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Income Tax Appellate Tribunal, HYDERABAD BENCH “A”, HYDERABAD
This appeal is filed by the assessee against the order of the Ld. CIT(A)-2, Hyderabad in appeal No. 0065/2015-16, dated 21/06/2016 passed U/s. 143(3) r.w.s 250(6) of the Act for the A.Y. 2012-13.
The assessee has raised three grounds in its appeal however, the crux of the issue is that “The Ld. CIT (A) has erred in confirming the addition made by the Ld. AO for Rs. 19,34,196/- invoking the provisions of section 14A r.w. Rule 8D of the Act.”
The brief facts of the case are that the assessee is a limited company engaged in the business of power generation filed its return of income for the relevant assessment year on 26/09/2012 declaring total income of approximately Rs. 14.84 Crs. Thereafter, the case was taken up for scrutiny under CASS and finally the assessment was completed U/s. 143(3) of the Act vide order dated 23/3/2015 wherein the ld. AO made addition of Rs. 19,34,196/- invoking the provisions of section 14A r.w. Rule 8D of the Act.
During the course of scrutiny assessment proceedings, it was observed by the Ld AO that the assessee had made investment to the tune of Rs. 62,59,96,646/- for earning exempt income out of its interest-bearing funds. Therefore, the Ld. AO invoked the provisions of section 14A read with Rule 8D of the Rules and computed the disallowance at Rs. 19,34,196/-. On appeal, the Ld. CIT (A) confirmed the order of the ld. AO by observing as follows: “5.3. I have perused the above and I find that the action of the AO is justified in making the above disallowance u/s. 14A r.w. rule 8D(2)(iii) as the efforts of management and staff of the appellant are necessarily required in earning income exempt from tax. Therefore, Rule 8D(2)(iii) is squarely applicable in the assessee's case. As a result, the said disallowance of Rs. 19,34,196/- made by the AO is hereby confirmed and the grounds raised
in this regard are dismissed.
6. Second issue relates to AO's action in stating the interest of Rs. 71,16,678/- shall not be charged to assets in future as the same was incurred in making investments in mutual funds and not acquiring of any asset. In this regard the AO's observations are as under; "4.1. Verification of records revealed that the assessee made large scale investments in mutual funds. During the proceedings, details of the immediate source were sought form the assessee. On 08.01.2015, the assessee filed the details. It was claimed that all the investments are made from internal resources. However, as seen from the details filed by the assessee, investments to the tune of Rs.62,59,96,646/- were admittedly made out of short term loan from syndicate bank taken for expansion purpose. The interest on this loan is incurred in making investments in exempt assets. 4.2. As per the submissions of the assessee dated 06.02.2015, interest of 16,15,07,063/- was incurred during the year on the loan of Rs 200 Cr taken from Syndicate Bank. The interest is related to expansion project (Phase - III) and hence not charged to P & L account and shown as expenditure during construction in Schedule "F" of the accounts. The proportionate interest on investments of Rs.62,59,96,646 Cr works out to be Rs.71,16,678/-. After reducing the dividend from mutual funds of Rs.51,53,846/- this becomes Rs.19,62,832/-. This amount shall not be charged to the assets by the assessee at any future date because the same is not incurred for acquisition of any assets. 4.3. It may also be mentioned that the loan from Syndicate Bank is a short term loan and the dividend income from mutual fund units out of this loan has no relation with expansion project. Therefore, it was not correct on the part of the assessee to reduce the dividend income from the interest expenditure. The dividend income is clearly income from "other sources". The interest expenditure incurred on keeping the investments needs to be set- off against exempt income from mutual funds because the same is incurred in earning such income. 6.1. On the other hand, the AR contended as under: "The Assessing Officer erred in stating that interest of Rs.71,16,678/- cannot be charged to assets in future. The Assessing Officer ought to have seen that interest was incurred on loans raised for expansion project and is to be capitalised as and when such expansion project commences its operations. Hence the Assessing Officer is not justified in stating that interest of Rs.71,16,678/- cannot be charged to assets in future." 6.2. I have pursed the above and I find that the action of the AO is justified as it is not correct on the part of the assessee to reduce the dividend income from the interest expenditure. The Dividend income is clearly income from other sources. The interest expenditure incurred on keeping the investment needs to be set-off against exempt income from mutual funds as the same is incurred in earning such income. The income exempt u/s 10(35) declared by the assessee in the return of income of Rs.l,42, 12, 189/- therefore gets reduced to Rs.70,95,511/-. It may be noted here that while computing book profits, the assessee did not consider this item in proper manner. Therefore, while computing book profit, the amount of Rs.70,95,511/- would be reduced from the profit as per P&L account in place of the figure adopted by the assessee. Therefore, the action of the A.O. is confirmed. As a result, the grounds raised in this regard are dismissed.”
At the outset, the Ld. AR submitted before that the entire investment made by the assessee was out of its non-interest-bearing funds. It was therefore, pleaded that the disallowance computed by the Ld. Revenue Authorities are erroneous. On the other hand, the Ld. DR vehemently argued in support of the orders of the Ld. Revenue Authorities however he could not successfully controvert to the submission of the Ld. AR.
We have heard the rival submissions and carefully perused the materials on record. On verifying the balance sheet of the assessee at page no.1 of the paper book we find that the assessee’s shareholder’s funds such as share capital and reserve stands at Rs. 535,60,16,221/- as on 31/3/2012 and the opening balance stands at Rs. 534,44,84,969/- which is much above the investment made by the assessee of Rs. 62,59,96,646/- for earning exempt income. Therefore, the element of interest expenditure cannot be included in the case of the assessee while computing disallowance U/s. 14A of the Act. However, it is eminent that for making investment to the tune of Rs. 62,59,96,646/- assessee would have certainly incurred some expenditure such as administrative expenses, stationary expenses etc. It is also an undisputed fact that any expenditure incurred by the assessee which is not for the purpose of the business of the assessee, cannot be claimed as deduction with respect to the income earned out of the business of the assessee. On similar occasions, this bench of the Tribunal in case DCIT vs. M/s. Shalivahana Green Energy Limited (ITA No. 1990/Hyd/2018) vide its orders dated 15/02/2021had remitted back the matter to the file of the ld. AO with certain directions. The relevant portion of the order is extracted herein below for reference:
“6. We have heard the rival submissions and carefully perused the materials on record. Factually for making any investment in equity shares by any entity only the following categories of expenditure will be attributable: - (i) Interest on interest bearing funds that is utilised for the purpose of making such investment. (ii) Direct and indirect expenses attributable to the process of making such investment such as expenditure incurred for due diligence, managerial expenditure, clerical expense, stationary expenditure and portfolio management expenditure.
7. There cannot be any other expenditure other than the expenditure mentioned herein above that can be incurred by an entity which will be attributable towards investments made in equity shares of other companies. In the case of the assessee, the assessee has invested in its own subsidiary companies out of its non-interest-bearing funds such as own share capital and reserves and this is not in dispute. Since in the case of the assessee the assessee company has utilised only its non-interest-bearing funds for making investment in its own subsidiary company, no interest cost can be attributable to the same because, there is no interest cost to the assessee, as it can be treated that the assessee has withdrawn from its capital and reserves which are assessee’s interest free funds for making such investment. Further, for making investment in its own company there cannot be any cost attributable with respect to direct and indirect expenses towards the process of decision making, due diligence, managerial expenditure and portfolio management expenditure because no such cost can arise for making investment in one’s own entity. Further, only meagre expenses can be attributable with respect to clerical and stationary expenses which is negligible and that is deserved to be ignored. Therefore, factually there cannot be any expenditure attributable to the investment made in sister company when the investment is out of its own interest free fund. When the above facts were pointed out to the Ld. DR, he could not controvert to the same however, he relied on the order of the Ld. AO. Considering these factual aspects of the issue, We are of the view that the order of the ld. CIT (A) deleting the disallowance of expenditure made by the Ld. AO invoking the provisions of section 14A of the Act read with Rule 8D of the Rules does not call for interference. Hence, we hereby confirm the order of the Ld. CIT (A) on this issue.”
Considering the facts and circumstances of the case and the decisions cited herein above, we hereby set aside the order of the ld. Revenue Authorities and remit the entire matter back to the file of the Ld. AO in order to consider the issue in the light of the order of the Tribunal cited herein above as well as the observations made by us supra.
In the result, appeal of the assessee is allowed for statistical purposes as indicated herein above. Pronounced in the open Court on the 29th July, 2021.