Interest Expenditure of Tonnage Tax Business has to be Excluded while Computing Disallowance under Rule 8D (2): ITAT Directs to Delete Disallowance [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) directed the deletion of disallowance as it ruled that interest expenditure related to Tonnage Tax Business must be excluded when computing disallowance under Rule 8D(2) of the Income Rule, 1962.

The actual administrative expenditure incurred by the Treasury Division, including employee costs and other relatable expenses aggregating to Rs.22,54,612/-, was allocated by the assessee between the taxable and non-taxable gross receipts of the Treasury Division and the disallowance of Rs.9,93,218/- under Rule 8D(2)(1) was computed by the assessee.

The interest payable on the borrowings utilized for the investment in equity and preference shares of Greatship (India) Ltd. of Rs.1,46,69,996/- as reduced by the amount disallowed under Section 43B of the Act of Rs 75,26,834/-, has also been considered as direct expenditure when computing the disallowance under Rule 8D(2)(i).

The assessee has  reduced the net interest expenditure on borrowings which were fully utilized for investment in growth schemes of Mutual Fund units aggregating to Rs.45,11,45,621/-, whereby the net interest expenditure attributable to the earning of exempt dividend income was Rs. 1,34,16,234/-. The disallowance of such indirect interest expenditure has therefore been computed at Rs.36,63,224/- in accordance with the formula prescribed under Rule 8D(2)(ii).

 AO did not accept the assessee’s computation of disallowance and proceeded to recompute the disallowance under Section 14A read with Rule 8D. First of all, he accepted the amount liable for disallowance under clause 2(i) of Rule 8D at Rs.81, 36, 380/- as computed by the assessee. However, the  AO has considered the total interest expenditure of the tonnage and non-tonnage business of the assessee of Rs.145,25,78,710/- as reduced by the amount disallowed under Section 43B of the Act of Rs. 4,30,66,574/-.

The DRP directed the AO to consider the aggregate interest expenditure incurred by the assessee pertaining to the tonnage and non-tonnage activities for computing the amount liable for disallowance under clause 2(ii) of Rule 8D.

However, in case the total disallowance so computed exceeds the total interest expenditure claimed against the non- tonnage income, the disallowance is to be restricted to the total expenditure by  way of interest claimed against the non-tonnage income only since the disallowance computed considering the total interest expenditure exceeds the total interest expenditure claimed against the non-tonnage income, the interest expenditure liable for disallowance has been restricted to the total expenditure by way of interest claimed against the non-tonnage income only, whereby the  AO has computed the disallowance under Rule 8D(2)(ii) at Rs 1,34,16,234/-.

The bench found that it is an undisputed fact that the assessee company was engaged in the business of shipping and treasury and financial operations. In so far as shipping business was concerned, it has preferred to be taxed under tonnage scheme.

The two member bench of the tribunal comprising S.Rifafur Rahman ( Accountant member ) and Amit Shukla ( Judicial member)  found that this issue was covered in favour of the assessee by the Tribunal in assessee’s own case for A.Y.2008-09 wherein, it has been held that interest expenditure pertaining to tonnage tax business has to be excluded while computing disallowance under Rule 8D(2). The said decision has been followed in assessee’s own case for A.Y.2009-10, 2010-11, 2012-13 and 2014-15.Accordingly, disallowance made by the AO under Rule 8D(2) of the Income Tax Act was deleted.

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