2023 (10) TMI 655 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - expenditure incurred on earning exempt income - HELD THAT - From the judgment of Bennett Coleman Co. Ltd. 2018 (2) TMI 730 - ITAT MUMBAI , it is vivid that where assessee had furnished details that it had surplus own funds to make investments in shares and mutual funds and it had not used borrowed funds for such purpose, the disallowance of interest expenses u/s 14A of the Act, is to be deleted. Therefore, delete the addition made by the Assessing Officer in respect of interest disallowance u/s 14A of the Act. However, direct the assessing officer to make the disallowance being 0.50% of average investment. Disallowance u/s 40(a)(ia) - TDS u/s 194A on interest expenses non deducted - HELD THAT - As during the appellate proceedings, the assessee submitted before CIT(A) that out of the total interest interest partly was paid to M/s Deutsche Bank AG and since the entity was a banking company, the provisions of section 194A were not applicable. This argument of the assessee was accepted by ld CIT(A), and hence the corresponding disallowance was deleted by ld CIT(A). As Counsel stated that despite of this, ld CIT(A) had enhanced the addition without issuing notice to the assessee for enhancement and without giving opportunity to the assessee. Therefore, enhancement made by the CIT(A) is bad in law and needs to be deleted. Reliance can be placed on the judgment in the case of CIT Vs. Lotte India Corporation Ltd 2006 (9) TMI 141 - MADRAS HIGH COURT . Hence, note that ld. CIT(A) without giving an opportunity to the assessee, has enhanced the assessment, therefore addition made by the ld CIT(A) t is hereby deleted.

Summary

Issues Involved:
1. Addition without rejecting books of account under section 145 of the Income Tax Act.
2. Addition under section 14A of the Income Tax Act.
3. Disallowance under section 40(a)(ia) of the Income Tax Act.

Summary:

Issue 1: Addition without rejecting books of account under section 145 of the Income Tax Act
The assessee contended that the CIT(A) erred in confirming the addition made by the Assessing Officer (AO) without rejecting the books of account under section 145 of the Income Tax Act. However, the order does not provide specific details on this issue, indicating it was not a primary focus of the judgment.

Issue 2: Addition under section 14A of the Income Tax Act
The AO observed that the assessee had exempt income and incurred expenses related to this income, thus invoking section 14A. The AO disallowed Rs. 7,56,965/- under section 14A, which was confirmed by the CIT(A). The assessee argued that the investments were made from own funds and should not attract disallowance. The tribunal noted that the assessee's own funds exceeded the investments and, following the precedent set by Bennett Coleman & Co. Ltd., deleted the interest disallowance of Rs. 6,73,350/-. However, the tribunal directed a disallowance of Rs. 83,616/- (0.5% of average investment).

Issue 3: Disallowance under section 40(a)(ia) of the Income Tax Act
The AO disallowed Rs. 17,30,151/- for non-deduction of tax at source under section 194A, but after considering the disallowance under section 14A, the net disallowance was Rs. 9,73,186/-. The CIT(A) enhanced this disallowance to Rs. 11,35,955/- without notice. The tribunal found this enhancement without notice to be against the principles of natural justice, citing the judgment in CIT Vs. Lotte India Corporation Ltd. Consequently, the tribunal deleted the enhanced addition, allowing the assessee's appeal on this ground.

Conclusion:
The appeal was partly allowed, with the tribunal providing relief on the disallowance under section 14A and deleting the enhancement under section 40(a)(ia). The order was pronounced on 12/10/2023.