2018 (5) TMI 243 - AT - Income Tax

Disallowance u/s 14A - Held that - As relying on Maxopp Investment Ltd 2018 (3) TMI 805 - SUPREME COURT OF INDIA we uphold the finding of the Ld. CIT(A) in considering the investment in shares of M/s Gwalior steels private limited for working out average value of investment required for rule 8D(2)(ii) and 8D(2)(iii) of the Rules. Whether the interest amount considered by AO for proportionate disallowance u/r 8D(2)(ii) was corresponding to money borrowed and utilized towards investment in shares - Held that - the onus is on the assessee to establish that funds utilized in investment in shares yielding exempt income are not mixed funds and out of its own fund only. The assessee is required to prepare fund flow statement and demonstrate that investment in shares has been made only out of free reserves available. In view of the aforesaid discussion we feel it appropriate to restore this issue to the file of the Assessing Officer for deciding a fresh after verification as stated above and in accordance with law after providing adequate opportunity of being heard to the assessee. Thus this ground of appeal is partly allowed for statistical purposes. Taxability of perquisite in the hands of the Director of the company for being allowed possession/use of the assessee s property at rates lower than the market value - Held that - CIT(A) has not issued any direction to make addition in the case of directors and only made an observation for need to examine the issue in the hands of the Director. Certainly the Assessing Officer of the directors of the company will have to examine the issue in accordance with law and for which the affected third-parties will get due opportunity of being heard. The Ld. CIT(A) has though allowed relief to the assessee on the issue in dispute but has not directed the Assessing Officer of the directors of the assessee company to tax the said amount in their hands and observed a need to examine issue in their hands. Since the Ld. CIT(A) has not concluded on taxability on the issue in hands of the directors or issued directions under-section 150(1) of the Act it is merely an observation and thus in our view Ld. CIT(A) has not exceeded his authority. - Decided against assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961.
2. Directions issued by the Commissioner of Income-tax (Appeals) [CIT(A)] regarding the taxability of perquisite in the hands of the director.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act, 1961
The first issue pertains to the disallowance of Rs. 4,82,238/- under Section 14A of the Income-tax Act, 1961. The assessee had disallowed Rs. 74,017/- suo moto. The Assessing Officer (AO) was not satisfied with the assessee's computation and invoked Rule 8D of the Income-tax Rules, 1962, resulting in a disallowance of Rs. 3,87,52,800/-, which was later rectified to Rs. 4,82,238/-.

Key Points:
- The AO computed the disallowance using Rule 8D(2)(ii) and Rule 8D(2)(iii), leading to an additional disallowance of Rs. 4,08,221/- after subtracting the assessee's disallowance.
- The assessee argued that the investment in M/s Gwalior Steels Private Limited was a strategic investment and should not be considered for Rule 8D purposes. Additionally, the assessee contended that the interest expenditure was for business purposes and not for investments.
- The CIT(A) upheld the AO's disallowance, stating that the onus was on the assessee to prove that borrowed funds were not used for investments and that strategic investments should still be considered under Rule 8D.
- The Tribunal referred to the Supreme Court's decision in Maxopp Investment Ltd., which held that strategic investments should be included for disallowance under Rule 8D.

Tribunal's Decision:
- The Tribunal upheld the CIT(A)'s decision regarding the inclusion of strategic investments.
- However, the Tribunal remanded the issue of interest expenditure to the AO for verification, directing the assessee to demonstrate that the investments were made from free reserves and not borrowed funds.

2. Directions Issued by the CIT(A) Regarding Taxability of Perquisite in the Hands of the Director
The second issue concerns the CIT(A)'s directions to the AO to examine the taxability of perquisites in the hands of the director for using the assessee's property at below-market rates.

Key Points:
- The CIT(A) deleted the addition made by the AO but directed the AO to examine the taxability of the perquisite in the director's hands.
- The assessee argued that the CIT(A) exceeded his jurisdiction by issuing directions for another case not before him.
- The Tribunal noted that the CIT(A) has co-extensive powers with the AO but cannot issue directions for third-party assessments.

Tribunal's Decision:
- The Tribunal held that the CIT(A) did not issue a direction to make an addition but merely observed the need to examine the issue in the director's hands.
- The Tribunal concluded that the CIT(A) did not exceed his authority and dismissed the assessee's ground.

Conclusion:
The appeal was partly allowed for statistical purposes. The Tribunal upheld the CIT(A)'s decision on the inclusion of strategic investments for disallowance under Section 14A but remanded the issue of interest expenditure for verification. The Tribunal also dismissed the assessee's challenge regarding the CIT(A)'s directions on the taxability of perquisites in the hands of the director.