CONTINENTAL DEVICE INDIA P.LTD,NEW DELHI vs. DCIT, CIRCLE-6(2), NEW DELHI

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ITA 8314/DEL/2019Status: DisposedITAT Delhi09 March 2022AY 2016-177 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that if an assessee has own funds exceeding the investments yielding tax-free income, no disallowance of interest expenditure can be made. This is based on the presumption that such investments are made from own funds, a principle upheld by the Supreme Court.

What were the facts?

The assessee claimed dividend income as exempt and made a suo motu disallowance under Section 14A. The Assessing Officer (AO) made a higher disallowance under Rule 8D, considering all investments. The CIT(A) reduced the disallowance but did not fully address the assessee's argument about using own funds.

What were the issues?

Whether disallowance of interest expenditure under Section 14A read with Rule 8D is justified when the assessee has sufficient own funds to make investments yielding tax-free income.

Which sections of the Income-tax Act were involved?

Section 14A

AI-generated summary — verify with the full judgment below

Cases cited in this judgment(11)Show list

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Income Tax Appellate Tribunal, DELHI BENCH ‘B’ : NEW DELHI

Before: SHRI AMIT SHUKLA & DR. B.R.R. KUMAR

For Appellant: Shri Pradeep Dinodia, Advocate
For Respondent: Shri Rajesh Kumar Dhanesta, Senior DR
Hearing: 09.03.2022

PER AMIT SHUKLA, JM :

1.

The aforesaid appeal has been filed by the assessee against the impugned order dated 24.09.2019 passed by the ld. CIT(A)-16, New Delhi for the quantum of assessment passed under section 143(3) of the Income-tax Act, 1961 (for short ‘the Act’) for the assessment year 2016-17.

2.

In the grounds of appeal, the assessee has challenged the disallowance under section 14A read with Rule 8D(2)(ii) on account of interest.

3.

Facts in brief are that the assessee company is engaged in the business of electronics and computer hardware. Assessee had earned dividend income of Rs.33,10,110/- which was claimed as exempt. The assessee in the computation of income has worked out suo motu disallowance of Rs.2,77,600/- which was worked out under Rule 8D(2)(iii) i.e. by taking 0.5% of average value of investments of Rs.5,55,19,967/- on which dividend was received. However, AO without recording any satisfaction has proceeded to make disallowance of Rs.2,99,83,789/- and after reducing the amount of Rs.2,77,600/- had disallowed by the assessee made addition of Rs.2,97,06,189/- under Rule 8D(2) on account of disallowance of interest.

4.

Before the ld. CIT (A), assessee submitted that it had huge surplus funds in the form of capital and surplus profits and, therefore, no disallowance of interest expenditure can be made. The relevant submissions of the assessee before the ld. CIT (A) are as under:-

“GROUND NO. 2(a), (b), (c) & (d) 1. Only those investments to be considered which have yielded tax free income:- In the computation of disallowance u/s 14A r.w.r 80 (Page No. 4 of the Assessment Order), the AO has ignored judicial pronouncements while considering total investment for the purpose of Rule 8D(2)(ii) and (iii). The AO has considered taxable and non-taxable investment including investment in partnership firm for the purpose of Rule 8D(2)(ii) & (iii) of IT Rules. It will be seen that for determining the average value of investments and the average value of the total investments, the Assessing Officer had included investments both taxable and non-taxable investments. He had also included investments which didn't yield any exempt income during the year under consideration. Whereas, the contention of the assessee was that only those investments should be considered which have yielded tax free income during the year under consideration. The assessee had submitted a statement before the Assessing Officer showing a disallowance of Rs.2,77,600/- u/s 14A. The disallowance of Rs.2,77,600/- was worked out at V2% of average investments of Rs.5.55,19,9671- on which dividend was received. The list of investments on which dividend received and working of disallowance computed by Assessee is enclosed as Annexure 2 for your kind perusal. Delhi Appellate Tribunal( Special Bench) in the case of ACIT vs. Vireet Investment (P) Ltd. [2017J 82 taxmann.com 415 (Delhi-Special Bench) has held that only those investments are to be considered for computing average value of investments which yielded exempt income during the year. In other words, the contention of the assessee stands fully APPROVED by the decision of the Special Bench of ITAT Delhi. Therefore, in the light of the decision of the Special Bench of Delhi ITAT, the working of disallowance u/r 8D(2)(ii)/(iii) is required to be recomputed in the light of recent judgment of Delhi ITAT Special Bench decision and other judicial pronouncements referred to above. There are various no. of judgments wherein it has been held that only those investments have to be considered which have actually yielded tax free income during the year;- i) ACB India vs. ACIT [2015J 374 ITR 108 (Delhi); ii) Chem Invest vs. CIT [2015J 370 ITR 33 (Delhi). iii) Pro CIT vs, IL & FS Energy Development Co. Ltd. (2017) Taxman.com 186 (Delhi). iv) Cit vs. Holcim India (P) Ltd. [2015} 272 CTR 282 (Delhi). v) HT Media Ltd. vs. Pro CIT [201. 7-TIOL-

1. 1. 643-HC-Delhi- IT]. vi) Pro CIT V. India Gelatine & Chemicals Ltd. [201.5] 376 ITR 553/[2016] 66 taxmann.com 356 The Hon'ble Supreme Court in the case of PCIT v. Sintex Industries Ltd. [201.8] 93 taxmann.com 24 (SC) dismissed the Special Leave Petition (SPL) filed by revenue against order of CIT v. Sintex Industries Ltd. [2017] 82 taxmann.com 71. (Guj. HC) wherein it was held that when the assessee had sufficient interest-free funds out of which concerned investments had been made, disallowance u/s 14A of the Act is not justified.

2. Where the assessee's own funds i.e. capital reserves and surplus profits exceed the investments which yielded tax free income, no disallowance of common interest expenditure could be made u/r 8D(2)(ii) in view of the following:- This is without prejudice to the claim that Assessing Officer has not recorded requisite satisfaction and has mechanically proceeded to apply rule BO, which is not permissible in law as per various judgments 'including the judgment of Apex Court and disallowance made by him is illegal. It is further submitted that assessee's own funds as per the Balance Sheet are much more than the total investments. Thus, According to the assessee no disallowance u/r 8D(2)(ii) on common interest was called for as the assessee's own funds exceeded the investments which yielded tax free income as under:- As on 31.03.2016 Rs.Crore 104.70 Shareholders' funds Total Investments Shares (Quoted & Unquoted) : 6.08 Mutual Fund (Quoted & Unquoted) : 15.00 Investments in Partnership : 73.76 Total 94.84 Thus, in light of aforesaid facts of assessee company and preposition of various court, it is submitted that where there is a common pool of assessee's own funds and interest bearing funds, the presumption is that the investments which yielded tax free income are out of assessee's own funds as long as the own funds exceed the investments which yield tax free income and. there is no need to establish with evidence that the tax free investments have come out of interest free funds [2016] 383 ITR 529 (Bom) Para 15 & 1.6 in the case of HDFC Bank vs. DCIT. Admittedly the shareholders funds are Rs.104.70 Crore and and investments are Rs.94.84 Crore. i) HDFC Bank Ltd. Vs. DCIT [2016] 383 ITR 529 (Bom): ii) CIT vs. Microlabs [2016] 383 ITR 490 (Karnataka); iii) CIT vs. Adani Enterprises Ltd. [2017] 396 ITR 313 (Gujarat). iv) Pro CIT v. Gujarat State Fertilizers and Chemicals Ltd. [ 2019] 416 ITR 13 (Guj) . Therefore, no disallowance of interest expenditure could be made u/r 8D(2)(ii).”

5.

Ld. CIT (A), though accepted many of the contentions raised by the assessee, however reduced the disallowance to the extent of exempt income of Rs. 33,10,110/- relying upon the decision of the Hon’ble jurisdictional High Court in the case of Joint Investment Pvt. Ltd. vs. CIT (2015) 372 ITR 694 (Del.).

6.

Before us, ld. counsel for the assessee submitted that the Tribunal in assessee’s own case in in AY 2014-15 vide order dated 14.10.2020 has deleted the similar disallowance made u/s 14A on account of interest expenditure under Rule 8D(2)(iii) on the ground that assessee has surplus fund for making the investment. In this year also, he submitted that the assessee had shareholders fund of more than Rs.104.70 crores and the investment made by the assessee was of Rs.94.48 crores wherein the investment in partnership was Rs.73.76 crores, thus on shares and mutual fund, there was only investment of Rs.21 crores. Thus, no disallowance u/s 14A can be made on account of interest expenditure in view of the decision of the Tribunal in assessee’s own case (supra).

7.

Ld. DR for the Revenue however relied upon the order of the ld. CIT (A).

8.

We have heard the rival submissions, perused the relevant findings given in the impugned order as well as the material referred to during the course of hearing. It is undisputed fact that assessee made suo motu disallowance of Rs.2,77,600/- under section 14A read with Rule 8D for earning dividend income of Rs. 33,10,110/-. Further, disallowance has been worked out only on those investments on which it has earned dividend income during the year and accordingly, assessee has worked out 0.5% of average value of those investment in which yielded dividend income during the year. Assessee’s specific contention was that no borrowed funds have been utilized and all the investments have been made in the earlier years from the assessee’s

own funds and, has not been rebutted and therefore, there was no reason for making any disallowance on account of interest. AO however without recording his satisfaction or examining the nature of investment and expenditure debited in books of account and mechanically applied Rule 8D without recording any satisfaction which is evident from the assessment order and succinctly made disallowance of expenditure of interest of Rs.2,53,78,577/- under Rule 8D(2) and Rs.46,02,713/- under Rule 8D(2)(iii). Ld. CIT (A), after calling the remand report and considering the material available on record, restricted the amount of disallowance of exempt income, however, has not specifically dealt with assessee’s argument how interest cost can be apportioned when assessee has used its own funds for making the investment. It is well settled proposition that if assessee has own funds which is higher than the investment for earning tax free income then presumption is drawn that all the investments in the tax free earning income has been made out of assessee’s own fund. This proposition has now been approved by Hon’ble Supreme Court in the case of South Indian Bank Ltd. vs. CIT 2021 TIOL 236-SC-IT. Accordingly, no disallowance of interest can be made and the same is directed to be deleted. Moreover, we find that in the earlier year also, similar finding has been given by the Tribunal. Accordingly, the appeal filed by the assessee is allowed.

Order was pronounced in the open court on the 9th day of March, 2022.

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