×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
These are the latest case laws decided by various Income Tax Appellate Tribunals (ITAT) of India on Income Tax which have been published recently. The case laws are open for discussion and we invite expert comments from our members on its applicability and effect on relevant issues.
This appeal by the revenue is directed against the order dated 8th February, 2018 of ld. CIT (A), Kota for the assessment year 2014-15. The revenue has raised the following grounds -
“ 1. Whether on the facts and circumstances of the case and in law the ld. CIT (A) was justified in deleting disallowance of Rs. 42,46,087/- being relatable interest expenses under section 14A r.w.r. 8D without appreciating the fact that so called strategic investments made in closely held companies or firms are fruitfied in the form of dividend, STCG/LTCG on sale of investment, Salary, remuneration etc. from any firm or company are received for the services rendered in personal capacity and not for mere investments ?
2. Whether on the facts and circumstances of the case and in law the ld. CIT (A) was justified in deleting disallowance of Rs. 65,28,895/- being interest incurred on investment in non business personal assets and loans and advances on which no interest has been charged without appreciating position of law that if the assessee sells assets the income from which is chargeable to capital gain tax, the assessee gets benefit of the all the moneys paid for acquiring such assets including ancillary expenses whatsoever, in computation of capital gain which is taxed at special rates also, say 20% in the case of long term capital gains and thus, strategic investment in acquiring assets as above cannot be said for the business purposes and relatable interest cannot be allowed treating the same as business expenses ?
Ground No. 1 is regarding disallowance of Rs. 42,46,087/- made by the AO under section 14A read with Rule 8D was restricted by the ld. CIT (A) to Rs.2,76,768/-.
2. The assessee is an individual and derives income from salary, house property, trading in shares and commodity, capital gain and interest. The assessee filed his return of income on 28th November, 2014 declaring total income of Rs. 22,00,000/- after claiming the exempt income by way of capital gain and dividend from shares total amounting to Rs. 19 09,954/-. The AO noted that the assessee has claimed interest expenditure of Rs 1,32,95,215/- and also having exempt income of Rs. 19,09,954/- against which attributable investment is Rs. 82,65,002/-. The AO invoked the provisions of section 14A read with Rule 8D(ii) & (iii) and made the disallowance of Rs. 42,46,082/-. Thus the AO has disallowed the interest expenditure in proportion to the total asset and investment in shares and securities as well as indirect administrative expenses being 0.5% of the average investment.
The assessee challenged the action of the AO before the ld. CIT (A) and pointed out that the AO has committed mistake in calculating the disallowance as per Rule 8D(iii) being 0.5%. The said mistake was subsequently rectified by the AO while giving effect to the order of the ld. CIT (A). Further it was pointed out that even after making the rectification in calculation, the disallowance would get reduced to Rs. 25,82,190/- which is still more than the exempt income earned by the assessee. The ld. CIT (A) allowed relief to the assessee by modifying the computation of disallowance under Rule 8D(ii) and 8D(iii) of the IT Rules. Thus the ld. CIT (A) has restricted the total disallowance under section 14A at Rs. 2,76,768/-.
3. Before us, the ld. D/R has submitted that the AO has computed the disallowance strictly as per Rule 8D of IT Rules. Therefore, excluding the investment made by the assessee, the disallowance restricted by the ld. CIT (A) is not as per the provisions of section 14A read with Rule 8D. The ld D/R has further contended that the assessee has also given the interest free funds to the group concerns and further used the funds for purchase of fixed assets but no business was done during the year under consideration. Therefore, the AO has rightly disallowed the interest expenditure to the extent of Rs. 23,97,313/-. Similarly, the AO has computed the disallowance under Rule 8D(2)(iii) being 0.5% of the average investment which was reduced by the ld CIT (A). He has relied on the order of the AO.
4. On the other hand, the ld. A/R has submitted that there is apparent mistake in calculating the disallowance under Rule 8D(2)(iii) while the AO has taken the
amount at Rs. 18,48,774/- as against Rs. 1,84,877/-. Further, as regards the disallowance on account of interest expenditure, the AO has not considered the interest received by the assessee of Rs. 65,87,152/- and the disallowance should have been made only against the net interest payment instead of gross interest. Thus the AO has again committed a mistake by taking the gross interest expenditure instead of the net interest expenditure. The ld. A/R has further pointed out that the attributable investment yielding the interest income is only Rs. 57,81,500/-. Therefore, the proportionate disallowance of interest needs to be computed with reference to only that investment from which the exempt income is earned. He has supported the order of the ld. CIT (A).
5. We have considered the rival submissions as well as the relevant material on record. As regards the computation of disallowance under Rule 8D(2)(iii), we find that there is a calculation mistake while arriving at the amount of disallowance by the AO of Rs. 18,48,774/- whereas the correct amount is Rs. ,84,877/-. We further note that the ld. CIT (A) has further reduced this disallowance by taking the average investment which has yielded the exempt income. Thus to that extent we do not find any error in restricting the disallowance under Rule 8D(2)(iii) to Rs. 36,694/-. As regards the disallowance under Rule 8D(2)(ii), the ld. CIT (A) has computed the disallowance by taking the percentage of the investment yielding investment income to the total asset which comes to 3.58%. Accordingly, the ld. CIT (A) after taking the net interest payment and the ratio of 3.58% of the same has made the disallowance as a tributable to the earning of exempt income. The relevant finding of the ld. CIT (A) on this issue is as under :-
“The A.O. has not worked out a nexus between the interest bearing & own funds or the investments which did not have any exempted incomes linked to them. The A.0 has also not analysed the own funds available to the assessee for making such investments. If he was sure that the working of the appellant was wrong, he should have recorded his satisfaction before resorting to the disallowance as per rule 8D, however, these elements are missing from the assessment order.