns the disallowance of Rs. 15,98,880 under section 14A of the Act. The assessing officer disallowed interest expenses and administrative costs related to exempt income earned by the assessee. The CIT(A) confirmed the disallowance based on precedent from a previous year. However, the ITAT held that since the assessee had substantial interest-free funds exceeding the investments for earning exempt income, no disallowance on interest expenditure was justified. The ITAT also noted that the assessee had already disallowed administrative expenses in its return, hence no further disallowance was warranted. Citing various legal precedents, the ITAT allowed the appeal on this ground.

Issue 2:
The second ground pertains to the disallowance of Rs. 17,77,659 under section 14A while computing income under section 115JB of the Act. The ITAT referred to recent legal developments, including a Supreme Court ruling and decisions by High Courts and Tribunals, which established that disallowances under section 14A cannot be added to the net profit for computing book profit under section 115JB. Relying on these precedents, the ITAT allowed the appeal on this ground as well.

Issue 3:
The third ground involves the disallowance of Rs. 3,17,222 in relation to the closing balance of M/s Jay Metal Industries. The AO had added this amount to the assessee's income due to unexplained differences in balances. The CIT(A) upheld the addition, citing lack of verifiable evidence. However, the ITAT found that the difference was primarily due to the opening balance discrepancy and directed the matter back to the AO for fresh adjudication, allowing the appeal on this ground for statistical purposes.

In conclusion, the ITAT allowed the appeal of the assessee on all grounds, providing detailed legal analysis and citing relevant case laws to support its decisions.