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Income Tax Appellate Tribunal, KOLKATA ‘B’ BENCH, KOLKATA
Before: SRI RAJPAL YADAV & DR. MANISH BORAD
order
: June 8th, 2023 ORDER
Per Manish Borad, Accountant Member:
This appeal filed by the assessee pertaining to the Assessment Year (in short ‘AY’) 2012-2013 is directed against the order passed u/s 250 of the Income Tax Act, 1961 (in short the ‘Act’) by Commissioner of Income Tax (Appeals)-NFAC, Delhi [in I.T.A. No.: 122/KOL/2023 Assessment Year: 2012-2013 Sri Aditya Kumar Rungta. short ld. ‘CIT(A)’] dated 30.01.2023 which is arising out of the assessment order framed u/s 143(3) of the Act dated 26.02.2015.
The assessee is in appeal before the Tribunal raising the following grounds of appeal: “1. For that in view of the facts and in the circumstances, the Ld. CIT(A) was wholly unjustified in confirming the action of the AO in disallowing interest and expenses u/s 14A and in view of the facts and in the circumstances the action of AO in such respect is bad in law and it may be held accordingly.
2. Without prejudice to Ground No. 1 above, the Ld. CIT(A) was wholly unjustified in confirming the action of the AO towards disallowance of interest amounting to Rs. 1,58,99,942/- and such action of the Ld. CIT(A) in affirming the action of the AO is bad in law and in view of the facts and in the circumstances it may be held accordingly. Even otherwise and without prejudice the disallowance in such respect cannot be more than Rs.47,08,373/- and in view of the facts and in the circumstances it may be held accordingly.
3. Without prejudice to Grounds No. 1 & 2 above, the Ld. CIT(A)’s action in affirming the action of AO in making disallowance of expense of Rs. 17,03,930/- u/s 14A is bad in law and in view of the facts and in the circumstances it may be held accordingly. Even otherwise and without prejudice the disallowance so computed by AO u/s 14A is over and above disallowance already made towards interest and hence to such extent it is bad in law and it may be held accordingly.
4. Without prejudice to Grounds No. 1 to 3 above, the Ld. CIT(A) failed to appreciate the fact that for invocation of sec. 14A “satisfaction” as to correctness of books required as per said provision has not been recorded by AO and such invocation of sec. 14A in such respect is bad in law and in view of the facts and in the circumstances it may be held accordingly.
5. Without prejudice to Grounds No. 1 to 4 above, the Ld. CIT(A) failed to appreciate the fact that for the computation of disallowance u/s 14A read with Rule 8D(2) only those investments out of which exempt income has been earned can be considered particularly in view of the judgment of Jurisdictional High Court and in view of the facts and in the circumstances it may be held accordingly.
I.T.A. No.: 122/KOL/2023 Assessment Year: 2012-2013 Sri Aditya Kumar Rungta.
Without prejudice to Grounds No. 1 to 5 above, the disallowance u/s 14A cannot exceed the exempt income and in view of the facts and law applicable then it may be held accordingly.
7. For that your petitioner craves the right to put additional grounds and/or to alter/ amend/ modify the present grounds at the time of hearing.”
Brief facts of the case as culled out from the records are that the assessee is an individual and carries out the business of supply of railway track material under the sole proprietorship concern namely M/s. Krishna Industrial Corporation and also carries out share trading business in his individual name. For the AY 2012- 13 income tax return was filed on 27.09.2012 declaring loss of Rs. 2,81,29,670/-. Case selected for scrutiny through CASS followed by serving of notices u/s 143(2) & 142(1) of the Act. During the course of assessment proceedings, ld. AO examined various details as called for and filed by the assessee. Ld. AO completed the assessment making addition for short term capital gain at Rs. 2,68,937/-, disallowing interest u/s 36(1)(iii) of the Act at Rs. 1,58,99,942/- and also making disallowance u/s 14A of the Act at Rs. 17,03,930/- thereby assessing loss at Rs. 1,04,78,820/-.
Aggrieved, the assessee preferred appeal before ld. CIT(A) challenging the disallowance u/s 14A of the Act as well as interest disallowance u/s 36(1)(iii) of the Act but failed to succeed on any issue. In the impugned order, ld. CIT(A) has merely reproduced the submissions filed by the assessee and in para 6 of the impugned order making general observation dismissed the grounds raised by the assessee observing as follows: “I have considered the submission of the appellant and the assessment order of the AO passed u/s 143(3) of the I.T. Act 1961. Page 3 of 10 I.T.A. No.: 122/KOL/2023 Assessment Year: 2012-2013 Sri Aditya Kumar Rungta. On perusal of the submissions made by the appellant I have noticed that the submissions are found without any substance and devoid of merits as the same submissions were filed before the AO who had rejected them after consideration of facts and circumstances of the case. I have noticed that AO had given opportunity of being heard to the appellant before making addition. AO had also discussed and incorporated appellant’s submission in the assessment order. Further, AO is found to have given reasons as to why he had rejected the appellant’s contentions. In the facts and circumstances of the case on hand, I am inclined to agree with the findings of the AO and all the additions made by the AO stand confirmed. All the grounds 1 to 4 taken by the appellant are dismissed.”
Aggrieved, the assessee is now in appeal before this Tribunal.
6. Ld. Counsel for the assessee submitted that the assessee is engaged in two types of business of which one is of supply of railway track material under the sole proprietorship concern M/s. Krishna Industrial Corporation having turnover of Rs. 3.39 Cr and the second is business of purchase and sale of shares/equities and during the year there is a purchase and sale of shares at Rs. 2,43,46,488/- and Rs. 1,18,93,316/- respectively. 6.1. So far as the disallowance u/s 14A of the Act is concerned it was submitted that the assessee is carrying out the business of purchase and sale of equity shares and investment. Interest disallowance is uncalled for as majority of investments are out of the assessee’s own capital and interest free loan and small portion of borrowed loan has been utilized. It was also submitted that in view of the settled judicial precedence including special Bench decision in the case of ACIT vs. Vireet Investment (P.) Ltd. reported in [2017] 82 taxmann.com 415 (Delhi - Trib.) (SB) only those investments are to be considered for computing the average value of investment for the purpose of disallowance u/s 14A of the Act I.T.A. No.: 122/KOL/2023 Assessment Year: 2012-2013 Sri Aditya Kumar Rungta. which yield exempt income during the year and on applying this ratio on the facts of the instant case, disallowance under third limb of Rule 8D of Income Tax Rules, 1962 read with Section 14A of the Act will amount to Rs. 58,099/- as against Rs. 2,50,778/- computed by ld. AO. It was also submitted that since the appellant has received dividend income of Rs. 6,70,100/- from shares held as investment the disallowance should not be more than Rs. 6,70,100/-. For this proposition, reliance was placed on the judgment of Hon'ble Punjab & Haryana High Court in the case of PCIT vs. Empire Package (P.) Ltd. reported in IT Appeal No. 415 of 2015 dated 12.01.2015. 6.2. As regards the interest disallowance u/s 36(1)(iii) of the Act is concerned, ld. Counsel for the assessee took us to the paperbook containing 120 pages and specifically referring to a sheet placed at page 1 of the paperbook showing the utilization of interest bearing funds and referring to the said sheet, it was submitted that the assessee possessed interest bearing funds at Rs. 9,04,18,587/- out of which a sum of Rs. 3,76,66,981/- was applied for non- business asset and therefore, if the rate of interest at 12.5% is adopted, the interest disallowance would amount to Rs. 47,08,373/- only. It was also submitted that ld. AO failed to consider the fact that the debit balance of the capital account of the assessee appearing in the sole proprietorship concern is not utilized for non-business purpose in totality as the said sum has been utilized for the share trading business carried out in the individual name. Thus, prayer was made to restrict the disallowance u/s 36(1)(iii) of the Act to Rs. 47,08,373/-.
I.T.A. No.: 122/KOL/2023 Assessment Year: 2012-2013 Sri Aditya Kumar Rungta.
On the other hand, ld. D/R vehemently argued supporting the orders of both the lower authorities.
We have heard rival contentions and perused the records placed before us. The first issue for our consideration is disallowance u/s 14A of the Act which has been raised by the assessee in ground nos. 3, 4, 5 & 6. We observe that ld. AO has computed the disallowance u/s 14A of the Act at Rs. 17,03,930/- . The exempt income earned by the assessee during the year is Rs. 61,47,689/- which comprises of dividend income of Rs. 12,96,867/-, long term capital gain at Rs. 4,85,822/- and PPF interest at Rs. 92,372/-. Ld. AO has computed the disallowance u/s 14A of the Act applying Rule 8D of Income Tax Rules, 1962 which consists of three limbs. Under the first limb the disallowance of Rs. 39,864/- has been made towards the amount of expenditure directly relating to the income which does not form part of total income. There is no dispute at the end of the assessee regarding this amount. Under the second limb interest disallowance at Rs. 15,87,650/- has been made towards interest expenditure incurred by the assessee attributable towards application of funds for earning exempt income. Under third limb disallowance of Rs. 25,778/- has been made at the rate of 0.5% of the average investment held during the year. Now the assessee is disputing the computation of disallowance under second and third limb.
As regards the interest disallowance of Rs. 15,87,650/- is concerned, we notice that the assessee has given a breakup of the available interest-bearing funds received as unsecured loan and loans from Axis Bank which is stated to be Rs. 9.04 Cr and out of I.T.A. No.: 122/KOL/2023 Assessment Year: 2012-2013 Sri Aditya Kumar Rungta. this application of the fund to the tune of Rs. 5.26 Cr are towards the business assets and Rs. 3.77 Cr approx towards non-business assets. During the course of hearing, ld. Counsel for the assessee stated that the assessee is ready to admit the disallowance of interest expenditure of Rs. 47,08,373/- calculated at the rate of 12.5% of the funds applied for non-business assets at Rs. 3.77 Cr. Since the non-business assets inter-alia includes the investments in shares and other investments there remains no justification to make interest disallowance u/s 14A of the Act separately. We, therefore, delete the interest disallowance of Rs. 15,87,650/- made under Rule 8D(2)(ii) of the I.T. Rules, 1962.
As regards the interest disallowance under the third limb calculated at the rate of 0.5% of the average investment of Rs. 5.02 Cr, ld. Counsel for the assessee stated that only the investments fetching exempt income should be considered for the purpose of calculating 0.5% disallowance. The details of the same has been placed at page 12 to 15 of the paperbook as per which the average investment fetching exempt income is shown at Rs. 3.66 Cr. Remaining investments are either in mutual funds or other investments which do not fetch exempt income. Thus, applying the rate of 0.5% on the average investment yielding exempt income of Rs. 3.66 Cr, the disallowance under third limb would work out to Rs. 1,83,000/-.
In the result, the disallowance u/s 14A of the Act stands confirmed at Rs. 2,22,864/- as against Rs. 17,03,930/- sustained by ld. CIT(A). Thus, ground nos. 3, 4 & 5 raised by the assessee stands partly allowed.
I.T.A. No.: 122/KOL/2023 Assessment Year: 2012-2013 Sri Aditya Kumar Rungta.
So far as the alternate claim made by the assessee in ground no. 6 is concerned, wherein it has been contended that disallowance u/s 14A of the Act cannot exceed the exempt income, we fail to find any merit in this ground because ld. Counsel for the assessee has stated that exempt income during the year is only Rs. 6,70,100/- being the dividend earned on the exempt income but he failed to take note of the fact that exempt income also comprises of long term capital gain from sale of equity shares at Rs. 4,85,822/- exempt u/s 10(38) of the Act, dividend income at Rs. 12,96,867/- and PPF interest at Rs. 92,372/-. Therefore, this alternate ground no. 6 raised by the assessee is dismissed.
So far as ground no. 2 is concerned it is against the finding of ld. CIT(A) sustaining disallowance of interest amounting to Rs. 1,58,99,942/-. We notice that for computing the said disallowance, ld. AO has referred to a figure of Rs. 9,94,96,513/- being the debit balance of the proprietor’s capital account standing in the books of sole proprietorship concern M/s. Krishna Industrial Corporation. Ld. AO based on this debit balance came to a conclusion that the said amount has been used by the proprietor in his individual name and since the source of the said sum is the unsecured loan, he disallowed the interest expenditure of Rs. 1,58,99,942/-.
We, however, notice that ld. AO was partially correct because the debit balance appearing in the sole proprietorship concern M/s. Krishna Industrial Corporation is reflected in the individual balance sheet of the assessee placed at page 32 of the paperbook. Under the individual name the assessee apart from making the