2021 (2) TMI 422 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D(2)(ii) - proportionate interest expenditure disallowance - HELD THAT - We notice that it had interest free funds of Rs. 13, 02, 47, 08, 990/- representing share capital followed by Rs. 7, 49, 10, 320/- of reserves and surplus; respectively. Meaning thereby that assessee s non-interest bearing funds exceed more than its exempt income s investment. We quote CIT Vs. Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT and CIT Vs. HDFC Bank Limited 2014 (8) TMI 119 - BOMBAY HIGH COURT that the necessary presumption that flow in such an instance is that of utilisation of non-interest bearing funds only in deriving exempt income. We go by this process reason alone to delete proportionate interest expenditure disallowance. Third limb of administrative expenditure disallowance - CIT-DR fails to dispute that both the lower authorities have gone by the assessee s gross amount of investments than those yielding its exempt income only. We therefore direct the Assessing Officer to restrict the impugned disallowance to the extent of assessee s exempt income yielding investments. The assessee gets part relief to this extent. This first substantive issue is partly decided in assessee s favour. Addition of interest income treated as income from other sources - HELD THAT - We find no merit in assessee s stand in principle since its interest income is not related to any revenue deriving business activity. The same therefore deserves to be treated as income from other sources only going by the CIT(A) s detailed discussion extracted hereinabove in the light of various judicial precedents. The fact also remains that neither of the lower authorities has proceeded on netting formula going by Hon ble apex court s decision in ACG Associated Capsules Pvt. Ltd. 2012 (2) TMI 101 - SUPREME COURT . We therefore direct the Assessing Officer to allow netting benefit qua the impugned addition vis- -vis the corresponding expenditure incurred at the taxpayer s behest in above terms. Set-off of its impugned interest income against business losses - CIT(A) appears to have denied the assessee the impugned intra head set-off of the two heads of income it is not clear as to under which clause of Section 72 was invoked to decline this relief. We thus are of the opinion that this issue of set-off of interest income against business loss deserves to be considered afresh as per law. We restore this issue back to the Assessing Officer therefore.

Summary

Issues Involved:
1. Correctness of Section 14A disallowance and Section 115JB MAT adjustment.
2. Treatment of interest income as 'income from other sources' and set-off against business losses.

Detailed Analysis:

Issue 1: Correctness of Section 14A Disallowance and Section 115JB MAT Adjustment

Section 14A Disallowance:
The primary issue was the correctness of the disallowance of Rs. 3,60,23,673 under Section 14A of the Income Tax Act, 1961. The Assessing Officer (AO) had invoked Section 14A read with Rule 8D(2)(ii) to arrive at a proportionate interest expenditure disallowance of Rs. 3,37,63,307. The AO's assessment noted that the assessee had made investments amounting to Rs. 17,41,46,612, yielding exempt income from dividends of Rs. 7,91,07,443. However, the assessee had interest-free funds exceeding these investments, with share capital of Rs. 13,02,47,08,990 and reserves and surplus of Rs. 7,49,10,320. Citing CIT Vs. Reliance Utilities & Power Ltd. and CIT Vs. HDFC Bank Limited, the tribunal presumed the utilization of non-interest bearing funds for deriving exempt income, leading to the deletion of the proportionate interest expenditure disallowance of Rs. 3,37,63,307.

Administrative Expenditure Disallowance:
The tribunal also addressed the administrative expenditure disallowance of Rs. 22,60,366. It directed the AO to restrict this disallowance to the extent of investments yielding exempt income, granting partial relief to the assessee.

Section 115JB MAT Adjustment:
Regarding the MAT inclusion of Section 14A read with Rule 8D disallowance, the tribunal referenced the case law ACIT Vs. Vireet Investment P. Ltd., which had ruled in favor of the assessee. Consequently, the assessee received relief on this limited aspect.

Issue 2: Treatment of Interest Income as 'Income from Other Sources' and Set-Off Against Business Losses

Interest Income as 'Income from Other Sources':
The second issue concerned the addition of Rs. 26,45,20,127 as 'income from other sources.' The AO had treated the bank interest on fixed deposits as such, based on the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilizers Limited Vs. CIT. The CIT(A) upheld this, noting that the interest income was not related to any revenue-generating business activity and thus should be assessed under 'income from other sources.'

Set-Off Against Business Losses:
The assessee argued that even if the interest income was assessable under 'other sources,' it should be set off against business losses. The CIT(A) denied this set-off, citing Section 72. The tribunal found that the CIT(A) had not specifically addressed the set-off issue and remanded it back to the AO for reconsideration under the appropriate clause of Section 72.

Alternative Plea for Work in Progress:
The assessee's alternate plea to increase the work in progress upon addition of the interest income was also considered. The tribunal found no merit in this ground but instructed the AO to ensure no double deduction/addition in the consequential proceedings.

Conclusion:
The assessee's appeal was partly allowed. The tribunal deleted the proportionate interest expenditure disallowance under Section 14A, granted partial relief on administrative expenditure disallowance, and remanded the set-off of interest income against business losses back to the AO for reconsideration. The MAT adjustment issue was resolved in favor of the assessee based on precedent case law.