Ten escape routes from the mischief of sec 14A r.w Rule 8D ( Part II )

Second and concluding part of the write up providing ready reference to the relevant and latest case-laws on the subject

        5. NETTING OF INTEREST INCOME IS  ALLOWED

        [Relevant prior to 2-6-2016]

Courts have held that Interest expenditure has to be netted against interest income and only the difference, if any, can be considered for disallowance.

In Trade Apartment Ltd’s case ,I.T.A. No. : 1277/ Kol . / 2011, order  dtd 30.03.2012,

ITAT  Kolkata  held that  as the interest income was more than interest expense and the assessee was having net positive interest income, the interest expenditure cannot be considered for disallowance u/s 14A and Rule 8D. Following further decisions may be gainfully used in this regard by the assessees-       

(a) ITO vs. Karnavati Petrochmem Pvt. Ltd , I.T.A. No. 2228/AHD/2012 (ITAT Ahmedabad), Order dated: 5.07.2013

(b) CIT vs. Jubiliant Enterprises (P) Ltd. 2017(2) TMI 1219 (Bom)

(c) Sanjay Kumar Gupta vs. DCIT, ITA No. 105/K/18, Order dated 24.05.2018 

( ITAT Kolkata)

(d) Dismissing the appeal of the revenue, the Court held that; Prior to its amendment with effect from 2-6-2016, amount of expenditure by way of interest would be interest paid by assessee on borrowings minus taxable interest earned during financial year. (AY. 2008-09)
PCIT v. Nirma Credit & Capital (P.) Ltd (2017) 85 taxmann. com 72 / (2018) 300 CTR 286/ 161 DTR 333 (Guj)HC)

(e)  Disallowance of expenditure-Exempt income –Net of interest-Benefits of netting of interest under rule 8D(2)(ii) be allowed without even emphasising on need of having any inextricable link between interest earned and interest paid prior to 2-6-2016. [R. 8D(2)(ii)]
Dy. CIT v. UMIL Share & Stock Broking Services Ltd. (2018) 171 ITD 713 / 170 DTR 441 / 196 TTJ 91(Kol.)(Trib.)

6.  EXPENSES SPECIFICALLY RELATED TO TAXABLE INCOME IS TO BE EXCLUDED

Courts have held that Rule 8D is not mandatory and should be applied as a last resort. In this regard reference may be made to the case of M/s. Soyuz Trading Co. Ltd. Versus I.T.O., No.- ITA.2530/Kol/2013,  ITAT Kolkata; order dtd July 8, 2016 wherein ITAT held as under-

“We find that the total expenses debited to profit and loss account is ₹ 2,28,25,154/- and out of this, direct expenses of consultancy and professional charges amounting to ₹ 1,96,48,885/- for earning consultancy income i.e taxable income would be automatically out of the purview of computing disallowance u/s 14A of the Act. The remaining common expenses of ₹ 31,76,269/- have to be apportioned between taxable and non-taxable income. We find that the ratio of apportionment adopted by the assessee at 45.5% in the income component is very fair and accordingly direct the Learned AO to disallow ₹ 14,45,202/- being 45.5% of ₹ 31,76,269/- u/s 14A of the Act to meet the ends of justice.

We hold that the Learned AO cannot mechanically apply the provisions of Rule 8D for the purpose of disallowance u/s 14A of the Act. In our opinion, the same could be used only as a last resort only in the event of the AO not able to make a fair substitution of the disallowance figure as contemplated u/s 14A(2) of the Act. In any case, the provisions of the Act would always prevail over the Rules as admittedly the Rules are only subordinate piece of legislation and are meant only to support the Act. Rules could act only as a guiding force to effectively implement the provisions of the Act. If the manner so contemplated in the Act fails, then as a last resort, the AO should go to Rules for making disallowance u/s 14A . Hence we hold that the Learned AO has got sufficient powers to substitute the disallowance figure at ₹ 14,45,202/- in terms of section 14A(2) of the Act itself and hence Rule 8D need not be followed in the facts of the instant case. - Decided partly in favour of assessee.”

Further decisions in this connection are as under-

(a) ITO vs. Narain Prasad Dalmia (ITAT Kolkata). Order dated: 27.1.2014

interest expenditure on loans taken for taxable business purposes has to be excluded.

(b) ACIT vs. Best & Crompton Engineering Ltd (ITAT Chennai), Order dated: 16.07.2013

Interest on loans for specific taxable purposes to be excluded.

(c) JCIT vs. Pilani Investment & Industries Corpn. Ltd (ITAT Kolkata), Order dated: 4.02.2013

Expense specifically relatable to taxable income cannot be disallowed.

(d) REI Agro Ltd vs. DCIT (ITAT Kolkata), Order dated: 19.06.2013

Interest on Loans taken for specific business purposes cannot be included under Rule 8D(2)(ii)

(e) CIT vs Shreno Ltd. (2018) 409 ITR 401/ (2019) 261 Taxman 239 (Guj)(HC)

7. THE DISALLOWANCE CANNOT EXCEED THE EXPENSES CLAIMED.

i) PCIT vs Adani Agro (P) Ltd. (2018) 253 Taxman 507 (Guj) (HC)

8. THE DISALLOWANCE CANNOT EXCEED THE EXEMPTED INCOME.

i) Pragathi Krishna Gramin Bank vs JCIT (2018) 256 Taxman 349 (Karn) (HC)

ii) Gold Seal Engineering Products P. Ltd. vs ACIT (2018) 66 ITR  37 (SN) (Mum) (Trib.)

iii) ITO vs. Accord Capital Markets Ltd., ITA No. 2076/K/2016 dated 16.03.2018 –

            Following –

Daga Global Chemicals (P) Ltd. vs. ACIT, ITA No. 5592/M/12 dated     01.01.2015 ( disallowance limited to the extent of dividend income)

iv) Delhi High Court order in the case of Joint Investments (P) Ltd. vs. CIT 372 ITR 694 (Del) dated 25.02.2015  ( disallowance limited to the extent of dividend Income.

(v) Magic Share Traders Ltd. DCIT (2019) 174 ITD 230 (Ahd) (Trib.)

(vi) PCIT v. State Bank of Patiala (2018) 99 taxmann.com 285 / 259 Taxman 315 (P& H) (HC)
Note:  SLP of revenue is dismissed, PCIT v. State Bank of Patiala (2018) 259 Taxman 314(SC)

9.  Where assessee maintains separate final accounts for personal investments recording investments generating exempt income and has not claimed expenses in personal  accounts –  sec14A/R 8D cannot be applied.

a)   Pawan Kumar Parmeshwarlal, ITA No 530/Mum/2009, dtd 11.01.2011

b)  ACIT, Kolkata vs  Usha Ranjan Sarkar, ITA 2674/K/2013 dtd. 24/05/2017

        10.  NON- APPLICATION IN COMPUTATION OF BOOK PROFIT 

N         (CONSIDERING CLAUSE (f) OF EXPLANATION 1 TO SEC 115JB)

   

 In  Universal Industrial Fund Ltd. (in the matter of Hill top Holdings India Ltd. since   amalgamated) Versus DCIT,  2016 (5) TMI 1259 - ITAT KOLKATA, addition of  expense including the interest disallowed u/s. 14A r.w. R. 8D of the IT Rules in computing the book profit u/s. 115JB fell for consideration. It was held that no addition to the book profit shall be made on account of alleged expenditure incurred to earn exempt income while computing income u/s115JB of the Act. Following Quippo Telecom Infrastructure Ltd. case [2011 (2) TMI 1400 - ITAT DELHI.

However, adverse view has been taken in CIT vs. Goetze (India) Ltd (Delhi High       Court) , Order dated 9.12.2013

 

But Spl Bench at Delhi in ACIT vs Vireet Investments P. Ltd.(2017) 165 ITD 27/ 154   DTR  241/ 188 TTJ 1 (SB)(Delhi)(Trib.) has held that the computation of BP 

( considering  clause (f) of Explanation 1 to section 115JB) is to be made without resorting to the computation as contemplated u/s 14A r.w.r. 8D .  It has considered Delhi High Court in CIT vs. Goetze (India) Ltd but didn’t found to be binding since the said decision was rendered on the basis of conset by the parties to the lis.