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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: HONBLE KUL BHARAT & HONBLE MANISH BORAD
आयकर अपील�य अ�धकरण, इ�दौर �यायपीठ, इ�दौर
IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE
BEFORE HON'BLE KUL BHARAT, JUDICIAL MEMBER AND HON'BLE MANISH BORAD, ACCOUNTANT MEMBER
ITA Nos.332 & 333/Ind/2017 Assessment Years: 2008-09 & 2011-12 ACIT-2(1) M/s. Turquoise Investment & Finance बनाम/ Pvt. Ltd., Ujjain Vs. PO Birlagram, Nagda, Ujjain (Revenue) (Respondent) PAN: AABCT5911H
Revenue by Smt. Ashima Gupta, CIT-DR Respondent by Shri Ronak Doshi CA Date of Hearing: 22.01.2019 Date of Pronouncement: 06.02.2019 आदेश / O R D E R PER MANISH BORAD, A.M: These two appeals filed at the instance of Revenue pertaining to Assessment Years 2008-09 & 2011-12 are directed against the orders of Ld. Commissioner of Income Tax (Appeals), (in short ‘Ld.CIT(A)’], Ujjain, dated 17.02.2017 which are arising out of the order u/s 143(3) r.w.s 263 dated 20.03.2014 framed by ACIT-2(1),
Torquise Investment & Finance Pvt. Ltd. ITANos.332 & 333/Ind/2017 Ujjain. As the issues raised are common in these appeals they were heard together and are being disposed of by this common order for the sake of convenience and brevity. The Revenue has raised following grounds for A.Y. 2008-09 in ITA No.332/Ind/2017: “1. Whether on the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting the addition of Rs.1,76,09,474/- on account of disallowance u/s 14A of the IT Act read with Rule 8D, ignoring the fact that correctness of claim of disallowance in return of income was not proved by the assessee. 2. Whether on the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting the addition of Rs.1,76,09,474/- on account of disallowance u/s 14A of the IT Act read with rule 8D, ignoring the fact that assessee failed to prove direct nexus between interest expenditure with taxable income and non- taxable income.”
The Revenue has raised following ground for A.Y. 2011-12 in ITANo.333/Ind/2017 “Whether on the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting the addition of Rs.65,73,689/- on account of disallowance u/s 14A of the IT Act.”
As issues raised in both these appeals are common relating to disallowance u/s 14A of the Act deleted by the Ld. CIT(A), for the purpose of adjudication we will take the facts for A.Y. 2008-09.
Brief facts as culled out from the records are that the assessee is a non-banking financial company registered with Reserve Bank of India and is engaged in the activity of long term investments in shares, securities etc. and giving/taking loans from/to body
Torquise Investment & Finance Pvt. Ltd. ITANos.332 & 333/Ind/2017 corporate, and is in the category of a company not accepting/not holding public deposits. In pursuance to order of CIT-Ujjain u/s 263 of the Act dated 28.03.2013, the assessment order u/s 143(3) of the Act was completed on 15.12.2010 was set aside for afresh examination on limited issue relating to disallowance u/s 14A of the Act. In set aside proceeding Ld. Assessing Officer carried out the assessment proceedings u/s 143(3) r.w.s 263 of the Act and after considering the submissions of the assessee computed disallowance u/s 14A of the Act at Rs. 1,76,09,474/- and after adding this disallowance to the income of Rs.41,296/- disclosed by the assessee in its return of income filed on 30.09.2008, assessed income at Rs. 1,76,50,770/-.
Aggrieved by the addition made by the learned assessing officer, assessee filed an appeal before Ld. CIT(A) and succeeded as Ld. CIT(A) deleted the impugned disallowance after referring to various judgments as well as decisions in assessee’s own case for A.Ys. 2001-02, 2002-03, 2004-05 & 2005-06 observing as follows: “Through these grounds of appeal the appellant has challenged the addition of Rs.1,76,09,474/- on account of disallowance u/s 14A of the 1.1. Act. The AO made the addition of Rs.1,76,09,474/- u/s 14A of the LT. Act r.w.r. 8D. The appellant Company is a NBFC registered with RBI and engaged in the activities of granting of Inter corporate loans and investment in shares/securities so for the purpose of carrying on financing and investments activities, the Appellant had borrowed funds from time to time and deployed the same for granting loans as well as in purchases of investments. During the year under consideration, the Appellant had incurred interest expenditure and Finance Charges aggregating to 3
Torquise Investment & Finance Pvt. Ltd. ITANos.332 & 333/Ind/2017 Rs.21,85,75,704/-. At the same time, the Appellant Company has earned interest income of RsA,15,68,496/- on Inter Corporate loans granted. The Appellant has received Rs.15,57,030/- as dividend on long term investments which is exempt u/s. 10(34) of the Act and it did not form part of total income. The appellant himself made the disallowance u/s 14A amounting to Rs.17,70,07,881/- as under:- A= Gross interest and finance charges = Rs.21,85,75,704/- B= Interest income on inter-corporate loans granted= Rs4,15,68,496/- The disallowance on account of interest charges equal to A-B= 17,70,07,208/-
The appellant has also considered the demat charges at Rs.673/-. Thereby making the total disallowance of Rs.17,70,07,881/- (Rs.17,70,07,208/- + Rs.673/-). The above action of the appellant of making disallowance of net interest has been upheld by following judicial authorities:- ~ Morgan Stanley India Securities Private Limited Vs ACIT, Circle 1 (2), Mumbai [ITA NO. 5072/ Mum/2005 dated 13.04.2011J (ASSESSMENT YEAR 2004-05) ~ DCIT Vs Trade Apartment Ltd. ITAT, Kolkata [ITA NO. 1277/ Kol/ 2011 dated 30.03.2012 (ASSESSMENT YEAR 2008-09) ~ ACIT Vs KESHA V SHARES & STOCKS LTD, ITAT, Delhi [ITA NO. 4394/Del/2011 dated 26.04.2013 (ASSESSMENT YEAR 2008-09) ~ ITO Vs KARNAVATI PERTOCHEM PRIVATE LIMITED, ITAT, Ahmedabad [ITA NO. 2228/Ahdl/2012 dated 05.07.2013 (ASSESSMENT YEAR 2008-09) ~ SAFAL REALITY PVT LTD. Vs A CIT, ITAT, Ahmedabad [ITA NO. 2334 & 1842/Ahdl/2012 dated 29.11.2013 (ASSESSMENT YEAR 2009-10 & 2010-11)
In the appellant's own case the AO while completing the assessment pertaining to the assessment year 2004-05, the AO made the disallowance of net interest as adopted by the appellant. The CIT(A), Ujjain while deciding the appeal of the appellant pertaining to the assessment year 2004-05 upheld this 4
Torquise Investment & Finance Pvt. Ltd. ITANos.332 & 333/Ind/2017 method while deciding the appeal no. U-734/2006-07, dated 20- 03-2007. The same has also been upheld by Hon'ble ITAT while deciding the appeal of the appellant vide ITA No.372/Ind.l2007, dated 25-06-2013. Assessment Year 2001-02 In this year, the CIT(A), Ujjain vide order dated 16.05.2008 in appeal No. U-733/06-07 sustained the addition of interest u/s 14A on net interest basis. (Para 2.2, Page 10 & 11). Assessment Year 2002-03 In this year, the CIT(A), Ujjain vide order u/s 250 dated 27.08.2009 and u/s 154 dated 10.02.2009 in appeal No. U- 555/07-08 made the disallowance of interest u./s 14A on a net basis i.e interest paid (-) interest received. (Para 5.3 & 5.4, Page 13 & 14) Assessment Year 2005-06 In this year, the CIT(A), Ujjain vide order dated 26.08.2009 in appeal No. U-SI9107-08 made the disallowance of interest u./s 14A on a net basis i.e interest paid (-) interest received. (Para 3.3, Page 3). In the Case of Sister Concern- Trapti Trading And Investments Private Limited Assessment Year 2002-03 In this year, the CIT(A), Ujjain vide order dated 26.08.2009 in appeal No. U-556107-08 made the disallowance of interest u./s 14A on a net basis i.e interest paid (-) interest received. (Para 5.3, Page 14) Assessment Year 2006-07 In this year, the CIT(A), Ujjain vide order dated 22.03.2010 in appeal No. U-398/08-09 made the disallowance of interest u./s 14A on a net basis i.e interest paid (-) interest received. (Para 3.2, Page 3). That the department has not filed any appeal before the Hon 'ble IT AT, Indore on the above issue of confirming disallowance of interest u/s 14A on net basis for various assessment years. So it is requested that the issue of disallowance of interest u/s 14A on net interest basis is covered in favour of appellant. In view of the above, the AO is not justified in applying Rule 8D and rejecting the claim of the appellant without showing non- satisfaction in not as per the law and therefore, the action of the AO in applying Rule 8D is to be treated as not justifiable and the disallowance u/s 14A is to be restricted to Rs.17,70,07,881/- as 5
Torquise Investment & Finance Pvt. Ltd. ITANos.332 & 333/Ind/2017 made by the appellant while filing the return of income. Therefore, the addition made by the AO amounting to Rs.1,76,09,474/- is deleted. Therefore, the appeal on these grounds is allowed.
Now the revenue is in appeal challenging the finding of the ld. CIT(A) deleting the addition of Rs.1,76,09,474/- made by the assessing officer on account of disallowance u/s 14A of the Act.
Ld. Departmental Representative (DR) vehemently argued supporting the order of the Ld. Assessing Officer.
Per contra Ld. counsel for the assessee relied on the finding of the Ld. CIT(A) as well as various decisions held in assessee own case in the preceding years. He also referred and relied following judgments taking the plea that Rule 8D of the IT Rules is not automatic and the assessing officer has to record objective satisfaction before invoking the Rule 8D and also pleaded that only net interest expenses should be considered while computing disallowance u/s 14A r.w.r. 8D: 1. Maxop Investment Ltd. vs. CIT (2018) 91 taxmann.com 154 (SC) 2. Godrej & Boyce Mfg. Co. ltd. vs. DCIT (328 ITR 81) (Bom) 3. Affirmed by Hon'ble Supreme Court in the case of Godrej & Boyce Mfg. Co. ltd. vs. DCIT (2017) 81 Taxmann.com 111 4. H.T. Media Ltd. vs. PCIT (2017) 85 Taxmann.com 113 (Del. HC) 5. CIT vs. I.P. Support Services Indid(P.) Ltd. (378 ITR 240) Del. HC) 6. Shapoorji Pallonji & Co. Ltd. vs. DCIT (2017) 164 ITD 42 (Mum. Trib) 7. Anshul Special melecules Limited vs. DCIT (ITANo.4436/Mum/2016) Mum. Trib
Torquise Investment & Finance Pvt. Ltd. ITANos.332 & 333/Ind/2017 8. DCB Birla Finance Ltd. vs. ACIT (ITANo.5706/Mum/2015) Mum Trib. 9. Aditya Birla Finance Ltd. Vs. ACIT (2017) 165 ITD 659 (Mum. Trib.) 10. Morgan Stanley Investment Management Private ltd. vs. DCIT (ITANo.5195/Mum/2014 Mum Trib. 11. CIT vs. Jubliant Enterprises Pvt. Ltd. (ITANo.1512 of 2014) (Mum HC) 12. PCIT vs. Nirma Credit & Capital (P.) Ltd. (2017) 85 taxmann.com 72 (Guj) 13. M/s. Four Dimensions Securities (India) Ltd. vs. ACIT (ITANo.6935/Mum/2011 (Mum. Trib.) 14. Aditya Medisales Ltd. vs. ACIT (2016) 67 taxmann.com 270 (Ahd. Trib.) 15. Moregan Standly India Securities Private Limited Vs ACIT, Circle 1 (2), Mumbai [ITA NO. 5072/Mum/2005 (Mum Tribunal.) 16. DCIT Vs Trade Apartment Ltd. ITAT, Kolkata [ITA NO. 1277/ Kol/ 2011 dated 30.03.2012 17. ACIT Vs KESHAV SHARES & STOCKS LTD, ITAT, Delhi [ITA NO. 4394/Del/2011 dated 26.04.2013 18. ITO Vs KARNAVATI PERTOCHEM PRIVATE LIMITED, ITAT, Ahmedabad [ITA NO. 2228/Ahd/2012 dated 05.07.2013 19. SAFAL REALITY PVT LTD. Vs A CIT, ITAT, Ahmedabad [ITA NO. 2334 & 1842/Ahd/2012 dated 29.11.2013 20. Paresh K. Shah v. DCIT (ITANo.8214/M/2011 order dated 5.6.13 (Mum Tribunal.) 21. DCIT vs. PHL Finvest Pvt. Ltd. (ITANo.2318/M/2017 order dated 31.08.2018 (Mum Tribunal.)
We have heard the rival contentions, perused the record placed before us and carefully gone through plethora of judgments referred and relied by the Ld. counsel for the assessee. Issue in brief relates to disallowance u/s 14A of the Act. It is well evident that amendment was brought by Income Tax (5th Amendment) Rules 2008 w.e.f. 24.03.2008 prescribing the method for determining the 7
Torquise Investment & Finance Pvt. Ltd. ITANos.332 & 333/Ind/2017 amount of expenditure incurred in relation to income not includible in total income. Section 14A(1) of the Act provides that for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. For attracting the disallowance u/s 14A three conditions needs to be satisfied: i. it is an expenditure ii. such expenditure is incurred iii. such incurring of expenditure is in relation to such income which does not form part of the total income under this Act.
If the above conditions are satisfying the quantum disallowance shall be determined by the assessing officer in accordance with the provisions of sub-section (2) and sub-section (3) of section 14A of the Act. In sub-section (2) & (3) of section 14A of the Act reference is given to the method provided in Rule 8D of the IT Rules which has following three limbs: (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) Computing of disallowance of interest expenditure incurred during the year which is not directly attributable to any particular income or receipts; (iii) An amount equal to 0.5% of the annual average of the value of investment.
Torquise Investment & Finance Pvt. Ltd. ITANos.332 & 333/Ind/2017 10. From perusal of the assessment order, we find that Ld. AO had not made any disallowance for the first limb (Rule 8D (2)(i)) of the IT, Rules. However, he made the interest disallowance of Rs.19,37,39,516/- taking basis of interest paid at Rs.21,85,75,704/-. From perusal of the records placed before us including the computation of income, audited balance sheet and the finding of Ld. CIT(A), we find that the gross interest and finance charges for the year amounted to Rs.21,85,75,704/- and there is also an interest income on inter corporate loan at Rs.4,15,68,496/-. The Net interest expenditure comes to Rs.17,70,07,208/- (Gross interest paid – Gross interest income). In the computation of income placed at page 17 of the paper book, we find that the net interest expenditure of Rs.17,70,07,881/- has been suo moto disallowed by the assessee and has been added to the total income. It means that no interest expenditure has actually been claimed by the assessee during the year, and in absence of such claim of interest expenditure, there remains no basis for computing disallowance of interest under Rule 8D(2)(ii) of the IT, Rules. We, therefore, find no justification in the finding of Ld. AO making disallowance of interest incurred u/s 14A of the Act at Rs. 1,67,32,308/- (Disallowance computed under rule 8D(2)(ii) of the IT Rules at Rs.19,37,39,516 – suo moto disallowance of net interest expenditure by the assessee at Rs.17,70,07,208/-. Our view also finds support from the judgment of Hon'ble High Court of Gujarat in the case of Pr. CIT vs. Nirma Credit & Capital (P.) Ltd. (2017) 85 taxmann.com 72 (Guj) wherein Hon'ble Court has held “that prior to amendment brought in
Torquise Investment & Finance Pvt. Ltd. ITANos.332 & 333/Ind/2017 Rule 8D of I.T. Rules with effect from 02.06.2016, amount of expenditure by way of interest for applying factors in clause (ii) of sub-rule (2) of rule 8D of IT, Rules would be interest paid by assessee on borrowings minus taxable interest earned during financial year i.e. net interest expenditure”. In other words net interest expenditure is to be considered for applying the factors in Rule 8D(2)(ii). In the instant case, as the assessee has not claimed any interest expenditure against the total income no disallowance of interest is called for u/s 14A of the Act by applying Rule 8D(2)9ii) of the IT, Rules.
As regards 3rd limb i.e. Rule 8D(2)(iii) of IT, Rules is concerned Ld. Assessing Officer has computed the amount at Rs.8,77,839/- after observing that against the total expenses of Rs.92,70,856/- debited in the P & L account the assessee has suo moto added back an amount of Rs.83,93,017/-.On perusal of the submissions made by the assessee before lower authorities find that against the total expenditure debited in the profit and loss account of Rs. 92,70,856/- an amount of Rs.83,93,690/- has been disallowed/added back to the assessee in the computation of income and further disallowance of Rs. 26,010/- was made u/s 14A vide order u/s 143(3) dated 15.12.2010, leaving behind an amount of Rs.8,51,156/-. Certainly some expenditure should have been incurred by the assessee for its regular business activities apart from earning exempt income which the assessee has submitted to have been incurred at Rs.65,025/- towards salary
Torquise Investment & Finance Pvt. Ltd. ITANos.332 & 333/Ind/2017 disallowance and Rs.63,483/- on account of Statutory Auditors Remuneration. After giving the set off to the above referred expenses remaining amount is Rs.7,22,648/-(Rs. 851156-65025-63483). Therefore, in the given facts and circumstances of the case the disallowance u/s 14A under the 3rd limb of Rule 8D(2)(iii) of the I.T. Rules stands confirmed at Rs.7,22,648/- for A.Y. 2008-09.
In the result against the total addition made by the assessing officer at Rs. 1,76,09,474/-, we sustain the addition u/s 14A of the Act at Rs. 7,22,648/- of the Act and partly allow the revenue’s appeal for A.Y. 2008-09.
Now we take up Revenue’s appeal for A.Y. 2011-12 13. As aggrieved by both the parties facts of the case for A.Y. 2011- 12 remains the same to that of A.Y. 2008-09. The issue relates to disallowance u/s 14A of the Act at Rs.65,73,689/-. No disallowance by the assessing officer have been made towards direct expenditure incurred for any exempted income at provided in Rule 8D(2)(i). Moving forward towards disallowance of interest expenditure under Rule 8D (2)(ii) of IT, Rules, perusal of computation of income placed at page 15 of the paper book shows that the assesse has suo moto disallowed the net interest expenditure of Rs.45,25,54,995/- as well as the finance charge of Rs.64,92,667/-. As the net interest expenditure has been added back to the total income by the assessee itself there remains no basis for computing disallowance for interest expenditure u/s 14A of the Act under the second limb of
Torquise Investment & Finance Pvt. Ltd. ITANos.332 & 333/Ind/2017 Rule 8D(2)(ii) and therefore following our consistent view no interference is called for in the finding of Ld. CIT(A) with regard to interest disallowance u/s 14A of the Act. Thus, our decision for interest disallowance in the assessee’s case for A.Y. 2008-09 discussed in the pleading para shall apply mutatis mutandis to the issue for A.Y. 2011-12.
Now coming to the issue of disallowance of administrative expenses we find that while framing the assessment u/s 143(3) of the Act. Ld. AO made disallowance for administrative expenses @ 0.5% of the average investment calculating at Rs.4,01,69,821/-. Subsequently, assessee filed an application u/s 154 of the Act on 10.03.2014 which was disposed of by assessing officer vide order dated 25.03.2014 u/s 154 of the Act thereby recertifying the order and amending the amount of disallowance for administrative expenses under Rule 8D(2)(iii) of IT, Rules at Rs.10,42,786/-. This disallowance of Rs.10,42,786/- has been deleted by the Ld. CIT(A). We, however, taking consistent view as taken for A.Y. 2008-09 observe that for A.Y. 2011-12 against the administrative expenses of Rs.8,51,156/-, assessee has contended that disallowance if any to be made for administrative expenses should be restricted to Rs.7,22,648/-. We find that for A.Y. 2008-09 average investments fetching exempt income stood at Rs.421.98 cr. which has grown to Rs.803.40 cr. for A.Y. 2011-112. We, therefore, being fair to both the parties and taking consistent approach, are of the view that disallowance of Rs.7,50,000/- shall be justified towards the
Torquise Investment & Finance Pvt. Ltd. ITANos.332 & 333/Ind/2017 disallowance of administrative expenses which may have been incurred for administrating the investments fetching exempt income. We accordingly order so and direct the assessing officer to sustain the disallowance u/s 14A of the Act at Rs.7,50,000/- under Rule 8D(2)(iii) of the IT, Rules.
In the result, against total disallowance of Rs.65,73,689/- made by the Ld. AO u/s 14A of the Act, we sustained the disallowance at Rs.7,50,000/- and partly allow the revenue’s appeal.
In the result, both appeals of the revenue are partly allowed.
Order was pronounced in the open court on 06 .02.2019.
Sd/- Sd/- (KUL BHARAT) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER Indore; �दनांक Dated : 06 /02/2019 ctàxÄ? P.S/.�न.स.
Copy to: Assessee/AO/Pr. CIT/ CIT (A)/ITAT (DR)/Guard file.
By order Assistant Registrar