2024 (8) TMI 690 - AT - Income Tax

Addition u/s. 14A r.w.r.8D - AO has not recorded his dissatisfaction over the workings made by the assessee, having regard to the accounts of the assessee - HELD THAT - Since the own funds available with the assessee exceeds the value of investments, no disallowance out of interest expenses u/r 8D(2)(ii) is called for. In respect of expenditure disallowance to be made u/r 8D(2)(iii) of I T Rules, we direct the AO to consider only those investments, which have yielded exempt income for the purpose of computing average value of investments and accordingly recompute the disallowance under Rule 8D(2)(iii). Addition of disallowance computed u/s. 14A for computing book profits u/s. 115JB - As held in the case of ACIT vs. Vireet Investment (P.) Ltd. 2017 (6) TMI 1124 - ITAT DELHI that the addition to be made under clause (f) of explanation (1) to section 115JB(2) of the Act is required to be made without resorting to computation contemplated u/s.14A r.w. Rule 8D of the Rules. Accordingly, we set aside the order passed by the tax authorities on this issue and restore the same to the file of the AO with a direction to compute the addition to be made under clause (f) of explanation (1) to section 115JB(2) of the Act on the basis of annual accounts of the assessee without having regard to the disallowance made u/s 14A of the Act.

Summary

Issues:
1. Challenge against addition made under section 14A and section 115JB of the Income Tax Act for multiple assessment years.
2. Dispute over whether the Assessing Officer recorded dissatisfaction over the workings made by the assessee.
3. Correct computation of disallowance under Rule 8D of the Income Tax Rules.

Analysis:

Issue 1: Challenge against addition made under section 14A and section 115JB
The appeals filed by the assessee challenged the additions made by the Assessing Officer under section 14A and section 115JB of the Income Tax Act for the assessment years 2014-15, 2016-17, 2017-18, and 2018-19. The Assessing Officer computed disallowances under these sections based on exempt income earned by the assessee and non-compliance with Rule 8D of the Income Tax Rules.

Issue 2: Dissatisfaction recorded by the Assessing Officer
The assessee contended that the Assessing Officer did not record dissatisfaction over the workings made by them, leading to a legal ground for the deletion of disallowances under section 14A. However, the Tribunal found that the Assessing Officer did refer to the quantum of investments and interest expenses, explicitly stating his dissatisfaction with the assessee's claims. The Tribunal concluded that the Assessing Officer had indeed recorded dissatisfaction, rejecting the legal contention of the assessee.

Issue 3: Correct computation of disallowance under Rule 8D
For each assessment year, the Tribunal analyzed the computation of disallowances under Rule 8D. In the assessment year 2014-15, the Tribunal directed the Assessing Officer to consider only investments that yielded exempt income for computing the disallowance under Rule 8D(2)(iii). Similar directions were given for the assessment years 2016-17 and 2018-19. The Tribunal also addressed the correct computation of disallowances for book profits under section 115JB, directing the AO to exclude disallowances made under section 14A while computing book profits.

Overall, the Tribunal allowed the appeal for the assessment year 2017-18 and partly allowed the other appeals, setting aside certain additions and directing the Assessing Officer to recompute disallowances in accordance with the Tribunal's directions. The order was pronounced on 9th August 2024.