Loading judgment…
No AI summary yet for this case.
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, JAIPUR BENCH ’B’, JAIPUR
Before: SHRI RAMESH C. SHARMA, AM & SHRI VIJAY PAL RAO, JM vk;dj vihy la-@ITA No. 711/JP/2018
PER VIJAY PAL RAO, JM : This appeal by the revenue is directed against the order dated 8th February, 2018 of ld. CIT (A), Kota for the assessment year 2014-15. The revenue has raised the following grounds :-
“ 1. Whether on the facts and circumstances of the case and in law the ld. CIT (A) was justified in deleting disallowance of Rs. 42,46,087/- being relatable interest expenses under section 14A r.w.r. 8D without appreciating the fact that so called strategic investments made in closely held companies or firms are fruitfied in the form of dividend, STCG/LTCG on sale of investment, Salary, remuneration etc. from any firm or company are received for the services rendered in personal capacity and not for mere investments ?
2. Whether on the facts and circumstances of the case and in law the ld. CIT (A) was justified in deleting disallowance of Rs. 65,28,895/- being interest incurred on investment in non-
business personal assets and loans and advances on which no interest has been charged without appreciating position of law that if the assessee sells assets the income from which is chargeable to capital gain tax, the assessee gets benefit of the all the moneys paid for acquiring such assets including ancillary expenses whatsoever, in computation of capital gain which is taxed at special rates also, say 20% in the case of long term capital gains and thus, strategic investment in acquiring assets as above cannot be said for the business purposes and relatable interest cannot be allowed treating the same as business expenses ?
Ground No. 1 is regarding disallowance of Rs. 42,46,087/- made by the AO under section 14A read with Rule 8D was restricted by the ld. CIT (A) to Rs. 2,76,768/-.
The assessee is an individual and derives income from salary, house property, trading in shares and commodity, capital gain and interest. The assessee filed his return of income on 28th November, 2014 declaring total income of Rs. 22,00,000/- after claiming the exempt income by way of capital gain and dividend from shares total amounting to Rs. 19,09,954/-. The AO noted that the assessee has claimed interest expenditure of Rs. 1,32,95,215/- and also having exempt income of Rs. 19,09,954/- against which attributable investment is Rs. 82,65,002/-. The AO invoked the provisions of section 14A read with Rule 8D(ii) & (iii) and made the disallowance of Rs. 42,46,082/-. Thus the AO has disallowed the interest expenditure in proportion to the total asset and investment in shares and securities as well as indirect administrative expenses being 0.5% of the average investment.
The assessee challenged the action of the AO before the ld. CIT (A) and pointed out that the AO has committed mistake in calculating the disallowance as per Rule 8D(iii) being 0.5%. The said mistake was subsequently rectified by the AO while giving effect to the order of the ld. CIT (A). Further it was pointed out that even after making the rectification in calculation, the disallowance would get reduced to Rs. 25,82,190/- which is still more than the exempt income earned by the assessee.
The ld. CIT (A) allowed relief to the assessee by modifying the computation of disallowance under Rule 8D(ii) and 8D(iii) of the IT Rules. Thus the ld. CIT (A) has restricted the total disallowance under section 14A at Rs. 2,76,768/-.
Before us, the ld. D/R has submitted that the AO has computed the disallowance strictly as per Rule 8D of IT Rules. Therefore, excluding the investment made by the assessee, the disallowance restricted by the ld. CIT (A) is not as per the provisions of section 14A read with Rule 8D. The ld. D/R has further contended that the assessee has also given the interest free funds to the group concerns and further used the funds for purchase of fixed assets but no business was done during the year under consideration. Therefore, the AO has rightly disallowed the interest expenditure to the extent of Rs. 23,97,313/-. Similarly, the AO has computed the disallowance under Rule 8D(2)(iii) being 0.5% of the average investment which was reduced by the ld. CIT (A). He has relied on the order of the AO.
On the other hand, the ld. A/R has submitted that there is apparent mistake in calculating the disallowance under Rule 8D(2)(iii) while the AO has taken the amount at Rs. 18,48,774/- as against Rs. 1,84,877/-. Further, as regards the disallowance on account of interest expenditure, the AO has not considered the interest received by the assessee of Rs. 65,87,152/- and the disallowance should have been made only against the net interest payment instead of gross interest.
Thus the AO has again committed a mistake by taking the gross interest expenditure instead of the net interest expenditure. The ld. A/R has further pointed out that the attributable investment yielding the interest income is only Rs. 57,81,500/-.
Therefore, the proportionate disallowance of interest needs to be computed with reference to only that investment from which the exempt income is earned. He has supported the order of the ld. CIT (A).
We have considered the rival submissions as well as the relevant material on record. As regards the computation of disallowance under Rule 8D(2)(iii), we find that there is a calculation mistake while arriving at the amount of disallowance by the AO of Rs. 18,48,774/- whereas the correct amount is Rs. 1,84,877/-. We further note that the ld. CIT (A) has further reduced this disallowance by taking the average investment which has yielded the exempt income. Thus to that extent we do not find any error in restricting the disallowance under Rule 8D(2)(iii) to Rs. 36,694/-. As regards the disallowance under Rule 8D(2)(ii), the ld. CIT (A) has computed the disallowance by taking the percentage of the investment yielding investment income to the total asset which comes to 3.58%. Accordingly, the ld. CIT (A) after taking the net interest payment and the ratio of 3.58% of the same has made the disallowance as attributable to the earning of exempt income. The relevant finding of the ld. CIT (A) on this issue is as under :-
“The A.O. has not worked out a nexus between the interest bearing & own funds or the investments which did not have any exempted incomes linked to them. The A.0 has also not analysed the own funds available to the assessee for making such investments. If he was sure that the working of the appellant was wrong, he should have recorded his satisfaction before resorting to the disallowance as per rule 8D, however, these elements are missing from the assessment order.
The Delhi High Court in the case of Joint Investments (P.) Ltd. vs. CIT [2015]372 ITR 694/233 Taxman 117/59 taxmann.com 295 held that-
By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.
It is also noticed that while calculating the disallowance as per rule 8D (iii) being 0.5% of Rs. 3,69,75,480/- in his order, the A.O has wrongly calculated the figure at Rs. 18,48,774/- (@5% instead of 0.5%). This amount comes to Rs. 1, 84,877/-. This reduces the addition by Rs.16, 63,897/- which the A.O should rectify while giving effect to this order. If this amount is reduced, the disallowance would get reduced to Rs. 25, 82,190/-(Rs.42, 46,087-16, 63,897) which is more than the exempt income earned. Thus the working itself gives unreal results based on the above calculations. Thus subject to the calculation done below based on the documents available, the disallowance is reworked as under-
Particulars Amount Interest paid 1,32,95,215 Less: interest received 65,87,152 Net interest paid 67,08,063 Investment attributable to exempt income 73,38,933 Total assets 20,50,61,628 Proportion of ratio of investment to the total 3.58% assets Disallowance under Rule 8D(ii) 2,40,074 Disallowance under Rule 8D(iii) (.5% of 36,694 73,38,933) Total disallowance 276768
Thus disallowance of Rs. 2,76,768/- is upheld. The balance disallowance of Rs. 39,69,319/- (inclusive of the calculation mistake amounting to Rs. 16,63,897/- discussed above) is to be deleted. This ground is partly allowed.” From the facts and details as considered by the ld. CIT (A), we find that the revenue has not pointed out any error as regards the correctness of the details considered by the ld. CIT (A). Accordingly, when the correct amount of investment and interest paid during the year under consideration was considered by the ld. CIT (A) for the purpose of disallowance under section 14A, then there is no reason to interfere with the said findings of the ld. CIT (A) qua this issue. Hence the order of the ld. CIT (A) is upheld.
Ground No. 2 is regarding disallowance of interest being incurred on the investment in non-business asset and loan and advances without interest.
The AO noted that the asseessee has incurred interest expenditure of Rs. 1.65 crore on the borrowed fund of Rs. 17.22 crores and arrived to the rate of interest expenditure at 9.6%. The AO further noted that the assessee has made certain loans and advances to relatives on which no interest was charged and also made investment in the properties which are non-business assets. Accordingly, the AO has applied the said average rate of 9.6% on these investments and loan & advances and worked out the proportionate interest of Rs. 65,28,895/-. The AO, however, allowed the interest income received by the assessee during the year while computing the disallowance on this account. The ld. CIT (A) deleted the disallowance made by the AO by considering the fact that the assessee’s own capital is Rs. 2,25,84,374/- which is more than the investment and loan & advances given by the assessee to the relatives.
Before us, the ld. D/R has submitted that there is no direct nexus that the assessee’s own fund is used by the assessee for giving loans and advances to the relatives and making investment in the non-business assets/personal assets. The AO has considered the net interest expenditure while making this disallowance and, therefore, the disallowance made by the AO is reasonable and proper. He has relied on the order of the AO.
On the other hand, the ld. A/R has submitted that the AO has ignored assessee’s current liability of Rs. 3.56 crores on which no interest is paid and further the assessee has own capital of Rs. 2,25,84,374/-. When the assessee’s own fund and interest free fund is more than the net investment in non-business asset, then no disallowance is called for on this account. He has supported the order of ld. CIT (A). The ld. A/R has further submitted that apart from the interest income of Rs. 65,87,152/-, the assessee has also received rental income of Rs. 29,38,242/- which is more than the interest worked out by the AO on such non-business assets. Hence, the ld. A/R has submitted that by considering all these facts no disallowance is called for.
We have considered the rival submissions as well as the relevant record. The AO has made the disallowance on account of interest by considering the non- business assets of the assessee at Rs. 13.66 crores and then applying the average rate of interest expenditure at 9.6% has worked out the disallowance at Rs. 75,25,859/-. The ld. CIT (A) has considered this issue as under :-
We find that the ld. CIT (A) has rightly considered the assessee’s own capital at Rs. 2.25 crores. Further, the revenue has not disputed the current liability of the assessee at Rs. 3.56 crores on which no interest is payable. Thus considering the interest free fund as well as the rental income and interest income of the assessee which alone is more than the amount of interest disallowed by the AO, the ld. CIT (A) deleted the disallowance. Accordingly once the rental income and interest income of the assessee is Rs.95,25,394/- earned on the alleged non-business assets then the disallowance worked out by the AO on account of interest of Rs. 75,25,859/- is less than the said income, hence we do not find any error or illegality in the impugned order of the ld. CIT (A).
In the result, appeal of the revenue is dismissed.
Order is pronounced in the open court on 02/07/2019.