The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has partly allowed the appeal filed by ACME Cleantech Solutions Private Limited for AY 2012-13 and dismissed the Revenue’s cross-appeal, holding that disallowance under Section 14A must be computed only with reference to investments yielding exempt income and that notional interest cannot be taxed in the absence of actual accrual.

A Bench comprising S. Rifaur Rahman and Vimal Kumar set aside parts of the assessment order passed against the assessee company, which is engaged in the telecom infrastructure and cleantech solutions business.

During the scrutiny proceedings, the Assessing Officer made multiple additions, including disallowance of Rs 53.33 lakh under Section 14A read with Rule 8D, notional interest addition of Rs 37.88 lakh on advances given to related parties, and transfer pricing adjustments relating to loans advanced to associated enterprises and sales transactions.

On the issue of Section 14A disallowance, the assessee argued that no expenditure had been incurred for earning exempt dividend income and that the Assessing Officer had invoked Rule 8D without recording the mandatory satisfaction under Section 14A(2). “The AO failed to record satisfaction as mandated u/s 14A(2) of the Act before invoking Rule 8D of the Rules.”

The Tribunal noted that a similar issue had already been decided in the assessee’s own case for earlier assessment years. Following the earlier coordinate bench ruling and relying upon the decisions in the ACB India Limited Judgement and Vireet Investment Special Bench Ruling, the Bench directed the AO to recompute the disallowance by considering only those investments which had actually yielded exempt income during the year.

The Bench accepted the contention and observed that there was no material to show any intention to lend money for earning interest income. “It is well settled that notional income is not taxable without actual accrual/receipts.”

With regard to transfer pricing adjustment on loans advanced to subsidiaries, the Tribunal held that since the loans were repayable in US Dollars, benchmarking had to be done using LIBOR-based rates instead of domestic SBI PLR rates adopted by the TPO. Relying on the decision of the Cotton Naturals judgement, the Tribunal directed the AO/TPO to apply LIBOR along with the applicable mark-up while determining arm’s length interest.

On the adjustment relating to outstanding receivables from associated enterprises, the Tribunal upheld the deletion granted by the CIT(A). It observed that the assessee had already factored the working capital impact into its pricing and profit margins. “When the assessee has factored the impact of receivable on working capital, no further adjustment is required on the outstanding receivables.”

The Tribunal further upheld the exclusion of Avantel Ltd., Goldstone Infratech Ltd. and Azure Power India Pvt. Ltd. from the final list of comparables after finding them functionally dissimilar to the assessee’s business profile.

The Revenue’s challenge against the deletion of the Section 14A adjustment while computing book profits under Section 115JB was also rejected. The Tribunal held that there was no specific provision permitting the importation of Section 14A disallowance into the MAT computation. Thus, the assessee’s appeal was partly allowed, while the Revenue’s appeal was dismissed.

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