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Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
Before: SHRI ANIL CHATURVEDI & MS. ASTHA CHANDRA
INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “C”: NEW DELHI BEFORE SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER AND MS. ASTHA CHANDRA, JUDICIAL MEMBER ITA No. 2013/Del/2017 Asstt. Year: 2011-12 ACIT, Vs. India Bulls Power Ltd. (Now known Circle-21(1), as Rattan India Power Ltd.) New Delhi. 5th Floor, Tower-B, Worldmark-1, Aerocity, New Delhi- 110 037 PAN AALCS2063D (Appellant) (Respondent)
Assessee by: Shri Ajay Wadhwa, Advocate Ms. Ragini Handa, CA Department by : Shri Anuj Garg, Sr. DR Shri Abhishek Kumar, Sr. DR Date of Hearing 29.11.2022 Date of 05.01.2023 pronouncement O R D E R PER ASTHA CHANDRA, JM
The appeal by the Revenue is directed against the order dated 20.01.2017 of the Ld. Commissioner of Income Tax (Appeals) –4, New Delhi (“CIT(A)”) pertaining to assessment year (“AY”) 2011-12.
The assessee is a company engaged in the business of establishing, commissioning, setting up, operating and maintaining power generating stations. For AY 2011-12, the assessee e-filed its return on 30.09.2011 declaring income at Rs. 2,36,13,611/-. The Ld. Assessing Officer (“AO”) found that the assessee earned dividend on units of mutual funds / shares of Rs. 7,62,44,036/- which it claimed as exempt under section 10 of the Income Tax Act, 1961 (the “Act”) and made suo-moto disallowance of Rs. 8,89,763/- under section 14A of the Act. The assessee’s working of disallowance under section 14A was not acceptable to the Ld. AO. After
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requiring the assessee to show cause why provisions of section 14A r.w. Rule 8D be not applied and considering the response of the assessee, the Ld. AO computed the expenses attributable to exempt income as per Rule 8D of the Income Tax Rules, 1962 at Rs. 7,76,51,949/- as under:-
Working of expenses attributable to exempt income as per Rule 8D of the Income-tax Rules 1962:
1 Expenses directly attributable to exempt income Rs. Nil II. Formula : A X B / C Rs.39,04,316 A: Expenses not directly related to exempt income (interest) i.e. 12423330 B- Average value of investment on the opening and closing day of the previous year i.e. (23766908240 + 5732145000)/2 = 14749526620 C- Average value of assets on the opening and closing day of the previous year i.e. (39407391512 + 54457057230 )/2 = 46932224371 12423330 X 14749526620 46932224371 = 3904316 III. 0.5% of average value of investment on the opening Rs.7,37,47,633 and closing day of the previous year i.e. 0.5% of B = 73747633 Aggregate of I + II + III Rs.7,76,51,949 *Investments exclude foreign investments & mutual funds which do not generate dividend income.
2.1 The Ld. AO deducted from Rs. 7,76,51,949/- the suo-moto disallowance of Rs. 8,89,763/- and made disallowance of Rs. 7,67,62,186/- under section 14A of the Act. He completed the assessment under section 143(3) of the Act on 23.03.2014 accordingly.
2.2 Subsequently, the Ld. AO passed rectificatory order under section 154 of the Act on 13.06.2014 and recalculated the disallowance under section 14A at Rs. 2,23,87,932/- as under:-
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Working of expenses attributable to exempt income as per Rule 8D of the Income-tax Rules 1962 1 Expenses directly attributable to exempt income Rs. Nil II. Formula : A X B / C Rs.11,70,410 A: Expenses not directly related to exempt income (interest) i.e. 12423330 B- Average value of investment on the opening and closing day of the previous year i.e. (3110775000 + 5732145000)/2 = 4421460000 C- Average value of assets on the opening and closing day of the previous year i.e. (39407391512 + 54457057230)/2 = 46932224371 12423330 X 4421460000 46932224371 = 1170395 III. 0 5% of average value of investment on the Rs.2,21,07,300 opening and closing day of the previous year i.e. 0.5% of B = 22107300 Aggregate of I + II + III Rs.2,32,77,695 Less: Suo-Moto Disallowance Rs. 8,89,763 Total Disallowance Rs. 2,23,87,932 *Investments exclude foreign investments & mutual funds which do not generate dividend income.
Aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A). Apart from making submissions, the assessee filed revised working of disallowance of Rs. 23,75,000/- under section 14A r.w. Rule 8D which is as under:- Particulars FY2010-2011 FY2009-2010 Total Investment (A) 16,186,211,620 13,438,841,620 Less: investment not consider for 14A Investment in subsidiaries company 8,900,855,552 7,209,485,552 Investment in preference shares 210,000,000 210,000,000 Investment in Fixed maturity Mutual Fund (taxable in capital gain) 6,125,356,068 6,019,356,068 Total(B) 15,236,211,620 13,438,841,620 950,000,000 Balance (A-B) Investment from where the exempt income received 950,000,000 Average investment 475,000,000 .5% of average investment 2,375,000 Disallowance u/s 14A 2,375,000 Already disallowed 889,763 Balance to be disallowed 1,485,237
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3.1 Accepting the above revised working of disallowance under section 14A r.w. Rule 8D filed by the assessee, the Ld. CIT(A) directed the Ld. AO to make disallowance of Rs. 14,85,237/- which is the remainder of Rs. 23,75,000/- minus Rs. 8,89,763/- original suo-moto disallowance made by the assessee with the following observations:-
“6. I have carefully considered the facts of the case and the submissions made by the counsel of the appellant, it emerges that the appellant of its own made the disallowance of administrative expenses of Rs. 8,89,763/- u/s 14A in the computation of income. It is evident from the submissions filed by the appellant that the investments have been made in the subsidiary companies which are in the nature of strategic investments. The Hon'ble jurisdictional High Court in the case of M/s Cheminvest Limited vs. CIT held as under: "15. Turning to the central question that arises for consideration, the Court finds that the complete answer is provided by the decision of this Court in CIT v. Holcim India (P) Ltd. (decision dated 5th September 2014 in ITA No. 486/2014). In that case a similar question arose, viz., whether the ITAT was justified in deleting the disallowance under Section 14A of the Act when no dividend income had been earned by the Assessee in the relevant AY? The Court referred to the decision of this Court in Maxopp Investment Ltd. (supra) and to the decision of the Special Bench of the ITAT in this very case i.e. Cheminvest Ltd. v. CIT (2009) 317 ITR 86. The Court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in Commissioner of Income Tax, Faridabad v. M/s. Lakhani Marketing Ind. (decision dated 2nd April 2014 of the High Court of Punjab and Haryana in ITA No. 970/2008) which in turn referred to two earlier decisions of the same Court in CIT v. Hero Cycles Limited [2010] 323 ITR 518 and CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204. The second was of the Gujarat High Court in Commissioner of Income Tax-1 v. Corrtech Energy (P) Ltd. [2014] 223 Taxmann 130 (Guj.) and the third of the Allahabad High Court in Commissioner of Income Tax, Kanpur v. Shivam Motors (P) Ltd. (decision dated 5th May 2014 in ITA No. 88/2014). These three decisions reiterated the position that when an Assessee had not earned any taxable income in the relevant AY in question “corresponding expenditure could not be worked out for disallowance.” In CIT v. Holcim India (P) Ltd. (supra), the Court further explained as under: "15. Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private
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placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.” On facts, it was noticed in CIT v. Holcim India (P) Ltd. (supra) that the Revenue had accepted the genuineness of the expenditure incurred by the appellant in that case and that the expenditure had been incurred to protect investment made. In the present case, the factual position that has not been disputed is that investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the appellant is in relation to such investments which give rise to income not forming part of total income. In light of the clear exposition of the law in Holcim India (P) Ltd. supra) and in view of the admitted factual position in this case that the appellant has made strategic investment in shares of Max India Ltd, that no exempted income was earned by the appellant, in the relevant AY and also that the genuineness of the expenditure incurred by the appellant is not in doubt, I am inclined to agree with the appellant. The appellant has made investment m subsidiary companies for strategic purpose and not received any dividend income in this assessment year. Based on revised working of disallowance u/s 14A read with Rule 8D filed by the assessee, I restrict the disallowance u/s 14A read with Rule 8D to Rs. 23,75,000/- out of which an amount of Rs. 8,89,763/- has been already disallowed by the assessee, hence I direct to Assessing Officer to make the disallowance of Rs. 14,85,237/-.”
The Revenue is aggrieved and is before the Tribunal with the following ground of appeal:-
“The Ld. CIT(A) has erred in restricting the disallowance under section 14A read with Rule 8D from Rs. 2,23,87,932/- to Rs. 23,75,000/-.”
The Ld. DR invited our attention to para 6 of the Ld. CIT(A)’s order where the Ld. CIT(A) stated that the assessee has made investments in subsidiary companies for strategic purposes and has not received any dividend income in this assessment year. The Ld. DR submitted that in Maxopp Investment Ltd. vs. CIT (2018) 91 taxmann.com 154(SC) it has been held that dominant purpose for which investment into shares is made by the assessee may not be relevant as section 14A applies irrespective of whether shares are held to gain control or as stock in trade. The Ld. DR further submitted that the words “shall not” in Rule 8D(2) refer to those investments
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which did not yield any exempt income during the year but if income would have been yielded, it would have remained exempt. Therefore, even if the assessee did not receive any dividend income in this year on investment in subsidiary companies for strategic purpose, it is of no consequence in so far as applicability of Rule 8D is concerned.
The Ld. AR, on the other hand, supported the order of the Ld. CIT(A). Inviting our attention to Ld. AO’s observation in para 5.7(v) on page 4 of his order that evidence to support that investments have been made from assessee’s own funds were not submitted, the Ld. AR pointed out that financial statements for the AY under consideration along with two earlier years were submitted to the Ld. AO which conclusively proved that investments were made from own funds available with the assessee. The Ld. AR also contended that investments made in prior year cannot be considered for disallowance under section 14A r.w. Rule 8D. Moreover, in earlier two years, the assessee did not have any borrowings and the borrowings made of Rs. 572.24 crores in the year of account have been used for assessee’s business purposes in Amravati Power Plant – Phase 1 which fact finds mention in Notes to Accounts on page 26 of the audited financial statement. The Ld. AR also submitted that the issue is covered by the decision of the Tribunal in its own case for AY 2010-11. He emphasized that only such investments that yielded exempt income during the year have to be considered for computing the disallowance under clause(ii) and clause (iii) of Rule 8D of the Income Tax Rules, 1962 which has been upheld by the Hon’ble Delhi High Court in ACB India Ltd. vs. ACIT (2015) 374 ITR 108 (Delhi).
We have given our careful thought to the submission of the parties and perused the material available in the records. The Ld. AO in his order dated 25.03.2014 computed disallowance of Rs. 7,76,51,949/- and after considering suo-moto disallowance of Rs. 8,89,763/- made disallowance of Rs. 7,67,62,186/- under section 14A which was reduced to Rs. 2,23,87,932/- in rectificatory order under section 154 of the Act passed on 13.06.2014. Before the Ld. CIT(A), the assessee submitted working of 6
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disallowance on taxable investment computing disallowance of Rs. 23,75,000/- and considering the suo-moto disallowance of Rs. 8,89,763/- arrived at the figure of Rs. 14,85,237/- to be disallowed under section 14A of the Act. Accordingly, the Ld. CIT(A) for the reasons recorded by him, restricted the disallowance to Rs. 23,75,000/- as against disallowance computed by the Ld. AO at Rs. 2,23,87,932/-. The Revenue is aggrieved.
It is observed that the Ld. AO found that the assessee received dividend on units of mutual funds/share of Rs. 7,62,44,036/- which it claimed as exempt under section 10 of the Act. On examining the suo-moto disallowance made by the assessee at Rs. 8,89,763/- under section 14A, he noticed that it was proportionate salary paid to Shri Arun Chopra, DGM and Ms. Minu Kumari, Executive who had been assigned the task of maintaining the investment portfolio. This led him to believe that expenses have directly/indirectly been incurred for earning exempt income. On being asked to show cause regarding applicability of Rule 8D, it was submitted before the Ld. AO that it has not incurred interest expenditure for earning exempt income as the investments have been made from its own resources and that the investments which are capable of generating taxable income should not be considered for working out the attributable expenses under Rule 8D. The Ld. AO did not accept these submissions as he found that investments had increased to Rs. 1618.62 crores from Rs. 1343.88 crore of the preceding year and interest bearing loans also increased from nil in the earlier year to Rs. 593.43 crore in the year of account with interest of Rs. 1.24 crore debited to P&L account.
During appellate proceedings, it was explained by the assessee that as on 31.03.2011, the assessee had interest free own funds of Rs. 4235.57 crores. Total investment during the year amounted to Rs. 1618.62 crores and those investments, the income from which are exempt from tax amounted to Rs. 815.85 crores. Thus, there was excess of interest free own funds of Rs. 2616.95 crores viz. a viz. total investments. Accordingly, there was excess of interest free own funds of Rs. 3419.72 crores viz. a viz.
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investments producing interest income. It was the contention of the assessee before the Ld. CIT(A) that interest free own funds available with the assessee were primarily used for the purpose of investments. The contention of the assessee was acceptable to the Ld. CIT(A) who recorded the finding that business of the assessee is of holding investments, hence the interest expenditure must be held to have been incurred for holding and maintaining such investments. The Ld. CIT(A) further held that the interest expenditure incurred by the assessee was in relation to such investments which gave rise to income not forming part of total income. No material has been brought on record by the Revenue to refute the above findings of the Ld. CIT(A) with which we are inclined to agree.
The assessee has placed on record decision dated 17.11.2021 of the Delhi “E” Bench of the Tribunal in assessee’s own case in ITA No. 3295/Del/2015 for AY 2010-11. In that year also interest of Rs. 24,657,534/- was disallowed under Rule 8D(2)(i) which has been deleted by the Tribunal by observing as under:-
“9. Now we come to the disallowance u/r 8D(2)(i). This sub rule provides that the amount of any expenditure directly relating to income, which does not form part of total income, is required to be disallowed. On careful analysis of the facts stated before us, we find that assessee has interest free owned funds of Rs. 3920 crores as on 31st of March 2010. The total investment made by the assessee in which tax-free income could have been earned is Rs. 1343 crores as on that date. Further, that investment from which exempt income has been actually earned during the year is only Rs. 605 crores. Furthermore, the investment made by the assessee is out of the mixed funds, as it did not maintain the books of account of the earning exempt income as well as taxable income separately. The honourable Supreme Court in case of Commissioner of Income tax versus Reliance Industries Ltd. [2019] 102 taxmann.com 52 (SC)[2019]261 Taxman 165(SC) has held as under:-
Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment
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Year 2002-03.
In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.
Therefore, in view of the above facts, we hold that there cannot be any interest disallowance in the case of the assessee. Accordingly, the interest disallowance made under rule 8D(2)(i) of the Act of Rs. 24,657,534/- deserves to be deleted, hence, we direct the learned assessing officer to delete the same.”
For the reasons aforesaid and following the decision (supra) of the Tribunal, we hold that no interest disallowance is warranted under Rule 8D(2)(i) in the year under consideration.
It is further observed that in the immediately preceding year 2010-11, a sum of Rs. 1,71,87,853/- was disallowed under Rule 8D(2)(iii) which stands deleted by the Tribunal vide its order (supra) on the basis of the facts pertaining to that year. However, in the AY under consideration the assessee submitted working of disallowance on taxable investment under Rule 8D(2)(iii) amounting to Rs. 23,75,000/- before the Ld. CIT(A). Since the assessee had already made disallowance of Rs. 8,89,763/- suo-moto out of administrative expenses incurred, it offered disallowance of Rs. 14,85,237/- under section 14A r.w. Rule 8D which has been accepted by the Ld. CIT(A).
Having gone through the facts and circumstances of the assessee’s case and the decision of the Hon’ble Supreme Court in Reliance Industries Ltd. (supra) relied upon by the Tribunal in the preceding year and the decisions in M/s. Cheminvest Ltd. and Holcim India (P) Ltd. (supra) followed by the Ld. CIT(A), we do not find any infirmity in the order of the Ld. CIT(A) which we uphold. Consequently, we reject the appeal of the Revenue.
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Accordingly, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 5th January, 2023.
sd/- sd/-
(ANIL CHATURVEDI) (ASTHA CHANDRA) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 05/01/2023 Veena Copy forwarded to - 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr. PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order