In a recent case, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that investment in gold and foreign companies should be excluded but while computing the disallowance under section 14A r.w.r.8D(2)(iii) had included the same and upheld the order of the Commissioner of Income Tax(Appeals).
M/s Macrotech Developers Limited, the respondent assessee is engaged in the business of real estate, construction and development. For the year under consideration, the assessee filed the return of income declaring total income of Rs.62,08,53,170/- and book profit under section 115JB of Rs.45,42,04,660/-.
Subsequently, the return was revised on 29/03/2018 declaring Nil income after setting off all brought forward losses of Rs.21,37,37,597/-. The case was selected for scrutiny under CASS and the notices were duly served on the assessee. The revised return is filed due to the merger of M/s Suryakripa Constructions Ltd with effect from 01.04.2015 vide order dated 24.04.2017 of the National Company Law Tribunal (NCLT).
The Assessing Officer noticed that the assessee has claimed a dividend income of Rs.11,91,27,112/- as exempt income. The assessee submitted that they have own funds more than investments earning exempt income and, therefore, no disallowance under section 14A of the Income Tax Act, 1961 can be made in its case.
The Assessing Officer relied on the decision in the Maxopp Investments Pvt Ltd vs CIT to hold that all investments including the purchase of shares for gaining control over the investing company to be considered for making disallowance under section 14A of the Income Tax Act and therefore held that the total current and non-current investments are more than the shareholders funds as of 31.03.2015 as well as 31.03.2016.
The Assessing Officer though had accepted that investment in gold and in foreign companies income from which is taxable should be excluded but while computing the disallowance under section 14A r.w.r.8D(2)(iii) had included the same. Thus the Assessing Officer proceeded to compute the disallowance by applying rules 8D(2)(ii) and 8D(2)(iii) to the tune of Rs.12,88,29,482/-. The Assessing Officer while computing the book profits under section 115JB of the Act also considered disallowance under section 14A of the Act.
The CIT(A), concerning the disallowance under rule 8D(2)(ii) noted that the assessing officer himself has accepted that investment in gold and foreign companies should be excluded and if the same is excluded the CIT(A) held that the assessee is having sufficient own funds, which are more than investments related to exempt income and accordingly deleted the addition.
The CIT(A) directed the Assessing Officer to re-compute the disallowance. In so far as the disallowance being considered for computing book profit under section 115JB, the CIT(A) held that the same could not be made following various judicial precedence.
The appellant submitted the below workings to submit that the own funds of the assessee are more than the investments made in tax-free income-earning investments. The submitted that no disallowance under section 14A r.w.r. 8D(2)(ii) is warranted. Regarding the disallowance under section 14A r.w.r. 8D(2)(iii) the Ld.AR submitted that the Assessing Officer had considered the entire investments to compute disallowance whereas he should have considered only the tax-free income-earning investments.
A two-member bench comprising Shri Kuldip Singh (Judicial Member) and Ms Padmavathy S (Accountant Member) observed that the disallowance under section 14 A of the act added by the assessing officer while computing the book profit under section 115JB of the act.
The Tribunal directed the assessing officer not to make any adjustment in the book profit concerning disallowance under section 14 A of the act and allowed the appeal of the assessee.
Respectfully following the decision of the co-ordinate bench decision, the ITAT dismissed the appeal of the revenue. Shri Niraj Sheth appeared for the appellant and Shri Samuel Pitta appeared for the respondent.
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