2024 (2) TMI 691 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - assessee on its own has made the disallowance u/s 14A - sufficiency of own funds - HELD THAT - It is clear that the assessee has more interest free funds available with it in the form of share capital and reserves and surplus then the amount of investment made which yielded tax free income during the year. Therefore, the presumption would be available in favour of the assessee that amount of investment made in such exempt income yielding investments are made of interest free funds available. Therefore, there could not have been any disallowance under rule 8D (2) (ii)of the income tax rules 1962 under section 14 A of the Act. Such a finding was given in the case of the assessee for assessment year 2014 15 by the coordinate bench 2023 (10) TMI 1361 - ITAT MUMBAI . The same is also covered by the decision of South Indian bank Ltd 2021 (9) TMI 566 - SUPREME COURT . Accordingly, we hold that such disallowance made by the learned assessing officer is not correct. The learned assessing officer is directed to delete the same. While working out disallowance u/s 14A of administrative expenses u/r 8D (2) (iii) made AO could have been made only after taking only those investments which have yielded exempt income during the year - This is also supported by the decision of Cargo motors private limited 2022 (10) TMI 571 - DELHI HIGH COURT wherein it has been held that for the purpose of making disallowance of expenses under section 14A as per rule 8D only those investments were to be considered for computing average value of investments which yielded exempt income during the year. Therefore, both the grounds in the appeal of the assessee are allowed. Disallowance u/s 14A of the act cannot be applied more than exempt income earned during the year for the impugned assessment year. MAT computation u/s 115JB - Disallowance made by AO u/s 14 A by invoking the provisions of rule 8D of the act could also be imputed under the computation of book profit under section 115JB has already been decided in case of Vireet Investments P Ltd 2017 (6) TMI 1124 - ITAT DELHI . Same is now also covered in favour of the assessee by the decision of Gujarat Fluorochemicals Ltd 2023 (12) TMI 713 - GUJARAT HIGH COURT - accordingly we do not find any merit in the appeal of the learned assessing officer.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Computation of book profit under Section 115JB of the Income Tax Act.

Summary:

Issue 1: Disallowance under Section 14A of the Income Tax Act
- Assessment Year 2015-16: The assessee, engaged in power generation, reported a business loss and filed its return. The AO disallowed Rs. 705,409,746 under Section 14A read with Rule 8D. The CIT-A restricted this disallowance to the extent of exempt income (Rs. 24,800,670) and further restricted the addition to Rs. 112,000 in the book profit computation under Section 115JB. The assessee argued that only investments yielding exempt income should be considered for disallowance and that no interest disallowance should be made when own funds exceed investments. The AO contended that disallowance should be made even if no exempt income is earned, citing a 2022 amendment. The tribunal upheld the CIT-A's decision, noting that the assessee had sufficient interest-free funds and that only investments yielding exempt income should be considered, aligning with judicial precedents.

- Assessment Year 2018-19: The assessee did not earn any exempt income and thus did not make any disallowance under Section 14A. The AO, however, invoked Section 14A and computed a disallowance of Rs. 1,682,398,967. The CIT-A deleted this disallowance, stating it was impermissible in the absence of exempt income. The tribunal agreed, citing that the 2022 amendment is prospective and does not apply to this assessment year. Therefore, the tribunal dismissed the AO's appeal and allowed the assessee's appeal.

Issue 2: Computation of Book Profit under Section 115JB of the Income Tax Act
- Assessment Year 2015-16: The AO added the disallowance under Section 14A to the book profit under Section 115JB. The CIT-A restricted this addition to Rs. 112,000, which was upheld by the tribunal, referencing the Special Bench decision in Vireet Investments and the Gujarat High Court decision in Gujarat Fluorochemicals Ltd.

- Assessment Year 2018-19: The AO included the disallowance under Section 14A in the book profit computation under Section 115JB. The CIT-A deleted this addition, which the tribunal upheld, reiterating that no disallowance under Section 14A can be made in the absence of exempt income.

Conclusion:
For Assessment Year 2015-16, the AO's appeal (ITA No. 3424/M/2023) was dismissed, and the assessee's appeal (ITA No. 3043/M/2023) was allowed. For Assessment Year 2018-19, the AO's appeal (ITA No. 3423/M/2023) was dismissed, and the assessee's appeal (ITA No. 3044/M/2023) was allowed. The tribunal consistently held that disallowance under Section 14A cannot exceed the exempt income earned and that the 2022 amendment does not apply retrospectively.