2024 (11) TMI 491 - AT - Income Tax

Disallowance u/s. 14A - computation of disallowance taking average investments that have yielded the exempt income earned by the assessee - considering the investments on which it had earned exempt income and excluded those investments which were capable of generating exempt income - CIT(A) held that the investments, which yielded exempt income, are only to be considered for the purpose of disallowance u/s. 14A r/w Rule 8 D(2) and to exclude such investments which did not earn exempt income - HELD THAT - We notice that the ld. CIT(A) has followed the decision rendered of Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI to hold that only those investments which have yielded exempt income should only be considered for computing the average value of investments for the purpose of Rule 8D. Further, he has followed order rendered in M/s. Nirved Traders Pvt. Ltd. 2019 (4) TMI 1738 - BOMBAY HIGH COURT holding that the disallowance cannot exceed the exempt income. No reason to interfere with the decision so rendered by the ld. CIT(A) on this issue. Decided in favour of the assessee. Allowable business expenditure - penal charges paid to NHB - HELD THAT - According to the letter dated 08.10.2020 issued by National Housing Bank (NHB) and addressed to the assessee company, an amount has been directed to be paid as penalty for violating the various non-compliances/directions. Similarly, another letter dated 26.02.2021 issued by the NHB and addressed to the assessee company, penalty in respect of various non-compliances, has further been imposed upon the assessee. As per these two letters issued by the NHB, the total amount is the penal charges, which are said to have been paid by the appellant assessee are incidental to the business of the assessee and cannot be held to be an offence or infraction of law. CIT(A) has thus rightly held that such penal charges are to be allowable as business expenditure Decided in favour of the assessee.

Summary

Issues:
1) Whether investments that yielded exempt income are the only ones to be considered for disallowance under section 14A r/w Rule 8D(2)?
2) Whether penal charges paid to NHB are allowable as business expenditure?

Analysis:

Issue 1:
The appeal involved a dispute regarding the disallowance of certain expenses under section 14A of the Income Tax Act. The assessing officer disallowed an amount under section 14A, which was later partly allowed by the CIT(A). The key contention was whether only investments that yielded exempt income should be considered for disallowance. The appellant revenue argued that all investments, including those not earning exempt income, should be considered for disallowance as per the clarificatory explanation of section 14A(1). However, the CIT(A) followed the decision of the Special Bench of ITAT Delhi and the Bombay High Court, holding that only investments yielding exempt income should be considered for disallowance. The ITAT upheld the CIT(A)'s decision, citing precedents and relevant legal provisions, thereby ruling in favor of the assessee.

Issue 2:
The second issue pertained to whether penal charges paid to NHB were allowable as business expenditure. The assessing officer disallowed the penalty amount, but the CIT(A) overturned this decision. The ITAT referred to relevant case laws and the Supreme Court judgment in CIT v Ahmedabad Cotton Mfg Co. Ltd (1993) to support the position that penal charges, if incurred as part of business operations and not as a punishment for a legal breach, could be considered as deductible business expenditure under section 37 of the Income Tax Act. The ITAT agreed with the CIT(A)'s decision, emphasizing that the penal charges imposed by NHB were incidental to the business and not a result of any legal offense. Consequently, the ITAT ruled in favor of the assessee, dismissing the revenue's appeal.

In conclusion, the ITAT upheld the CIT(A)'s decision on both issues, ruling in favor of the assessee and dismissing the revenue's appeal.