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2023 (12) TMI 1442 - AT - Income TaxDisallowance of expenses relatable to exempt income by invoking the provisions of Section 14A r/w Rule 8D - as argued disallowance u/s. 14A should be restricted only on the investments which give rise to exempt income i.e. dividend income - HELD THAT - We find that this issue is now squarely covered by almost by all Hon ble High Courts in unanimity and the Tribunal is consistently taking view that disallowance in relation to expenditure incurred on exempt income should be restricted only on the investments which give rise to exempt income. A.O will see each portfolio and will examine whether it gives exempt income or not and that investment only will be considered for the purpose of making disallowance under Rule 8D(2)(iii) of the Rules. Accordingly we direct the A.O and hence this issue of assessee s appeal is allowed for statistical purposes. Depreciation of computer software - @ 20% holding that they are intangible assets OR @ 60% - HELD THAT - We noted that this issue is squarely covered in the case of CIT vs. Computer Age Management Services 2019 (7) TMI 1153 - MADRAS HIGH COURT and the assessee even now on computer software licenses is eligible for claim of depreciation at 60%. Fresh claim of deduction on long term capital loss inadvertently not claimed in the return of income and also claim of deduction on account of compounding fee paid to Reserve Bank of India (RBI) - HELD THAT - We noted that the assessee has tried to give basic facts in relation to the claim of long term capital loss on reduction of mutual funds and claimed deduction of compounding fee paid to RBI under Forum Exchange Management Act which needs to be verified in detail and to be examined. Hence these two issues are remitted back to the file of A.O for adjudication at his level. Set-off of losses incurred by the units claimed deduction u/s.10AA against the taxable income of other units - HELD THAT - Since this issue is squarely covered by the decision of Hon ble Madras High Court in assessee s own case in allowing losses incurred by the units u/s. 10AA of the Act the profits and set-off of losses against other taxable profits of the business made by the assessee we respectfully following the it and the decision of Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT answer the appeals and the questions arising therein as formulated at the outset of this order by holding that though Section 10A as amended is a provision for deduction the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. Disallowance made u/s 14A under the provisions of Section 115JB while computing the book profit - HELD THAT - We noted that this issue is also squarely covered in the case of ACIT vs. Vireet Investments (P.) Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein it is held that disallowance u/s. 14A of the Act r/w Rule 8D of the Rules cannot be added back while computing the book profit u/s. 115JB of the Act. MAT - allowability of lease equalization charges under the provisions of Section 115JB - HELD THAT - CIT(A) has rightly deleted the addition and held that it is ascertained liability and cannot be added back in book profit u/s. 115JB of the Act. We uphold the order of the CIT(A) and this issue of Revenue s appeal is dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in the appeals before the Appellate Tribunal (ITAT) Chennai are:
2. ISSUE-WISE DETAILED ANALYSIS Disallowance under Section 14A read with Rule 8D - Scope of Disallowance Legal Framework and Precedents: Section 14A of the Act disallows expenditure incurred in relation to income that does not form part of total income, i.e., exempt income. Rule 8D prescribes the method of computing such disallowance. The principle is to disallow expenses attributable to earning exempt income. Court's Interpretation and Reasoning: The CIT(A) confirmed the Assessing Officer's (A.O.) disallowance but allowed the disallowance to be adjusted against business income eligible for deduction under Section 10AA, based on a prior ITAT decision. The assessee contended that disallowance should be restricted only to investments yielding exempt dividend income under Section 10(38). The Tribunal noted that this issue is settled by various High Courts and consistent Tribunal decisions holding that disallowance under Section 14A must be restricted to investments that yield exempt income. The A.O. must examine each investment portfolio to identify whether it yields exempt income and disallow expenses only in respect of such investments. Application of Law to Facts: The Tribunal directed the A.O. to restrict disallowance only to investments generating exempt income and allowed the assessee's appeal on this issue for statistical purposes. Treatment of Competing Arguments: The Revenue could not controvert the legal or factual basis of the assessee's contention. The Tribunal relied on binding precedents and consistent judicial views. Conclusion: Disallowance under Section 14A must be confined to expenses relatable only to investments yielding exempt income. Depreciation on Computer Software Licenses Legal Framework and Precedents: Depreciation rates for assets are prescribed in the Income Tax Rules. Computer software is treated as an intangible asset. The question was whether software licenses qualify for depreciation at 60% (as computers) or at 20% (as intangible assets). Court's Interpretation and Reasoning: The A.O. and CIT(A) restricted depreciation to 25%, treating software licenses as intangible assets under Part B of Appendix I. The assessee relied on the Madras High Court decision in CIT vs. Computer Age Management Services, which held that customized software licenses used in business qualify as computers under Entry 5 of Part A of Appendix I, allowing depreciation at 60%. The Tribunal followed this binding High Court precedent, noting the software licenses were customized and integral to business operations. Application of Law to Facts: The assessee's software licenses were akin to computer assets and eligible for 60% depreciation. Treatment of Competing Arguments: The Revenue's argument that software licenses are intangible assets was rejected based on the specific entry in the Rules and judicial precedent. Conclusion: Depreciation on computer software licenses is allowable at 60% as per the Madras High Court ruling. Fresh Claims for Long-Term Capital Loss and Deduction of Compounding Fee Paid to RBI Legal Framework and Precedents: Generally, claims not made in the original return of income are not entertained unless allowed under specific provisions. Deduction for compounding fees under FEMA is debatable, depending on whether such payments are penalties or compensatory in nature. Court's Interpretation and Reasoning: The assessee claimed long-term capital loss on redemption of preference shares and deduction for compounding fee paid to RBI, both not claimed originally. CIT(A) rejected these claims on merit and for non-maintainability due to non-claim in the return. The Tribunal observed that these claims require detailed examination and verification of facts and evidence. Application of Law to Facts: The Tribunal remitted these issues to the A.O. for fresh adjudication with opportunity to the assessee to file evidence. Treatment of Competing Arguments: The Tribunal did not decide on merits but emphasized procedural fairness and proper adjudication. Conclusion: Claims for long-term capital loss and compounding fee deduction are remitted for fresh adjudication by the A.O. Set-off of Losses of Units Eligible for Deduction under Section 10AA Legal Framework and Precedents: Section 10AA provides deduction for profits of eligible units in Special Economic Zones (SEZ). The question is whether losses of such units can be set off against profits of other units or business segments. The Madras High Court and Supreme Court have held that deductions under Section 10A/10AA are to be computed at the level of the eligible undertaking independently, prior to aggregation with other income under Chapter VI. Court's Interpretation and Reasoning: The A.O. disallowed set-off of losses of eligible units against profits of other units, relying on Karnataka High Court and ITAT decisions. CIT(A) allowed the set-off relying on binding Madras High Court decisions in the assessee's own case and the Supreme Court decision in CIT vs. Yokogawa India Ltd., which clarified that deductions under Section 10A are to be allowed prior to set-off under Chapter VI provisions. Application of Law to Facts: The Tribunal followed the Madras High Court and Supreme Court rulings, holding that set-off of losses of eligible units against other business profits is not permissible and the losses must be set off within the eligible units. Treatment of Competing Arguments: The Tribunal rejected the Revenue's reliance on contrary High Court and ITAT decisions, giving primacy to the jurisdictional High Court and Supreme Court rulings. Conclusion: Losses of units eligible for deduction under Section 10AA cannot be set off against profits of other units; the set-off must be confined to eligible units. Disallowance under Section 14A for Book Profit Computation under Section 115JB Legal Framework and Precedents: Section 115JB provides for Minimum Alternate Tax (MAT) on book profits. The issue is whether disallowance under Section 14A can be added back to book profits while computing MAT. Court's Interpretation and Reasoning: The Tribunal relied on the Special Bench decision in ACIT vs. Vireet Investments (P.) Ltd., which held that disallowance under Section 14A read with Rule 8D is not to be added back for computing book profits under Section 115JB. The Tribunal also referred to decisions of Delhi High Court, Karnataka High Court, and ITAT Chennai supporting this view. Application of Law to Facts: The CIT(A) deleted the addition of Section 14A disallowance to book profits, and the Tribunal upheld this deletion. Treatment of Competing Arguments: The Revenue could not produce any contrary binding decision. Conclusion: Disallowance under Section 14A read with Rule 8D cannot be added back while computing book profits under Section 115JB. Allowability of Lease Equalization Charges under Section 115JB Legal Framework and Precedents: Lease equalization charges arise from accounting treatment of lease rentals under the principle of substance over form. The question is whether such charges are ascertained liabilities deductible for MAT purposes or unascertained liabilities to be added back. Court's Interpretation and Reasoning: The A.O. treated lease equalization charges as unascertained liabilities and added them back. CIT(A) deleted the addition relying on the Supreme Court decisions in CIT vs. Yokogawa India Ltd. and CIT vs. Virtual Soft Systems Ltd., which upheld the accounting principle of lease equalization as valid and recognized the charges as ascertained liabilities. The Supreme Court emphasized that bifurcation of lease rentals into principal and interest components is a valid accounting method capturing real income, and there is no bar in the IT Act against such bifurcation. The lease equalization charge is essential to reflect true income and cannot be treated as a mere notional provision. Application of Law to Facts: The Tribunal upheld the CIT(A)'s deletion of the addition, holding lease equalization charges as allowable deductions for book profit computation under Section 115JB. Treatment of Competing Arguments: The Revenue's contention that the entire lease rental should be taxed was rejected based on the principle of substance over form and binding Supreme Court rulings. Conclusion: Lease equalization charges are ascertained liabilities and allowable deductions under Section 115JB; they cannot be added back to book profits. 3. SIGNIFICANT HOLDINGS "The Tribunal is consistently taking view that disallowance in relation to expenditure incurred on exempt income should be restricted only on the investments, which give rise to exempt income. The A.O will see each portfolio and will examine whether it gives exempt income or not and that investment only will be considered for the purpose of making disallowance under Rule 8D(2)(iii) of the Rules." "The Hon'ble Madras High Court held that computer software licenses are eligible for depreciation at 60% under Entry 5 of Part A of New Appendix I, as computers including computer software, and not under Part B which deals with intangible assets." "Though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. ... The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee." "Disallowance u/s. 14A of the Act r/w Rule 8D of the Rules cannot be added back while computing the book profit u/s. 115JB of the Act." "The method of accounting followed, as derived from the ICAI's Guidance Note, is a valid method of capturing real income based on the substance of finance lease transaction. The rule of substance over form is a fundamental principle of accounting ... lease equalization is an essential step in the accounting process to ensure that real income from the transaction in the form of revenue receipts only is captured for the purposes of income tax." Final determinations:
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