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Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI
iv. It is made clear that the present order passed will not affect any TDS already deducted by the respondent Nos.3 to 5/Banks prior to interim order dated 09.09.2019 passed by this Court.”
Thus, as seen from the above order of the jurisdictional High Court on the issue of deduction of TDS u/s 194A of the Act, it has been held by Hon’ble Court that “the entitlement of interest accruing on the FDs to the assessee would be dependent on the result of the pending Court/CBI proceedings and consequently, till the conclusion of the said court proceedings, the interest & M/s. Bellary Iron Ores Pvt. Ltd., Bellary Page 35 of 42 accruing on the FD cannot be considered as income for the purpose of deduction of TDS u/s 194A of the Act and directed the bank not to deduct TDS on the interest of FDs. However, it cannot be treated as absolving the assessee of its liability to pay tax on the interest accruing on the FD if the petitioner becomes entitled to the same after conclusion of the court proceedings.” It is also brought on record by assessee that first appellate authority i.e. CIT(A) Gulbarga/NFAC in assessee’s own case for AY 2017-18 vide his order dated 15.7.2023 taken a decision in this issue in appeal No.CIT(A) Gulbarga/10049/2019-20 in that assessment year as follows:
“The direction of the honourable High court is that till the conclusion of the proceedings by the CBI, no tax at source is required to be deducted and also the liability under income tax in respect of the interest income would arise also only on completion of the said proceedings. The said direction in the writ petition is binding and therefore, in the absence of any reversal of this decision, in a writ appeal filed, the issue is to be decided in favour of the appellant. To the extent tax credit by way of TDS availed, the appellant had already admitted the same. Therefore, the interest net of TDS brought to tax by the AO is directed to be deleted.”
7.1 Same view was taken by the first appellate authority i.e. CIT(A)/NFAC in assessee’s own case for the assessment year 2018- 19 in appeal No.NFAC/2017-18/10045058 dated 15.7.2023 as follows: “Similar issue came for adjudication for the earlier AY 17-18. Without going into the merits of the issue whether any income by way of interest would accrue to the appellant chargeable to tax for the impugned AY, since the matter is covered by a direction of the Honourable High Court in writ proceedings, following the same stand as in last AY, the AO is directed to delete the addition by way of interest income accrued. Accordingly, this ground is allowed.” & M/s. Bellary Iron Ores Pvt. Ltd., Bellary Page 36 of 42
Being so, in our opinion, the lower authorities has committed an error in bringing the interest accrued on FD which is subject to prohibitory order by CBI Hyderabad into tax in these assessment years under consideration and the same has to be taxed in assessment year when it was actually received by the assessee or right to receive accrued to the assessee. In other words, the assessee has to pay the tax on the same on actual accrual of right to receive this impugned interest by the assessee in any assessment year and not in these assessment years. Accordingly, this ground of appeal
of the assessee is partly allowed.
9. Next ground in 2015-16 is with regard to disallowance u/s 14A of the Act. 9.1 The ld. A.R. submitted that the learned AO has disallowed an amount of Rs.62,19,040/- as expenditure related to exempt income applying section 14A r.w. Rule 8D without considering that the assessee had sufficient reserves & surpluses and there was no investment cost by way of interest. It was further contended that the investments in sister concerns are made for strategic purposes only and consequently, section 14A had no application. SURPLUS FUNDS. 9.2 He submitted that the learned AO has disallowed an amount of Rs.62,19,040/- as expenditure related to exempt income applying section 14A r.w. Rule 8D without considering that the appellant had sufficient reserves & surpluses and there was no investment cost by way of interest. It was further contended that the investments in sister concerns are made for strategic purposes only and consequently, section 14A had no application. 9.3 He submitted that the learned AO has upheld the disallowance citing the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC). It is & M/s. Bellary Iron Ores Pvt. Ltd., Bellary Page 37 of 42 submitted that the ground of the assessee, that the investments were made out of surplus funds, was not considered in proper perspective either by the learned AO or by the learned Appellate Commissioner. It is submitted that the working of the availability of surplus funds for the said investments was furnished before the learned AO as well as the learned Appellate Commissioner. Reference is invited to Enclosure No. I to the written submissions dated, 09-02-2018 filed for the AY 2015-16, before the learned AO. 9.4 He submitted that While the learned AO has referred to and relied upon the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. (Supra), he has failed to apply the principles laid down by the Hon’ble Court that recording of satisfaction by the assessing officer regarding the expenditure relatable to the exempt income, if any, is a prerequisite to invoke section 14A. 9.5 He submitted that the investment of Rs.111,98,35,311/- in Mutual Fund FMP and investment in sister concern M/s. BIOP Steels of Rs.4,00,00,000/- have been considered in disallowing the expenditure u/s 14A r.w. Rule 8D. The following Grounds of the assessee have also not been considered: (a). Mutual Fund FMP’s are subject to tax on being transferred and are not exempt u/s 10 and profit on maturity is subjected to capital gain tax. Hence the inclusion of the said amount of Rs.111,98,35,311/- in calculating the interest portion for the purpose of section 14A is an error. (b). The investment in BIOP Steel & Power Private Ltd. is strategic investment in the sister concern which adds value to the products produced by the company. It also may be mentioned that surplus on sale of investments in private companies are subjected to capital gains. Hence section 14A is not applicable. & M/s. Bellary Iron Ores Pvt. Ltd., Bellary Page 38 of 42 It is therefore submitted by the ld. A.R. that the addition is unsustainable for the reason that – (a). Satisfaction is not recorded before applying the said section 14 and Rule 8D as is seen from the impugned assessment order. (b). The investment is strategic and beyond the scope of section 14A, and; (c). On merits, the investment is made out of surplus funds and there is no cost involved.
The ld. D.R. submitted that as long as an exempted income earned, the expenditure incurred was attributable to earning such exempted income had to be disallowed u/s 14A of the Act. According to the ld. D.R., assessee had made various investments in various Government Securities, Mutual Funds, Equity investments and other Bonds to the extent of Rs.128,11,67,076/- out of which income earned on investment at Rs.120,64,48,347/- was exempted. The assessee has received exempted income of Rs.94,12,976/- during the previous year, therefore, the ld. AO invoked the provisions of section 14A r.w.s. 80D of the I.T. Rules. The ld. AO after considering the working of disallowance u/s 14A of the Act pointed out that while computing the disallowance, the investments in unquoted equity shares were not considered. Hence, the ld. AO redetermined the disallowance u/s 14A of the Act at Rs.62,19,040/- and the same to be considered.
We have heard the rival submissions and perused the materials available on record. The main contention of the ld. A.R. is that the ld. AO while computing the disallowance u/s 14A r.w. Rule 8D of the IT. Rules has considered certain investments though it was not exempted income yielding investment. If there is any mistake on this count, same to be rectified by ld. AO while passing the fresh order on this issue. Further, the total disallowance u/s 14A r.w. Rule & M/s. Bellary Iron Ores Pvt. Ltd., Bellary Page 39 of 42 8D shall not exceed the exempted income earned by the assessee. This view of ours is fortified by the order of the Tribunal in the case of GMR Enterprises in dated 28.10.2021 for the AY 2015-16 wherein held as under:
“3.4 We have heard rival submissions and perused the material on record. It is settled position of law that disallowance cannot exceed the amount of dividend income earned during the relevant assessment year. In this context, the following judicial pronouncements support the stand of the assessee:-
(i) Joint Investments Pvt. Ltd. v. CIT (59 Taxmann.com 295) – it was held that disallowance u/s 14A of the Act is to be restricted to the tax exempt income. (ii) Daga Global Chemicals Pvt. Ltd. v. ACIT [2015-ITRV-ITAT-MUM- 123) – has held that disallowance u/s 14A r.w.Rule 8D cannot exceed the exempt income. (iii) M/s.Pinnacle Brocom Pvt. Ltd. v.ACIT (ITA No.6247/M/2012) – has held that disallowance u/s 14A cannot exceed the exempt income. (iv) DCM Ltd. v. DCIT (ITA No.4567/Del/2012) – held that the disallowance u/s 14A of the Act cannot exceed the exempt income.
3.5 In view of the above settled position, the amount of disallowance u/s 14A of the I.T.Act needs to be restricted to the extent of exempted income earned during the relevant assessment year. As would be evident that in the facts and circumstances of the present case the amount of exempted income of Rs.27,37,47,187 was earned on investment and consequently the amount of disallowance, if at all, to be made is to be restricted to Rs.27,37,47,187.
3.6 However, in this case, the assessee had made disallowance of Rs.145,02,09,668 voluntarily while filing the return of income. In this context, it is important to refer to the judgment of the Hon’ble Madras High Court in the case of M/s.Marg Limited v. CIT in Tax Case Appeal Nos.41 to 43 & 220 of 2017 (judgment dated 30.09.2020). The Hon’ble Madras High Court followed the judgment of the Hon’ble Karnataka High Court in the case of Pargathi Krishna Gramin Bank v. JCIT[(2018) 95 taxman.com 41 (Kar.)]. In the case considered by the Hon’ble Madras High Court, the assessee therein had made voluntarily disallowance u/s 14A of the I.T.Act more than the dividend income earned and the Tribunal confirmed the disallowance made u/s 14A of the I.T.Act. However, the Hon’ble Madras High Court held that the disallowance u/s 14A of the I.T.Act cannot exceed the exempt income earned during the relevant assessment year. The relevant finding of the Hon’ble Madras High Court reads as follow:- & M/s. Bellary Iron Ores Pvt. Ltd., Bellary Page 40 of 42
“20. Before parting, we may also note with reference to the Table of disallowance voluntarily made by the Assessee, which is part of the Paper Book before us for the four assessment years in question. In the Table quoted in the beginning of the order, shows that the Assessee himself computed and offered the disallowance beyond the exempted income in the particular year, namely AY 2009-10, as against the dividend income of Rs.41,042/- and the Assessee himself computed disallowance under Rule 8D of the Rules to the extent of Rs.2,38,575/- , which was increased to Rs.98,16,104/- by the Assessing Authority. Similarly, for AY 2012-13, against Nil dividend income, the Assessee himself computed disallowance at Rs.8,50,000/-, which was increased to Rs.2,61,96,790/-.
We cannot approve even the larger disallowance proposed by the Assessee himself in the computation of disallowance under Rule 8D made by him. These facts are akin to the case of Pragati Krishna Gramin Bank(2018) 95 Taxman.com 41 (Kar.) decided by Karnataka High Court. The legal position, as interpreted above by various judgments and again reiterated by us in this judgment, remains that the disallowance of expenditure incurred to earn exempted income cannot exceed exempted income itself and neither the Assessee nor the Revenue are entitled to take a deviated view of the matter. Because as already noted by us, the negative figure of disallowance cannot amount to hypothetical taxable income in the hands of the Assessee. The disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure under Section 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard.
We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under Rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assesee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the Assessing Authority, he cannot resort to & M/s. Bellary Iron Ores Pvt. Ltd., Bellary Page 41 of 42
the computation method under Rule 8D of the Income Tax Rules, 1962.” (underlining supplied) 3.7 In view of the above judgment of the Hon’ble Madras High Court in the case of M/s.Marg Limited v. CIT (supra), it is clear that the disallowance u/s 14A of the I.T.Act cannot exceed the exempt income earned during the relevant assessment year irrespective whether larger amount was disallowed by the assessee u/s 14A of the I.T.Act while filing the return of income. Therefore, the AO is directed to restrict the disallowance u/s 14A of the I.T.Act to Rs.27,37,47,187.
3.8 In the result, ground No.II raised by the assessee is allowed.”
11.1 In view of the above discussion, we hold that disallowance should be restricted to the amount of exempted income earned by the assessee after considering only the exempted income yielding investments, so as to apply the formula contained in Rule 8D. Accordingly, the issue is restored to the file of ld. AO for fresh consideration. This ground of assessee is partly allowed for statistical purposes.
Next ground in 2015-16 is with regard to computation of income u/s 115JB of the Act.
The ld. A.R. submitted that the Ground of appeal on this issue was not taken before the learned CIT(A), and it is a legal ground arising on the same set of facts already on record and therefore, the same may be considered and adjudicated on merits. He submitted that the learned AO has also computed the liability to tax under MAT i.e., Section 115JB by adding the above said additions/disallowances to the net loss of Rs.1,98,61,008/-. The said amount of Rs.10,32,94,857/- representing interest on the said fixed deposits, which are under the prohibitory order of the Court is also added to the MAT income, without appreciating that section 115JB is a self- contained code and no addition or reduction of items not expressly & M/s. Bellary Iron Ores Pvt. Ltd., Bellary Page 42 of 42 provided under the section itself is permissible. Reference is invited to the decision of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. [2002] 122 Taxman 562 (SC) / [2002] 255 ITR 273 (SC).
The ld. D.R. submitted that this ground was not at all before the ld. CIT(A). Hence, this ground shall not be considered.
We have heard the rival submissions and perused the materials available on record. With regard to computation of book profit u/s 115JB of the Act, the main grievance of ld. A.R. is that he has not followed the provisions of section 115JB r.w. Explanation in proper perspective and in our opinion, this issue requires to be examined by ld. AO and to pass a fresh order in total conformity with the provisions of section 115JB r.w. all the explanations therein. This ground of appeal
is partly allowed for statistical purposes.
16. In the result, the appeal of the assessee in is partly allowed and the assessee’s appeal in is partly allowed for statistical purposes. Order pronounced in the open court on 20th Sept, 2023