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Income Tax Appellate Tribunal, ‘’A’’ BENCH, AHMEDABAD
Before: SHRI KUL BHARAT & 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 Learned Commissioner of Income Tax (Appeals)-1, Ahmedabad dated 10/04/2015 (in short “Ld.CIT(A)”) arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here- in-after referred to as "the Act") dt.15/03/2013 relevant to the Assessment Year 2010-2011.
The assessee has raised the following grounds of appeal.
1. In law and in the facts and circumstances of the appellant's case, the Impugned assessment order passed by Assessing Officer is void and deserves to be quashed.
2. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in upholding addition of Rs. 17.19 crores to book profit u/s 115JB on the basis that interest expenditure falls under clause (f) to Explanation 1 to section 115JB. 2.1 In law and in the facts and circumstances of the appellant's case, the Learned CIT(A) erred in applying clause (f) to section 115JB(1) without appreciating the fact that investments made by appellant is capable of earning capital gain and such gajn whether exempt or not as per normal provisions of the Act is taxable for the purpose of computing book profit u/s 115 JB of the Act. 2.2 In law and in the facts and circumstances of the appellant's case, Ld . CIT{A) ought to have appreciated that clause (f) to section 115JB(1) relates to expenditure relatable to any income to which provision of section 10 applies other than exempt income u/s 10(38) and as appellant has not earned any exempt dividend income on investments considered for making disallowance u/s 14A r.w.s 115JB and such investments even if would earn exempt income u/s 10(38), same is liable to be taxed u/s 115JB which means that entire expenditure incurred by appellant is for earning taxable income for the purpose of computing book profit u/s 115JB and such expenditure is beyond the scope of adjustments as provided in said section.
2.3 In law and in the facts and circumstances of the appellant's case, the Learned CIT(A) has erred in upholding disallowance of interest expenditure u/s 14A r.w.s 115JB for investments made in two shares even though no exempt dividend income is earned from such investments. 2.4 In law and in the facts and circumstances of the appellant's case, disallowance u/s 14A r.w.s 115JB made by Assessing Officer and upheld by Ld. CIT(A) cannot exceed exempt income of Rs43,150/- 3.In law and in the facts and circumstances of the appellant's case the Ld. CIT(A) has erred in charging excessive interest u/s 234B and 234C of the Act when no such excessive interest is chargeable. The appellant craves leave to add to, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.
The interconnected issue raised by the assessee is that the ld. CIT-A erred in confirming the order of the AO by sustaining the addition of Rs. 17,19,25,856/- under clause (f) to explanation 1 of section 115JB 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 trading in shares, clothes and garments. The assessee has also earned rental income during the year. The assessee in the year under consideration has debited interest expenditure in its profit and loss account amounting to Rs. 17,31,87,000/- only. But the assessee under the normal computation of income has added back an amount of Rs. 17,19,25,856/- out of total interest expenses on the ground that such interest expenses are in the nature of capital expenditure and therefore the same is required to be added to the investments. However, the assessee did not make such adjustment in the book profit computed under section 115JB of the Act on account of such interest expenditure.
2.1 As a result of such adjustment under the normal computation of income, the AO noticed that the book profit computed under section 115JB of the Act has been reduced by the amount of such interest expenses debited in the profit and loss account though requires to be capitalized.
2.2 On question by the AO, the assessee submitted that there are limited adjustments which can be made while computing the profit for the purpose of MAT as specified under section 115JB of the Act. Furthermore, there is no provision to make the adjustment on account of interest expenses being capital in nature claimed by the assessee in the profit and loss account under the provisions of section 115JB of the Act.
2.3 However, the AO during the assessment proceedings was not convinced with the reply of the assessee and made certain observations as detailed below: i. The provisions of section 211 of the companies Act requires the assessee to prepare the accounts so as to give true and fair picture of the financial statements. Accordingly such financial statements should be prepared in accordance with the requirement of the companies Act as well as generally accepted accounting principles and policies, more particularly accounting standard 16 namely borrowing cost. Once the assessee has not capitalized the impugned interest expenditure in its books of accounts, then the auditor should have furnished qualified audit report but it has not been done so. Accordingly, the claim of the assessee that the impugned interest needs to be capitalized was not sustainable. ii. Similarly, the impugned interest is also not to be capitalized as per the provisions of section 36(1)(iii) of the Act. As such the interest can be capitalized if it relates to the acquisition of assets for the extension of existing business. But there is no extension of the business of the assessee. Therefore such interest cannot be capitalized. iii. The amount borrowed has been invested in the shares which will generate exempt income as specified under section 10(34) of the Act. Accordingly, such interest expenses needs to be disallowed as per clause (f) to section 115JB of the Act while determining the book profit as well as under section 14A read with rule 8D of Income Tax Rule under normal computation of income. 2.4 In view of the above, the AO concluded that such amount of interest expenses cannot be added to the total income of the assessee under normal computation of income, based on the reasoning that these are capital expenditure. As such, the impugned interest expenditure is purely in connection with the investment in shares which will give rise to the exempted income. Therefore, the right course of action is to make the disallowance of impugned expenses under section 14A read with rule 8D of Income Tax Rule under normal computation of income and similarly under clause (f) to the explanation 1 of section 115JB of the Act while determining the books profit.
2.5 Based on the above reasoning, the AO increased the book profit by the amount of impugned interest expenses as per clause (f) of explanation to section 115JB of the Act.
Aggrieved assessee preferred an appeal to the learned CIT (A).
The assessee before the learned CIT (A) submitted that the tax auditor in his tax audit report in the form 3CD under the clause 17(a) has submitted that the impugned interest expenditure is capital in nature and therefore the same needs to be added with the cost of investments.
3.1 The assessee also submitted that it has prepared its financial statements in accordance with the provisions of part II and part III of schedule VI of the companies Act and in compliance to the applicable accounting standards/generally accepted accounting principles which were also laid before the company in its annual general meeting. Therefore all the necessary disclosures have been duly made in such financial statements.
3.2 The scope while determining the book profit under section 115JB of the Act is very limited insofar only to the specified adjustments which can be made.
3.4 The provisions of accounting standard 16 borrowing cost are not applicable to the impugned investment made by the assessee. As such it is applicable to the qualifying assets, which takes substantial period of time to get ready. The assessee claimed that the accounting standard 13 namely accounting for investment is applicable to the impugned investments, which does not require the assessee to capitalize the recurring interest expenses to the cost of investments.
3.5 The assessee also claimed that there can be 2 kinds of exempted income out of such investments namely dividend income and secondly long-term capital gain if holding period is more than 12 months with respect to the listed securities. But there was no dividend income received with respect to the investments made out of the borrowed fund namely Arvind product Ltd and Amazon textiles private Ltd and therefore, there cannot be disallowance of the expenses under normal and MAT computation of Income. Similarly, in case of long-term capital gain, the same is exempted under normal computation of income but liable to be taxed under MAT provisions. Accordingly the assessee claimed that there cannot be any disallowance of the expenses as discussed above.
3.6 The assessee without prejudice to the above also submitted that there is no exempt income earned by it in the year under consideration therefore, there cannot be any disallowance of any expense as per clause (f) of explanation 1 to section 115 JB of the Act.
The learned CIT (A) upheld the contention of the assessee by holding that the assessee rightly claimed the expenditure in the profit and loss account. Accordingly the learned CIT (A) upheld the finding of the AO i.e. treating the interest expenses as revenue expenditure.
4.1 However, the learned CIT (A) observed that there is an exempted income of Rs. 43,150.00 earned by the assessee in the year under consideration as well as investment has been made out of the borrowed fund which will give rise to the exempted income. Therefore, he was of the view that the disallowances of the expenditure incurred to earn such income requires to be disallowed under normal computation of income and MAT computation of income by virtue of the provisions of section 14A read with rule 8D and 115JB of the Act respectively. Accordingly the learned CIT (A) confirmed the order of the AO.
Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.
The learned AR before us filed a paper book running from pages 1 to 82 and submitted that the disallowance under section 14A r.w.r. 8D cannot be imported while determining the book profit under MAT. The ld. AR
also submitted that disallowance if any needs to be made, then it should not exceed the amount of dividend income.
On the other hand, the learned 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. Before dealing with the issue involved in the impugned appeal, it is pertinent to note that that the disallowance made under section 14A read with rule 8D cannot be equated with clause (f) of explanation 1 to section 115JB of the Act. In this regard we place our reliance on the order of Delhi Tribunal special bench 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.” 7.1 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) to explanation 1 to section 115JB of the Act.
7.2 As such, the disallowance if any needs to be made while computing the book profit, the only resort available to the revenue is clause (f) of explanation 1 to section 115JB of the Act which reads as under: “the amount or amounts of expenditure relatable to any income to which [ section 10 (other than the provisions contained in clause (38) thereof) or [***] section 11 or section 12 apply; or]”
On perusal of the above clause, it reveals the fact that the expenses relatable to exempted income other than the income specified under section 10(38) of the Act will be added back to the book profit.
7.3 However, there is no mechanism provided for computing such expenses relatable to impugned exempt income unlike the provisions of rule 8D applicable under normal computation of income. Thus, to our mind it becomes a debatable issue to quantify the amount proposed to be disallowed as per clause (f) to explanation 1 to section 115JB of the Act.
7.4 Now, turn to the facts of the present case. Admittedly, the assessee has made investment in shares out of the borrowed fund and this fact has not been disputed. The assessee from such investment can earn certain kinds of income as detailed under: i. short-term capital gain ii. long-term capital gain iii. dividend income 7.5 We do not foresee any other income out of such investment other than the income as specified above.
7.6 Now, if the assessee earns income under the head capital gain (long term) from such investments, then such income might be exempted under section 10(38) of the Act under normal computation of income but such immunity is not available to the assessee while computing the income under the provisions of MAT. Thus, it is transpired that any expenditure incurred by the assessee from such investment which is resulting income under the head capital gain, then such expenditure will not be added back under clause (f) of explanation 1 to section 115JB of the Act while determining the book profit.
7.7 However, we note that the assessee has not treated such interest expenses as revenue expenditure which has also been admitted by the authorities below and this fact has reached to the finality.
7.8 Thus from the treatment of such interest expenditure as revenue in nature, it is transpired that such interest expenditure incurred against the dividend income. But the fact that such investments are also capable of generating the income under the head long term capital gain, though exempted under section 10(38) of the Act but taxable under section 115JB of the Act. Thus it will not be proper to conclude that the entire expenditure has been incurred against the income exempted income.
7.9 Before proceeding further, we are inclined to see the investments made by the assessee as shown in the financial statements. The details of these investments are available on page no. 75 of paper book. From such details, we note that all the investments shown above have not resulted dividend income in the year under consideration. As such the assessee has earned dividend income against the investment made in the companies namely Prism Cement Ltd. and Amol Decalite Ltd. amounting to Rs. 43,150.00 only as evident from the ledger of dividend income placed on page 77 of the PB.
The next question arises whether the entire amount of interest expenses incurred by the assessee can be disallowed under clause (f) of explanation 1 of section 115JB of the Act while computing the profit against such amount of exempted income.
8.1 In this regard, we find that there are judgments on the issue which mandates that the disallowance of the expenses cannot exceed the exempted income i.e. CIT Vs. Vision Finstock Ltd. of Hon’ble Gujarat High Court in 486 of 2017 or only those investments should only be considered for the purpose of the disallowance which have resulted the dividend income. However, we note that although judgments are in relation to the determination of income under the normal computation of income. None of the judgments deals with the determination of income under the provisions of section 115JB of the Act. Therefore, we find that there is no precedent available to resolve the controversy on hand. However, we are also conscious to the fact that the above judgment was rendered in connection with the income determined under normal computation of income but to our mind the same principles can also be applied to the case on hand. It is because, the provisions of section 115JB of the Act require to make the disallowance of the expenditure related to any income to which section 10 applies other than section 10(38) of the Act. Accordingly, we hold that the expenses incurred in connection with the exempted income cannot exceed the amount of such exempted income under the provisions of section 115JB of the Act. Accordingly, we limit the disallowance to the extent of rupees 43,150.00 under the clause (f) to section 115 JB of the Act. Hence the ground of appeal of the assessee is partly allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Court on 03/10/2019 at Ahmedabad.