ANDHRA PRADESH INDUSTRIAL DEVELOPMENT CORPORATION LIMITED,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX , CIRCLE-1(1), HYDERABAD

O R D E R PER L.P. SAHU, A.M.: This appeal filed by the Revenue is directed against CIT(A) - 1, Hyderabad’s order dated 08/12/2017 for AY 2013-14 involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short “the Act on the following grounds of appeal:

1. The order of the learned CIT(A) not only is erroneous both on facts and in law but is contrary to :- 2 -: M/s Andhra Pradesh Industrial Development Corporation Ltd., Hyd. the settled principles of law and is passed without application of mind.

2. The learned CIT(A) erred in confirming the action of the AO in disallowing ujs.14A of Rs.53,56,654 contrary to the decision of the Supreme Court in the case of M/s.Godrej & Boyce Mfg., Ltd., without appreciating that the AO has not made such disallowance for the immediately preceding assessment year and has not recorded any satisfaction that there was any expenditure for earning dividend income.

3. The learned CIT(A) erred in dismissing the ground against taxing of capital loss as capital gains and taxing it at 30% on the ground that no documentary evidence is filed though never such a question is put to the assessee and further that the assessee complied with the directions of the learned C1T(A) for filing minutes of the Board and details of payments received on divestment with regard to the computation of Capital loss 4. Any other ground that may be urged at the time of hearing. “

the assessee at Rs. 4,32,48,557/- by making various including the Disallowance of expenditure u/s 14A of Rs. 53,56,654/- and the addition of Rs. 20,57,266/- towards profit on sale of investments under capital gains, which are the subject matter in this appeal.

2. When the assessee preferred an appeal before the CIT(A), the CIT(A) partly allowed the appeal of the assessee.

5. As regards ground No. 2 relating to disallowance of Rs. 53,56,654/- u/s 14A of the Act, during the assessment proceedings, the Assessing Officer noticed that the assessee had made investments in the shares of other companies amounting to Rs.91,96,90,136/- and earned dividend of Rs.3,30,08,537/-. The AO noted that the assessee company had capital of Rs. 1,09,22,89,OOO/- & reserves of Rs.71,55,02,458/-. The borrowings during the year were Rs.9,06,46,007/-. Further the interest paid during the year is Rs.22,12,500/-. The Assessing Officer asked the assessee

:- 4 -: M/s Andhra Pradesh Industrial Development Corporation Ltd., Hyd. as to why the disallowance u/s.14A should not be made. The assessee submitted that the corporation had earned dividend income of Rs.3,30,08,537/- during the year. No expenditure had been incurred to earn the dividend income as the investments have been made out of own funds comprising share capital and accumulated profits. The assessee submitted that the same issue for the earlier years was decided in favor of the assessee by the Appellate Tribunal. The assessee also submitted that the decision of the Tribunal was accepted by the Department and no disallowance has been made for the AY 2012-13.

5.1 Rejecting the submissions of the assessee, the Assessing Officer concluded that it was not clear from the cash flow statement that the investments were made out of own funds comprising share capital and accumulated profits as the assessee had not maintained any separate accounts. The Assessing Officer relying on the decision of Hon'ble Mumbai ITAT in the case of HDFC Bank Limited (2015 Taxpub DT 3761) made disallowance of expenditure u/s.14A as per Rule 8D amounting to Rs.53,56,654/-.

5.2 Before the CIT(A), the appellant submitted that the disallowance u/s.14A of Rs.53,56,654/- had been made in respect of dividend income. The appellant submitted that the investments were made in earlier years and no part of the interest or other expenditure was incurred or was :- 5 -: M/s Andhra Pradesh Industrial Development Corporation Ltd., Hyd. attributable to the earning of dividends. The appellant submitted that in earlier years, the issue was decided in favour of the assessee by the Hon'ble ITAT for the AY 2008- 09 to AY 2010-11 in to 1477/Hyd/2013 and ITA No.1561 to 1563/Hyd/2013 dated 30.09.2014 and the decision was accepted by the Department. The appellant submitted that in the earlier AYs i.e., AY 2011-12 and AY 2012-13, no such disallowance was made.

5.3 The CIT(A) after considering the submissions of the assessee, confirmed the disallowance by holding that the assessee having earned dividend income, cannot claim that section 14A is not applicable.

5.4 Before us, the ld. AR of the assessee besides reiterating the submissions made before the lower authorities submitted that the assessee had sufficient own funds, out of which, investments were made and no interest bearing funds were utilized by the assessee for making investments. He further submitted that no exemptions can be disallowed under rule 8D(2)(iii) because the incomes are directly credited into the bank account and, therefore, no administrative expenses were incurred for earning exempt income.

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5.5 The ld. DR, on the other hand, relied on the orders of revenue authorities and vehemently argued that section 14A will apply in the case of the assessee. He submitted that every assessment year is an independent and, therefore, the submission of the assessee that in earlier AYs 2011-12 and 2012-13 no such disallowance was made is not tenable. He therefore submitted that the orders of the lower authorities may be upheld.

5.6 After hearing both the parties and perusing the material on record as well as the orders of revenue authorities, we observe that the AO has made the disallowance u/s 14A under two limbs, i.e., under rule 8D(2)(ii), the disallowance was Rs. 8,17,998/- and under rule 8D2(iii) the disallowance was Rs. 45,38,656/-.

5.6.1 With regard to the disallowance under rule 8D(2)(ii), on examination of the financial statements for the relevant AY as well as previous FYs, we find that the assessee has sufficient own funds to make the investments on which the assessee had earned exempt income during the AY. We find that there is increase in the non-current investments of Rs. 3,13,94,363/- and further, there is increase in the own funds by Rs. 7,21,59,927/-, which is evident from trading and P&L Account of the assessee, which is more than the investments made during the year. After considering the sale of investments of Rs. 74,76,610/- (61,81,200 +

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12,95,410) and also perusing the orders of coordinate bench for AYs quoted supra wherein the coordinate bench held that the assessee had made the investments out of own funds of the assessee company, we direct the AO to delete the addition of Rs. 8,17,998/- made under rule 8D(2)(ii) of the Act. 5.6.2 With regard to the disallowance of Rs. 45,38,656/- under rule 8D(2)(iii), to arrive the said figure, the AO has taken average value of the entire investments as on the date of the balance sheet, which is not correct, because the assessee has earned exempt income of Rs. 3,30,08,537/- from some of the value of investments, but, not from the entire value of investments. The contention of the assessee is that it has not incurred any expenditure for earning exempt income is also not tenable because for earning of income & maintaining portfolio, administrative involvement and expenditure cannot be denied. We therefore remit this issue back to the file of the AO with a direction to compute the disallowance under this limb by considering the investments which yielded exempt income only during the year instead of taking average value on entire investments. The assessee is directed to substantiate its claim before the AO for true and correct calculation of the disallowance under rule 8D(2)(iii) of the Act.

5.7 Thus, this ground of appeal is partly allowed for statistical purposes.

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6.1 The CIT(A) confirmed the addition on the ground that the assessee did not submit any documentary evidences regarding purchase and sale of shares neither before the AO nor before him and, in the absence of the same, the contention of the assessee was rejected.

6.2 Before us, the ld. AR of the assessee submitted that the matter may be restored to the file of the AO to substantiate its claim by way of documentary evidence to enable the AO to calculate the exact capital gains. The ld. DR, did not object to the submissions of the ld. AR.

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6.3 Considering the prayer of the ld. AR of the assessee, we remit this issue to the file of the AO with a direction to decide the issue after examining the documentary evidence which will be put-forth by the assessee before him and in accordance with law after providing reasonable opportunity of hearing to the assessee. The assessee is directed to substantiate its claim before the AO with all the relevant evidences; at its own risk and responsibility to be followed by three effective opportunities of hearing. Accordingly, this ground is allowed for statistical purposes.