THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), AHMEDABAD vs. ADANI WILMAR LTD., AHMEDABAD

First we take Revenue’s appeal. Sole grievance raised by the Revenue is that the ld.CIT(A) has erred in restricting the disallowance of Rs.7,72,41,277/- made under section 14A of the Income Tax Act, 1961 r.w. Rule 8D of Income Tax Rules, 1962.

Brief facts of the case are that the assessee has filed return of income on 28.11.2013 declaring total loss of Rs.NIL. After processing the same under section 143(1) of the Act, the case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee. During the scrutiny assessment, it was noticed by the AO that the assessee has earned dividend income to the tune of Rs.2,64,500/- which was exempt from tax. The AO also noticed that opening balance investment as on 1.4.2013 was Rs.1569.02 million, and closing of the same as on 31.3.2014 was Rs.1326.33 million. The ld.AO accordingly sought for details of expenses incurred towards earning of tax free income, and also proposed as to why proportionate expenses should not be disallowed. The assessee made elaborate written submissions along with supporting case laws. Assessee has also furnished details of investment as on 31.3.2013 and 31.3.2012 as reflected in the audited financial statements. It was accordingly submitted that investment reflected in the books of assessee was due to merger/amalgamation of companies viz. Acalmar Oil & Fats Ltd., and Rajshri Packagers Ltd. with the assessee company, and there was no cash outflow, except Rs.10,02,68,894/- for purchase of 25% shares of Krishnapatnam Oils & Fats P.Ltd., which was made out of interest free funds available with the assessee-company. Assessee had huge amount of interest free funds in the form of cash profit viz. profit after tax of Rs.75.42 crores, deferred tax liability of Rs.45.81 crores and depreciation Rs.54.94 crores, which were sufficient to make new investment to the tune of Rs.10 crores, and therefore, since interest free own funds were far in excess of the funds invested in tax free income, no disallowance under section 14A be made in respect of earning tax free income. Disallowance if at all to me made, then the same should not exceed the quantum of exempt income of Rs.2,64,500/-. The ld.AO however did not satisfy with explanation of the assessee, he accordingly calculated proportionate presumptive expenditure for earning of tax free income with the aid of section 14A read with Rule 8D at Rs.7,72,41,277/- and made addition to that extent.

Aggrieved by the action of the AO, assessee went in appeal before the ld.CIT(A). Before the ld.first appellate authority, assessee reiterated its submissions as were made before the ld.AO. Assessee filed summarized position of balance sheet as on 31.3.2013 and 31.3.2012 and submitted that assessee’s own funds in the form of share capital and reserves were Rs.682,01 crores at the beginning of the year, and Rs.771.39 crores at the end of the year. In other words, assessee’s own funds were 4.35 times more than its investment at the beginning of the year, and 5.81 times more than at the end of the year. It was further submitted that for earning meager dividend income of Rs.2,64,500/- the assessee did not have to incur any expenditure, as all the expenditure were in group companies and strategic in nature, and therefore, there was no question of any disallowance under section 14A of the Act. Even otherwise also, in any case, the disallowance could not be more than the amount tax free income of Rs.2,64,500/-. The AO has simply made the impugned disallowance on the assumption that the assessee would have incurred some amount towards interest and administrative expenses, and such assumption is without any basis or lack of appreciation of assessee’s case. It was further submitted by the assessee that the ld.CIT(A)-1 in the assessee’s own case for the Asstt.Year 2011-12 vide order No.CITA)-1/72/DCIT, Cir.1(1)(1) 2015-16 dated 26.4.2016 similar disallowance made by the AO was restricted to the amount of exempt income earned by the assessee. Therefore, at the most the impugned disallowance should be restricted to exempt income i.e. Rs.2,64,500/-. After considering the submissions of the assessee and also decision of his predecessor for the Asstt.Year 2011-12 in assessee’s own case disallowance was restricted to Rs.2,64,500/-. Dissatisfied with the action of the ld.CIT(A), Revenue is now before the Tribunal.

Before us, both the parties have supported respective orders of the Revenue authorities.

After hearing both the sides and on perusal of material available on the record, we find section 14A of the Act contemplates that the expenditure incurred in relation to earning of tax free income deserves to be disallowed. During this year, the assessee has earned exempt income of Rs.2,64,500/- in the form of dividend. Assessee has submitted before the Revenue authorities that it has sufficient funds in the form of paid up share capital and reserves and surplus at Rs.682.01 crores at the beginning of the year, and Rs.771.39 crores at the end of the year, which is more than five times of the investment made by the assessee during the year. There is no finding by the AO that the investment made by the assessee was out of loan/borrowed funds, and therefore, provisions of section 14A r.w.rule 8D is not applicable to the assessee’s case. As the facts emerges from the record, the investment made by the assessee was strategic investment and not made for earning of dividend income, therefore, disallowance cannot be more than the exempt income. We are of the view that the ld.CIT(A) has appreciated the facts of the case, and also considered earlier claim of the assessee for the Asstt.Year 2011-12, whereby he concurred with the decision of his predecessor in restricting disallowance to the extent of exempt income. In the case of CIT Vs. Corrtech Energy Ltd., 372 ITR 97 (Guj) Hon’ble Gujarat High Court has held that in the absence of any exempt income being claimed by the assessee provisions of section 14A r.w.r 8D could not be invoked. The rationale behind this judgment is that the amount of disallowance u/s 14A should not exceed the exempt income. The ld.AO was not justified in invoking provisions of section 14A of the Act in the present case. Moreover, the assessee has earned a small amount of Rs.2,64,500/-, whereas the ld.AO has calculated a whopping sum of Rs.7,72,41,277/- as proportionate expenditure for earning the exempt income. Even assuming that some expenditure is required to be disallowed but such disallowance should not exceed the quantum of exempt income. Therefore, we uphold order of the ld.CIT(A) on this issue, and dismiss the ground of appeal of the Revenue.

The ld.counsel for the assessee did not press assessee’s appeal for adjudication. Therefore, the same is dismissed for want of prosecution.

In the result, both appeal of the Revenue and the CO of the assessee, are dismissed.