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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
आदेश / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)–2, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)-VII/36/DC (OSD)-1. Cir.4/2014-15 dated 11/04/2014 arising in the assessment order passed under s.143(3) of the Income Tax Act, 1961(hereinafter referred to as "the Act") dated 28/02/2014 relevant to Assessment Year (AY) 2011-12.
The assessee has raised the following grounds of appeal:-
K.B. Mehta Construction Pvt.Ltd. vs. DCIT Asst.Year - 2011-12 - 2 -
The ld. CIT(A) has erred in law and on the facts of the case in confirming the action of ld.AO in disallowing interest of Rs.1,41,235/- u/s.36(1)(iii) of the Act.
2. The ld.CIT(A) has erred in law and on the facts of the case in confirming the disallowance of Rs.50,554/- out of Rs.76,311/- made by ld.AO u/s14A r.w.r 8D of the Income-Tax Rules, 1962. 3. Alternatively and without prejudice to the above, learned CIT(A) ought to have appreciated that interest cannot be disallowed simultaneously u/s.36(1)(iii) and S.14A of the Act. 4. Alternatively and without prejudice to the above, learned CIT(A) has erred in law and on facts of the case in confirming the action of learned AO in adding back disallowance u/s14A r.w.r 8D amounting to Rs.50,554/- to the book profits calculated u/s.115JB of the Act. 5. The ld.CIT(A) has erred in law and on the facts of the case in confirming the action of ld.AO in adding Rs.1,70,127/- on account of income tax refund. 6. Both the power authorities have passed the orders without properly appreciating the facts and that they further erred in grossly ignoring various submission, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 7. The Ld.CIT(A) has erred in law and in facts of the case in confirming action of Ld.AO in levying interest u/s.234A/B/C/D of the Act. 8. The Ld.CIT(A) has erred in law and on the facts in confirming the action of Ld.AO in initiating penalty u/s.271(1)(c) of the Act.
The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.
2. The 1st issue raised by the assessee is that the Ld.CIT (A) erred in confirming the disallowance of interest expenses for Rs. 1,41,235.00 under section 36(1)(iii) of the Act.
The facts in brief are that the assessee in the present case is a private limited company and engaged in the business of industrial and commercial construction. The assessee during the year under consideration has acquired a machine on the money borrowed from the bank vide sanction letter dated 29th December, 2010. The assessee till the end of the financial year under consideration i.e. 31-3-2011 did not put to use the machine the purchased by it. However, the assessee claimed the deduction on account of the interest
K.B. Mehta Construction Pvt.Ltd. vs. DCIT Asst.Year - 2011-12 - 3 - paid on the money borrowed for Rs. 1,41,235.00 only which was utilized for the purchase of the impugned machinery.
3.1. However, the AO was of the view that the amount of interest expenses on the money borrowed which was utilized for the purchase of the machinery cannot be allowed as deduction under the provisions of section 36(1)(iii) of the Act until and unless the interest relates to the post put to use period. Accordingly he disallowed the same and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the Ld. CIT (A).
The assessee before the Ld.CIT(A) submitted that there was no extension of the existing business. Therefore, the condition specified under the proviso to section 36(1)(iii) of the Act does not apply.
However, the Ld. CIT (A) disregarded the contention of the assessee and confirmed the order of the AO by observing that the machine purchased by the assessee out of the borrowed fund was not put to use in the year under consideration. Accordingly he was of the view that the amount of interest on the borrowed fund utilized for the purchase of the machinery is not eligible for deduction in pursuance to the provision of section 36(1)(iii) of the Act.
Being aggrieved by the order of the Ld. CIT (A), the assessee is in appeal before us.
K.B. Mehta Construction Pvt.Ltd. vs. DCIT Asst.Year - 2011-12 - 4 -
The Ld. AR before us submitted that there was no extension in the business of the assessee for the purchase of the machinery. Therefore the interest expense is revenue in nature.
On the other hand, the Ld. DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, there was the acquisition of the new machinery out of the borrowed fund which was not put to use during the year under consideration. But the question arises whether such acquisition of machinery amounts to the extension of the existing business. None of the authorities below has put some light on this aspect. As such the proviso to section 36(1)(iii) of the Act mandates to capitalize the amount of interest on the machine acquired out of the borrowed fund provided such acquisition results in the extension of the business. The relevant proviso to section 36(1)(iii) of the Act reads as under:
(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— (i)XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
(ii)XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :
[Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.]
K.B. Mehta Construction Pvt.Ltd. vs. DCIT Asst.Year - 2011-12 - 5 - 8.1. As there is no finding of the authorities below about the extension of the existing business of the assessee, the controversy arises for adjudication whether such acquisition of the machinery refers to the extension of the business in the given facts of the circumstances.
8.2. In this regard, we note that the value of the machine acquired by the assessee during the year is negligible to the total value of the plant and machineries shown by the assessee in its balance-sheet as on 31 March 2011. Such, small addition in the plant and machinery cannot amount to the extension of the existing business. As there is no detail available before us suggesting that there was some increase in the production/sales etc, we are not inclined to treat the interest expense on the acquisition of such machinery out of the borrowed fund as extension of the existing business. Accordingly we hold that as there was no extension of the existing business, therefore the amount of interest expenses incurred by the assessee on the borrowed money utilized for the acquisition of the machineries is eligible for deduction as revenue expense. Hence the ground of Appeal of the assessee is allowed.
9. The next issue raised by the assessee is that the Ld. CIT(A) erred in confirming the disallowance for Rs. 50,554.00 under the provisions of section 14A read with Rule 8D of the Income Tax Rules, 1962.
9.1. The assessee in the year under consideration has received the income amounting to Rs. 50,554,00 which was claimed exempted under section 10(34) of the Act. But the assessee has not made any disallowance of any expense as per the provisions of section 14A read with rule 8D of income tax
K.B. Mehta Construction Pvt.Ltd. vs. DCIT Asst.Year - 2011-12 - 6 - rule on the reasoning that it has not incurred any expenditure qua the dividend income.
9.2. However, the AO disagreed with the contention of the assessee and invoked the provisions of section 14A read with rule 8D of Income Tax Rule for the purpose of the disallowance as detailed under:
Direct expenses Nil Interest Expenses Rs. 63,504.00 Administrative Expenses Rs. 12,807.00 Total Rs. 76,311.00 9.3. In view of the above, the AO disallowed the sum of Rs. 76,311.00 and added to the total income of the assessee.
9.4. Aggrieved assessee preferred an appeal to the Ld. CIT (A) who also confirmed the order of the AO in part by restricting the disallowance to the extent of exempt income.
Being aggrieved by the order of the Ld. CIT-A, the assessee is in appeal before us.
The Ld. AR before us submitted that the amount of investment shown by it is less than the amount of own fund of the assessee. Therefore there cannot be any disallowance on account of interest expenses.
On the other hand, the Ld. DR vehemently supported the order of the authorities below.
K.B. Mehta Construction Pvt.Ltd. vs. DCIT Asst.Year - 2011-12 - 7 -
We have heard the rival contentions of both the parties and perused the materials available on record. Indeed, the own fund of the assessee exceeds the amount of investment which is detailed as under:
“Asst.YEAR INVESTMENT DURING Share Capital + Reserves THE YEAR 2007-08 Rs. 7,86,350/- Rs. 61,69,662/- 2008-09 Rs.45,00,000/- Rs.1,50,86,500/- 2009-10 Rs.19,75,066/- Rs.3,79,43,716/- 2010-11 Rs.Nil Rs.3,93,45,805/- 2011-12 Rs.Nil Rs.4,53,51,365/-“ 12.1. Thus, it is presumed that the investment has been made by the assessee out of its own fund without utilizing the borrowed money. Accordingly there cannot be any disallowance on account of interest expense. In holding so we find support and guidance from the judgment of Hon’ble Gujarat High Court in the case of CIT Vs.UTI Bank ltd. reported in 32 taxmann.com 370 wherein it was held no disallowance of interest expenses is warranted if the own fund of the assessee exceeds the amount of investment. The relevant extract of the head note is reproduced as under:
“Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not chargeable to tax [Dividends] - Assessment year 2003-04 - Whether, where assessee had sufficient interest free funds to meet its tax free investments yielding exempt income, it could be presumed that such investments were made from interest free funds and not loaned funds and, thus no disallowance under section 14A being warranted - Held, yes”
12.2. Regarding the addition of administrative expenses, the Ld. AR did not advance any argument at the time of hearing considering the smallness amount involved therein. Accordingly, we do not find any reason to interfere in the finding of the Ld. CIT-A. Accordingly we confirm the disallowance of K.B. Mehta Construction Pvt.Ltd. vs. DCIT Asst.Year - 2011-12 - 8 - Rs. 12,807.00 on account of administrative expenses. Hence the ground of appeal of the assessee is partly allowed.
13. The next issue raised by the assessee is that the Ld. CIT-A erred in confirming the disallowance of Rs. 50,554.00 while determining the books profit under section 115JB of the Act.
13.1. The AO during the assessment proceeding has made the disallowance of Rs. 50,554.00 under the provisions of section 14A read with rule 8D of Income Tax Rule against the exempted income. The AO subsequently disallowed the same amount while determining the book profit under the provisions of section 115JB of the Act.
13.2. Aggrieved assessee preferred an appeal to the Ld. CIT(A) who confirmed the order of the AO.
Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us. The ld. AR before us submitted that there cannot be any application of the provisions for section 14A r.w.r.8D Rules while determining the income under section 115JB of the Act.
On the contrary, the ld. DR vehemently supported the order of the aythorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. Regarding the addition in the book profit under section 115JB of the Act, we note that the AO in the instant case has made
K.B. Mehta Construction Pvt.Ltd. vs. DCIT Asst.Year - 2011-12 - 9 - the disallowance u/s 14A r.w.r. 8D of the Income Tax Rules for Rs. 50,554/- while determining the income under normal computation of income. Further, the AO while determining the income under Minimum Alternate Tax (MAT) as per the provisions of section 115JB of the Act, has added the disallowance made under the normal computation of Income under section 14A r.w.r. 8D of Income Tax Rule for Rs. 50,554/- in pursuance to the clause (f) of explanation 1 to section 115JB of the Act.
14.1. However, we note that in the recent judgment of Special Bench of Hon’ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 has held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the book profit u/s 115JB of the Act. The relevant portion of the said order is reproduced below:
“In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962.”
14.2. The ratio laid down by the Hon’ble Tribunal is squarely applicable to the facts of the case on hand. Thus it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot be resorted while determining the expenses as mentioned under clause (f) of explanation 1 to section 115JB of the Act.
14.3. However, it is also clear that the disallowance needs to be made with respect to the exempted income in terms of the provisions of clause (f) to section 115JB of the Act while determining the book profit. In holding so, we draw support from the judgment of Hon’ble Calcutta High Court in the case of K.B. Mehta Construction Pvt.Ltd. vs. DCIT Asst.Year - 2011-12 - 10 - CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance regarding the exempted income needs to be made as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:- “We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 under section 115JB of the Act. We remand the matter for such computation to be made by the Ld. Tribunal. We accept the submission of Mr. Khaitan, Ld. Senior Advocate that the provision of section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act.”
14.4. In view of the above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra).
14.5. Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. In this regard, we note that there is no mechanism/ manner given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the expenses with respect to the exempted income. Therefore in the given facts & circumstances, we feel that ad-hoc disallowance will serve the justice to the Revenue and assessee to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also feel to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of K.B. Mehta Construction Pvt.Ltd. vs. DCIT Asst.Year - 2011-12 - 11 - Sec. 115JB of the Act independently. But now we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income under the clause (f) to Explanation-1 of Sec. 115JB of the Act subject to the condition that the disallowance shall not exceed the amount of disallowance determined by the authorities below under the provisions of section 14A r.w.r. 8D of Income Tax Rules. Hence, the ground of appeal of the assessee is partly allowed.
15. The last issue raised by the assessee is that the Ld. CIT-A erred in confirming the addition of Rs. 1,70,127.00 on account of interest on the income tax refund.
15.1. The AO during the assessment proceedings found that the assessee has received interest income on the income tax refund for Rs. 1,70,127.00 as evident from the form 26AS. But the assessee has not offered the same to tax. Accordingly the AO made the addition of such amount to the total income of the assessee.
15.2 Aggrieved, assessee preferred an appeal to the Ld. CIT-A, who confirmed the order of the AO.
Being aggrieved by the order of the Ld. CIT (A), the assessee is in appeal before us.
K.B. Mehta Construction Pvt.Ltd. vs. DCIT Asst.Year - 2011-12 - 12 -
The Ld. AR before us submitted that the impugned amount of interest on income tax refund has been offered to tax in the subsequent assessment year. Accordingly, he prayed before us to give a direction to the Revenue that there should not be double taxation on the same income. As such it was pleaded before us to provide the direction to the AO to exclude the amount of such interest on income tax refund from the income of the subsequent year if it has been offered to tax otherwise it would lead to double addition of the same income.
On the other hand, the Ld. DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The Ld. AR for the assessee before us agreed for the addition of the impugned amount of interest on the income tax refund but requested to give a direction to delete the same from the income of the subsequent assessment year provided such interest has been offered to tax. We find considerable force in the argument of the Ld. AR for the assessee. The Ld. DR has not brought anything on record contrary to the argument advanced by the Ld. AR for the assessee. The scheme of Act prohibits taxing the same income twice. Thus if such amount of interest income has already been offered to tax by the assessee in any of the assessment year, then the same shall stand deleted. Accordingly we set aside the file to the AO with the direction to adjudicate the issue afresh as per the provisions of law and in the light of the above stated discussion. Hence the ground of appeal of the assessee is allowed for the statistical purposes.
K.B. Mehta Construction Pvt.Ltd. vs. DCIT Asst.Year - 2011-12 - 13 -
In the result, the appeal of the assessee is partly allowed for statistical purposes.