INDIA PISTONS LIMITED,CHENNAI vs. ACIT CORPORATE CIRCLE 2(2), CHENNAI

आदेश / O R D E R PER G. MANJUNATHA, AM: This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-5, Chennai, dated 20.03.2019 and pertains to assessment year 2009-10.

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2.1 The Commissioner of Income Tax (Appeals) ought to have appreciated that assessee has not incurred any expenditure for earning the dividend income and hence no notional income could be deducted from the said income.

2.2 The Commissioner of Income Tax (Appeals) ought to have appreciated that the paid up capital and Reserves & Surplus of the Assessee as on 31-03-2009 was Rs.7882.45 lakhs while the investments was only Rs.3164.54 lakhs. Further the cash generated during the year from sale of Investments was more than the investments made during the year. Hence no borrowed fund was utilized towards the investment to earn the exempt income.

2.3 The Commissioner of Income Tax (Appeals) failed to appreciate that as per the details of expenditure produced before the assessing officer, none of the expenditure incurred were attributable to dividend income and hence the provisions of section 14A r.w. Rule 8D(2)(ii) cannot be invoked without indicating cogent reasons.

2.4 The Commissioner of Income Tax (Appeals) ought to have appreciated that the following decisions wherein it has been held that unless the assessing officer established that specific expenditure has been incurred by the assessee for earning exempt income, no disallowance under Section 14A can be made. i) CIT(vs) Hero Cycles 323 ITR 518 (P&H) ii) ACIT Vs Sun Investments 8 ITR (Tri) 33 (Del)

2.7. Without prejudice, The Commissioner of Income Tax (Appeals) ought to have I excluded the investments in subsidiaries and associate concerns, made in the course and for the purpose of business, for the purpose of computing disallowance u/s 14A read with Rule 8D.

4.1 The Commissioner of the Income tax (Appeals) ought to have appreciated that The appellant have received a sum of Rs.24,31,565/- from Mahle IPL towards management fee during Financial year 2007-2008 (AY 2008-09) and same has been offered to tax. Hence no disallowance is called for in this regard.

5. The Commissioner of Income tax (Appeals) erred in confirming the disallowance u/s 35(2AB) amounting to Rs.1,12,500/-.

5.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the expenses claimed were only eligible expenses and all other expenses that are not qualified for weighted deductions have been eliminated at the time of claiming weighted deduction. The DOT should have granted weighted deduction on the entire amount claimed by the Appellant as the expenditure has been incurred in the R&D facilities approved by the prescribed authority for the purpose of Section 35(2AB). The appellant relies on the following decisions: -

CIT Vs Claris Lifesciences Ltd - 326 ITR 251 (Guj) Wheels India Ltd - 336 ITR 513 (Mad) Cadilia Helthcare Ltd Vs Addl.CIT - 2012 TIOL - 366 - ITAT (Ahm)

5.2 The Commissioner of Income tax (Appeals) ought to have granted deduction under section 35(1)(iv) in respect of expenditure not approved by the DSIR.

6. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of education grant expenses amounting to Rs.10,64,382/- as it is not related to its business activity. 6.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the above expenditure incurred by the assessee towards the education of its employees which is relevance to the job requirement of the position he/she carries related to its business. Hence it should be allowed as business expenditure.

at the time of hearing.

3. The brief facts of the case are that the assessee company is engaged in the business of manufacturing of pistons and piston assemblies, filed its return of income for the AY 2009-10 on 29.09.2009 claiming a loss of Rs.16,48,54,559/-. The assessment has been completed u/s.143(3) of the Act, on 04.03.2015 and determined total loss of Rs.13,32,81,335/- by making various additions towards disallowance u/s.14A r.w.r.8D of Income Tax Rules, 1962 and disallowance of excess deduction claimed u/s.35(2AB) of the Act. The assessee carried the matter in appeal before the First Appellate Authority, but could not succeed. The Ld.CIT(A) for the reasons stated in their appellate order dated 20.03.2019, sustained the additions made by the AO. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us.

4. The first issue that came up for our consideration from Ground No.2 to 2.7 of the assessee’s appeal is disallowance u/s.14A of the IT Act r.w.r.8D of IT Rules. During the Financial Year relevant to the AY 2009-10, the assessee had earned exempt income being dividend of Rs.4,70,69,853/-. However, does not made any disallowance towards expenditure relatable to exempt income u/s.14A of the Act. Therefore, the AO has determined disallowance u/s.14A of the Act, by invoking Rule 8D of IT Rules, and determined total disallowance of Rs.1,78,17,320/-.

4.1 The Ld.Counsel for the assessee submitted that the AO as well as the Ld.CIT(A) erred in disallowing interest expenditure u/r.8D(2)(ii) of Income Tax Rules, 1962, even though, the assessee demonstrated with evidences that investment made in shares which yielded exempt income is out of own funds in the form of share capital and reserves & surplus. He further submitted that in so far as disallowance u/r.8D(2)(iii) of IT Rules, @ 0.5% of average value of investments, only those investments which yielded exempt income needs to be considered.

4.2 The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A), submitted that the assessee could not adduce any evidences in support of its arguments that investments in shares is out of own funds. Therefore, there is no error in the reasons given by the AO to compute disallowance of interest u/r.8D(2)(ii) of IT Rules. In so far as disallowance of other expenses @ 0.5%, he submitted that the assessee could not file any evidences to prove its claim of shares which yielded exempt income and shares which does not yield exempt income. Therefore, the matter may be set aside to the file of the AO for verification of the claim of the assessee.

4.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The AO has disallowed expenditure relatable to exempt income u/s.14A of the IT Act r.w.r.8D of IT Rules. It was the arguments of the assessee before the AO that, investments in shares is out of own funds in the form of share capital and reserves & surplus, therefore, question of interest disallowance does not arise. We find that although, the assessee has made a claim in light of certain judicial precedents, including the decision of the Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd., reported in [2009] 313 ITR 340 (Bom.) that if investment is made out of mixed funds, including borrowed funds, a general presumption goes in favour of the assessee that investment is out of own funds. In this case, the assessee has filed its financial statement and argued that its investments in shares is duly covered by share capital and reserves & surplus. Therefore, we are of the considered view that the matter needs re-examination from the AO’s side in light of financial statement of the assessee by keeping in mind the decision of the Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. (supra), and thus, we set aside the issue to the file of the AO and direct the AO to re-consider the issue of interest disallowance.

As regards disallowance of other expenses @ 0.5%, it is a well settled principal of law by the decisions of various courts that only those investments which earned exempt income during the relevant Financial Year needs to be considered for working out disallowance of other expenses and thus, we direct the AO to re-consider the issue in light of details filed by the assessee to classify investments which yielded exempt income and investments which does not yield exempt income and compute disallowance u/r.8D(2)(iii) of IT Rules. In so far as additions made by the AO towards book profit u/s.115JB of the Act, and we find that, the ITAT Delhi Special Bench in the case of Vireet Investments Pvt. Ltd. v. ACIT in dated 16.06.2017 had considered an identical issue and held that disallowance contemplated u/s.14A of the Act, cannot be made to book profit computed u/s.115JB of the Act, and thus, we direct the AO to delete the addition made towards s.14A disallowance to book profit computed u/s.115JB of the Act.

5.1 Having heard both sides and considered relevant materials, we find that there is no finding from the AO including the Ld.CIT(A) on eligibility of the assessee towards deduction u/s.35(1)(iv) of the Act, even though, there is no specific observations with regard to ineligibility of said expenditure for 100% deduction, although, said expenditure is not eligible for weighted deduction u/s.35(2AB) of the Act. Therefore, we set aside the issue to the file of the AO and direct the AO to re-examine the claim of the assessee and if the assessee is able to prove its claim that amount disallowed u/s.35(2AB) of the Act, is eligible u/s.35(1)(iv) of the Act, with necessary evidences, then, the AO is directed to allow deduction claimed u/s.35(1)(iv) of the Act.

Order pronounced on the 15th day of February, 2023, in Chennai.