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Facts
The assessee earned exempt dividend income but made no disallowance under Section 14A. The Assessing Officer computed a disallowance of Rs. 3.82 crores, later restricted to Rs. 3.56 crores due to a casting error. The CIT(A) restricted the disallowance to the amount of exempt income earned, Rs. 1.09 crores.
Held
The Tribunal held that the average value of investments for Rule 8D should consider only investments yielding exempt income. It was also held that no disallowance of interest expenditure is required if own funds exceed investments. Further, disallowances under Section 14A cannot be added to the net profit for computing book profit under Section 115JB.
Key Issues
Disallowance of expenses under Section 14A and the computation of book profit under Section 115JB.
Sections Cited
14A, 115JB, 8D(2)(ii), 8D(2)(iii)
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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: SHRI B.R. BASKARAN & SHRI SANDEEP SINGH KARHAIL
PER B.R. BASKARAN, ACCOUNTANT MEMBER :
These cross appeals are directed against the order dated 30/01/2024 passed by Ld Commissioner of Income Tax (Appeals) [in short the ld. CIT(A)], NFAC, Delhi and they relate to the Assessment Year 2016-17. The grounds urged by both parties relate to the disallowance made u/s. 14A of the Act.
The assessee company is engaged in the business of generation and sale of power/electricity. The Assessing Officer noticed that the assessee has earned exempt dividend income of Rs.1.09 crores, but did not make any disallowance u/s. 14A of the Act. Accordingly, the Assessing Officer computed the disallowance u/s. 14A of the Act as per Rule 8D consisting of interest disallowance u/r.8D(2)(ii) Rs.3.54 crores and expenses disallowance u/r. 8D(2)(iii) at Rs.0.27 crores. Though the aggregate amount of actual disallowance computed by the Assessing Officer worked to Rs.3.82 crores, yet the Assessing Officer disallowed a sum of Rs.3.56 crores only, apparently due to casting error. The same amount was also added by the Assessing Officer to the Net profit, while computing the book profit u/s. 115JB of the Act.
In the appellate proceedings, the ld.CIT(A)directed the Assessing Officer to restrict the disallowance u/s. 14A of the Act to the amount of exempt income earned by the assessee. Accordingly, the disallowance u/s. 14A of the Act was directed to be restricted to Rs.1.09 crores. With regard to the addition made by Assessing Officer while computing book profit u/s. 115JB of the Act, the ld.CIT(A) directed the Assessing Officer to compute book profit u/s. 115JB of the Act without resorting to the disallowance computed u/s. 14A of the Act. Both the parties are aggrieved.
The contention of the assessee is that, while computing disallowance u/r 8D, the average value of investments should be computed by considering only those investments which have yielded exempt income. Further, it is contended that the no disallowance out of interest expenditure is called for since the own funds exceeds the value of investments.
The Contention of the revenue is that the disallowance should not have been restricted to exempt income and further, the amount of disallowance computed u/s 14A of the Act should have been allowed to be added to the net profit while computing book profit 115JB of the Act.
We heard the parties and perused the record. The first contention of the assessee is that the disallowance of interest expenses u/r 8D(2)(ii) is not called for, since the own funds exceeds the value of investments. In this regard, we notice the details of own funds and investments are given at page 26 of the order passed by Ld CIT(A). We notice that the own funds available with the assessee as at the beginning and end of the year is Rs.1736 crores and Rs.1981 croes respectively, while the value of investments stand at Rs.44.25 crores in the beginning and end of the year. Hence, no disallowance out of interest expenses is called for as per the decision rendered by Hon’ble Bombay High Court in the case of HDFC Bank Ltd ((366 ITR 505). &1491/MUM/2023 ASSESSMENT YEAR :2016-17
The next contention of the assessee is that the “average value of investments” for the purpose of Rule 8D should be computed by considering only those investments which have yielded exempt income. In this regard, the ld.A.R placed his reliance on the decision rendered by the Special bench of ITAT in the case of Vireet Investments P Ltd (2017)(82 taxmann.com 415). He further submitted that the Co-ordinate Bench has decided an identical issue in the case of DCIT vs. Reliance Power Limited (ITA No.1952/Mum/2023 dated 25/10/2023), wherein it was held as under: “8. In the cross objection, it is the contention of the assessee that the “average value of investments” to be computed for the purpose of Rule 8D should be computed by considering only those investments, which have yielded dividend income. The above said contention finds support from the decision rendered by Delhi Special Bench in the case of Vireet Investments P Ltd (supra). Accordingly, we direct the AO to compute average value of investments by considering only those investments, which have yielded dividend income and then compute the disallowance under Rule 8D. One more principle to be followed is that, if the own funds available with the assessee exceeds the value of investments, then no disallowance of interest expenditure is called for u/r 8D(2)(ii) of I T Rules. If the disallowance so computed by applying above said principles works out to be lower than the value of exempt income, then the disallowance u/s 14A should be restricted to the lower amount so computed. We order accordingly.”
We notice that the above said contention of the assessee finds support from the decision rendered by the Special bench in the Vireet Investments P Ltd (supra), which has also been followed in the case of Reliance Power Ltd (supra). Accordingly, we modify the order passed by ld. CIT(A) and direct the Assessing Officer to compute the disallowance of average value of investment by considering only those investments which have yielded exempt income and accordingly compute the disallowance u/s. 14A of the Act.
In any case, the disallowance u/s 14A should not exceed the exempt income as held by Hon’ble Delhi High Court in the case of Caraf Builders & Constructions Private Limited, (2019) 112 taxmann.com 322.
The revenue’s appeal is related to the addition made to the net profit while computing book profit u/s 115JB of the Act. With regard to this issue, we notice that the Special Bench of ITAT, Delhi has held in the case of Vireet Investment Private Ltd (supra) that the disallowance made u/s. 14A of the Act cannot be imported into section 115JB of the Act, i.e. addition to be made under clause (f) of Explanation-1 to section 115JB of the Act has to be computed independently with reference to the books of account. In view of the above, ld. CIT(A) was justified in holding that the amount disallowed u/s. 14A of the Act cannot be imported and added while computing book profit u/s. 115JB of the Act.