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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Per CHANDRA POOJARI, AM:
This appeal filed by the assessee is directed against the order of the CIT(A),
Kottayam dated 01/10/2018 and pertain to the assessment year 2010-11.
The assessee has raised the following grounds of appeal:
The order of the Commissioner of Income Tax (Appeals) is opposed to law, facts and circumstances of the case.
The Learned Commissioner of Income Tax (Appeals) has erred in not considering the detailed submission in the argument note filed and the supporting judgments attached thereto.
The Learned Commissioner of Income Tax (Appeals) ought to found that based on the accounts and statements furnished, it stands proved that no
I.T.A. No.564/Coch/2018 expenditure was incurred for earning exempt income as contemplated in sub section (2) of section 14A.
The Learned Commissioner of Income Tax (Appeals) ought to have found that no satisfaction was entered into by the Assessing Officer based on the accounts and statements prior to invoking Rule 8D.
The Learned Commissioner of Income Tax (Appeals) ought to have found that the amount estimated and disallowed by the assessee towards probable administrative expenses was reasonable and no amounts were borrowed for investment purposes and hence interest on borrowings is not applicable.
The Learned Commissioner of Income Tax (Appeals) ought to have found from the statements of loans that the loans granted by banks are specific business loans, the terms and conditions spelt out in the loan agreement prevents the company from diverting the borrowed funds for any other purpose.
The Learned Commissioner of Income Tax (Appeals), after finding that a substantial portion of the investment is in subsidiaries, ought to have found that such investments are only for commercial expediency.
The Learned Commissioner of Income Tax (Appeals) erred in stating that the possession of substantial reserves is not relevant.
The Learned Commissioner of Income Tax (Appeals) erred in relying on the decision of the Commissioner of Income-tax(Appeals), Trivandrum, in the case of Muthoot Bankers, the facts therein having no connection with assessee’s business and ignoring the various High Court and Supreme Court decisions on the point as applicable and referred to in the argument note.
For the above and other grounds that may be advanced at the time of hearing, it is respectfully submitted that the order of the Learned Commissioner of Income Tax(Appeals) be set aside.
The Ld. AR has filed an application for revival of ground which reads as follows:
“At the time of hearing, it was observed by the Hon. Bench that ground No. 4 was not before the Commissioner of Income-tax(Appeals) and accordingly, was directed to be conceded as not pressed. In obedience to the direction from the Hon. Bench it was accordingly submitted.
However, the said ground is one arising from the assessment order and since it has a legal implication, by virtue of the judgment of the Hon.
I.T.A. No.564/Coch/2018 Supreme Court in the case of National Thermal Co. Ltd. vs. CIT (229 ITR 383), it is submitted that the said ground is admissible.
Accordingly it is respectfully submitted that ground No. 4 noted as not pressed, may be revived and considered for adjudication.
3.1 The additional ground of appeal reads as follows:
“The Ld. Commissioner of Income Tax(Appeals) ought to have found tat the Assessing Officer had himself entered into a categoric finding that the borrowed funds were not used for the purpose of investment and as such there is no expenditure in the form of interest incurred for earning exempt income.”
3.2 We have heard the rival submissions and perused the record. We find
bona fide reasons in the act of the assessee in not raising the additional ground on
an earlier occasion. We place reliance on the judgment of the Supreme Court in
the case of National Thermal Power Corporation Ltd. vs. CIT (229 ITR 383)
wherein it was held that Tribunal has the discretion to allow or not to allow
additional ground to be raised for the first time before the Tribunal. Accordingly,
we admit the additional ground for adjudication.
Coming on merits of the ground, the facts of the case are that during the
assessment proceedings, the Assessing Officer observed that the assessee had
received during FY 2009-10 dividend income of Rs.10,49,358/- and at the same
time made interest payment of Rs.10,03,98,769/- on the borrowed funds. The
assessee had disallowed 2% of the dividend income as expenditure attributable to
earning dividend income. The Assessing Officer rejected the said method adopted
by the assessee and computed the disallowance u/s. 14A of the Act by applying
I.T.A. No.564/Coch/2018 Rule 8D of I.T. Rules, 1962. The total disallowance made by the Assessing Officer
u/s. 14A of the Act was Rs.1,23,89,765/-.
4.1 Before the CIT(A) , the Ld. AR submitted that there was no fresh investment
during the F.Y. 2009-10. Further, it was submitted that substantial investment
was made in the subsidiaries of the assessee and the said investments were made
only on account of commercial expediency. It was submitted that the assessee
had substantial reserves and surplus many times over the value of investments
and there can be no case as assumed by the authorities that any loan was utilized
for investment.
4.2 The CIT(A) rejected the argument of the assessee that investments in
subsidiaries would amount to commercial expediency. According to the CIT(A),
the commercial expediency flows from the business relationship and the assessee
had to show how the said investment protected or improved the business of the
assessee. The CIT(A) observed that the assessee had paid interest on borrowed
funds and the assessee had earned exempt income during the F.Y. 2010-11.
Therefore, the CIT(A) held that disallowance had to be made. However, regarding
the question whether the said allowance can be more than the exempt income
earned, the CIT(A) relied on the order of the CIT(A), Trivandrum dated
15/12/2017 wherein it was held as under:
“2.5 by no stretch of imagination can section 14A or Rule 8D be interpreted so as to mean that much more than the exempted income earned against 4
I.T.A. No.564/Coch/2018 which the expenditure is to be disallowed. Disallowance u/s. 14A therefore, cannot exceed the exempted income earned. Reliance is placed here to the decision of Hon’ble Mumbai Bench of the ITAT in the case of Nimbus Communications Ltd. vs. ACIT reported in 47 ITR (Trib.) 496 wherein it was held that disallowance could not be made u/s. 14A more than the exempted income. As a result, if any disallowance could be made that can be restricted only to the dividend income earned of Rs.55,80,741/- but not to Rs.88,68,993/- disallowed by the Assessing Officer by invoking the provisions of section 14A of the Act. In view of this, the disallowance is hereby restricted to Rs.55,80,741/- to the extent the exempted income was earned and thereby, the balance amount of Rs.32,88,252/- is hereby deleted. As a result the appeal is partly allowed.”
4.3 Following the decision in the case of Muthoot Bankers, the CIT(A) held that
the interest disallowance should be limited to the amount of exempt income
earned by the assessee i.e., Rs.10,49,358/- and the balance disallowance of
Rs.1,13,40,407/- was deleted.
Now the Ld. AR submitted that Ground No. 4 was a new ground and was
raised for the first time before the Tribunal and it was not raised before the lower
authorities. As seen from the order of the CIT(A), the CIT(A) has not considered
the ground with regard to recording of satisfaction before invoking the provisions
of Rule 8D r.w.s. 14A of the Act. This being a legal ground and which goes to the
root of the issue, in the interest of justice, we remit Ground No. 4 of this appeal to
the file of the CIT(A) for fresh consideration.
5.1 Since we have remitted this ground of appeal raised by the assessee to the
file of the CIT(A), we refrain from going into other grounds of appeal including the
I.T.A. No.564/Coch/2018 additional ground of appeal raised by the assessee at this stage. Thus, this
ground of appeal of the assessee is partly allowed for statistical purposes.
In the result, the appeal of the assessee is partly allowed for statistical
purposes. Order pronounced in the open Court on this 1st August, 2019
sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER
Place: Kochi Dated: 1st August, 2019 GJ Copy to: 1. M/s. The Malayala Manorama Co. Ltd., Manorama Building, K.K. Road, Kottayam-686 001. 2. The Assistant Commissioner of Income-tax, Circle-1, Kottayam. 3. The Commissioner of Income-tax(Appeals), Kottayam. 4. The Pr. Commissioner of Income-tax, Kottayam. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order (ASSISTANT REGISTRAR) I.T.A.T., Cochin
I.T.A. No.564/Coch/2018