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Income Tax Appellate Tribunal, AHMEDABAD – BENCH ‘A’
Before: SHRI AMARJIT SINGH
आदेश/O R D E R PER MADHUMITA ROY- JM:
The instant appeal filed by the Revenue is against the order dated 08/09/2017 passed by the Commissioner of Income Tax (Appeals)-2, Ahmedabad arising out of the order passed by the DCIT Cir.-2(1)(2) Ahmedabad under section 143(3) of the Income Tax Act 1961(herein after referred as ‘the Act’) for assessment year 2014-15 dated 21.11.2016.
The Revenue has challenged the order passed by the Ld. CIT(A) in restricting the disallowance of Rs. 91,25,846/- to Rs. 19,311/- made u/s.
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14A of the Act. The assessee company has filed his return of income on 26.09.2014 declaring total income at Rs. 49,69,50,500/- followed by revised return of income filed on 31.03.2016 declaring total income at Rs. 49,62,23,790/- which was processed u/s. 143(1) of the Act. Under scrutiny notice u/s. 143(2) of the Act was issued on 31.08.2015 followed by a further notice dated 10.06.2016 u/s. 143(2) r.w.s 129 of the Act due to change in incumbent. A further notice u/s. 143(1) of the Act dated 26.04.2016 and 07.07.2016 were issued and served upon the issue along with the questionnaire.
During the course of assessment proceeding it was found that the assessee has shown investment of Rs. 10,83,31,128/-. The assessee earned dividend income during the year which was shown as exempted u/s. 10(35) of the Act. Interest expenditure was also incurred by the assessee to the tune of Rs. 75,41,48,306/- during the year. The assessee was not being able to justify the investment made in shares from his own fund or from the funds on which no interest payment was not made by the assessee a show-cause, therefore, dated 21.11.2016 was issued. The assessee submitted the details of following interest free funds and investment: Sr. Particulars Financial Year No. 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 1 Share Capital 16000000 994710900 994710900 92971090 934770900 5347121 5947121 0 0 50 50 2 General 5459344 4215747 4215747 12077747 30404600 5630988 8736776 Reserves 4 2 3 Accumulated 43264920 1 6578450 16850058 34683852 64264328 5626026 1747588 Profits 4 10 4 Total 20872476 101550509 1015776705 97647249 102937982 6472822 8565387 Interest free 4 7 9 8 98 22 Funds 5 Balance of 21089635 90934327 90934327 90831129 108331128 1083311 1083311 Investments 28 28 6 Excess 18763512 924570770 924842378 88564137 921048700 5389511 7485075 Funds 9 0 70 94
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(4-5)
7 Excess 8.90 10. 17 1 0.17 times 9.75 limes 8.50 times 4.98 6.91 funds in times times times times multiple of investments (6-5)
Sr No. Assessment Total income Increase in Excess of total income Year offered for Investments over increase in taxation investments 1 2008-09 129940463 20000000 109940463 2 2009- 10 105724893 69844692 35880201 3 2010-11 200946099 0 200946099 4 2011-12 266826770 0* 266826770 5 2012-13 252258200 17500000 234758200 6 2013-14 392183560 0 392183560 7 2014-15 496275794 0 496275794
However, the submissions that the assessee is in possession of ample interest free fund in the form of capital, free reserve and accumulated profit which is substantially higher than the investment was not found acceptable by the Ld. AO. He, therefore, applying the provision u/s. 14A read with rule 8D disallowed Rs. 91,25,846/- and added to the total income of the assessee being expenses incurred for earning exempt income not forming the part or total income of the assessee.
In appeal the Ld. CIT(A) restricted such disallowance to the tune of Rs. 19,311/- to the extent of dividend income of the assessee. He however made disallowance with regard to the administrative and expenses being 0.5 per cent of the average investment invoking Rule 8D(2) to the extent of dividend income of Rs. 19,311/- with the following observation: “3.3 Decision: I have carefully considered the facts of the case, assessment order and submission of the appellant. The AO has made the disallowance u/s. 14A of
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the I. T. Act, 1961 amounting Rs. 91,25,846/-. In the assessment order, the AO has worked out the disallowance under Rule 8D(2)(ii) being interest of Rs.85,84,190/- and administrative expenditures @ 0.5% of the average investments at Rs.5,41,6567-totalling to Rs.91,25,846/-. 3.4. The AO has made the disallowance u/s. 14A of the I. T. Act, 1961 stating that the interest bearing borrowed funds have been utilized for the purpose of investment in the shares. Further, it was mentioned that the appellant needs to prove by demonstrating evidence that on the day on which the investments were made, the assessee had interest free funds and there was no diversion of interest bearing funds for non business purpose. The appellant could not prove by way of submitting fund flow statement that there was no diversion of interest bearing funds and subsequently he relied upon certain decisions / judgments. 3.5. It has been claimed by the appellant that it has interest free fund of Rs.85,68,38,722/- in form of share capital and reserves and surplus against the investment of Rs.10,83,31,128/-. Therefore, appellant had sufficient interest free fund to make investment. The appellant has further submitted that investment has been made in the subsidiary company MAS Rural Mortgage and Housing Finance Limited as strategic investment and has received dividend income amounting to Rs.19,311/- which was exempt. Therefore no disallowance u/s. 14A is called for and in any case, the disallowance cannot exceed to the exempt income of dividend as has been held by Hon'ble ITAT, Ahmedabad in the case of Chudgar Racnhhodlal Jethalal Vs. DCIT in ITA No. 245/Ahd/2013. The relevant para of the decision is reproduced as under:- "12. We have heard the rival submissions and perused the material on record. On perusing the Balance Sheet, we find that there is no change in investments at the year under as on 31st March, 2007 and as at 31st March, 2008 meaning thereby that prima facie no new investments have been made by the Assessee during the year. Further on perusing the Balance Sheet as on 31st 8 ITA No.245/AHD/2013 A. Y. 2008-09 March, 2008 we find that the shares were to the extent of Rs.1.49 crores and during the year assessee has also earned profit after tax at Rs.60.39 lacs meaning that the availability of interest free funds with Assessee at the year end were in excess of investments. From the details of other income placed on record, it is seen that during the year dividend earned by the assessee is of Rs.20,498/- and the disallowance made by AO u/s. 14A is of Rs. 1,02,007/- and thus the disallowance u/s. 14A worked out by the AO is more than the tax free income. Before us, ld. D.R. has not brought any decision of Tribunal or High Court on record to controvert the submissions made by the ld. A.R that disallowance u/s. 14A cannot be more than tax free income. On the other hand, while dictating the order, we have come across the decision of Hon'ble Delhi High Court in the case of Joint Investment Pvt. Ltd. Vs. CIT ITA No. 117 of 201 5 decided on 25/02/2015, wherein the Hon'ble High Court has held as under:- "9. In the present case, the AO has not firstly disclosed why the appellant / assessee's claim for attributing Rs.2,97,440/- as a disallowance under section 14A had to be rejected. Taikisha says that the jurisdiction to produced further and determine amounts is derived
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after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT(A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs.48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum i.e. Rs. 52,56,197/-. 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 to the tax exempt income surely cannot swallow the entire amount as has happened in this case." 13. Considering the totality of the facts and in view of the fact that the provisions of Rule 8D are applicable for the year under consideration and in the light of the aforesaid decision of Delhi High Court called hereinabove and in view of the fact that the disallowance worked out by AO u/s. 14A is more than the exempt income and considering the alternate submission of the ld. AR to make a reasonable disallowance u/s. 14A as deemed fit, we are of the view that disallowance of Rs.5,000/- if made in the present case will meet the ends of justice. We thus direct accordingly." 3.6. The submission of the appellant has been examined and noticed that appellant has sufficient interest free fund to make investment in the subsidiary company from which dividend has been received. Therefore, the interest disallowance under Rule 8D(2)(ii) is not called for. As regard to disallowance relating to administrative expenses of Rs.5,41,65/7-computed under Rule 8D(2)(iii), it is noticed that appellant had only exempt income of Rs. 19,311/-. It has been held by Hon'ble ITAT, Ahmedabad in the case of Chudgar Racnhhodlal Jethalal Vs. DCIT in ITA No. 245/Ahd/2013 (supra), that the disallowance cannot exceed to the exempt income of dividend. 3.7. Reliance is also placed on the decisions of jurisdictional ITAT, Ahmedabad in the following cases;- (i) M/s. Shree Laxmi Bidi Trading Co. Vs. DCIT[CO No.315&316/Ahd/2014 dt. 30/03/2015] (ii) Jivraj Tea Limited Vs. DCIT Circle - 1, Surat [ITA No. 866/Ahd/2012 dated 28/08/2014 (Ahmedabad Tribunal) (iii) Wladhusudan Industries Ltd. Vs. ITO [ITA No. 1715/Ahd/2011 dated 13/02/2015 (Ahmedabad Tribunal) (iv) M/s. K. Ratanchand & Co. vs. Income Tax Officer, Ward 11 in ITA No. 2660/Ahd/2011 dated 24/09/2015 3.8. It was also argued that the investment made by the appellant was in subsidiary companies is in the nature of strategic investment. No administrative efforts have been made towards earning any exempt dividend income. In support, the appellant relied upon various decisions as noted in
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the preceding paras of this order. The appellant's plea that the investments have been made not for the purpose of earning dividend income is not proved by adducing necessary evidences. On the contrary, the appellant's plea for business in trading of shares is also found not correct for the reason that there was no increase in the investment held during the year under consideration. Had it been the business of trading of shores, there would have been change of quantum of investments in the year under consideration. 3.9. Further, the appellant's plea that it had the more interest free funds than the investment made in shares is also not based upon some details and documents saying that actually those interest free funds were available in liquid form at the time of investment in subsidiary companies. 3.10. In view of the aforesaid discussion, the disallowance made by the AO with regard to the administrative and expenditures being 0.5% of the average investments invoking the Rule 8D(2)(iii) is confirmed to the extent of dividend income which is Rs.19,311/-. In other words, the disallowance under section 14A amounting to Rs.91,25,846/- is restricted to Rs. 19,311/-. Relief is granted for the balance disallowance.”
At the time of hearing of the instant appeal the Ld. Advocate appearing for the assessee submitted before us that the disallowance u/s. 14A cannot be made more than the tax free income. In this particular case since the appellant had only exempt income of Rs. 19,311/- such disallowance of Rs. 91,25,846/- exceeding the exempt income not sustainable. He, therefore, relied upon the order passed by the Ld. CIT(A) in restricting the disallowance to the dividend income of Rs. 19,311/-. He also relied upon the judgment passed in the case of Jivraj Tea Ltd. vs. DCIT Circle-1 by the Surat Bench in ITA No. 866/Ahd/2012 dated 28.08.2014 of the Hon’ble Ahmedabad Tribunal.
On the other hand the Ld. DR relied upon the order passed by the Ld. AO.
We have heard the respective parties, we have also perused the relevant materials available on record and the order passed by the Hon’ble ITAT Surat Bench in ITA No. 866/Ahd/2012 as relied upon by the Ld. Advocate appearing for the assessee. We have also carefully considered the order passed by the Ld. CIT(A). It appears that relying
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upon the ratio as laid down by different High Court followed by the Coordinate Bench in several matters including the order passed by the Surat Bench the Ld. CIT(A) has restricted the disallowance to the exempt dividend income of Rs. 19,311/- since disallowance exceeding such exempt income is not permissible in law which does not call for any interference. We, therefore, uphold the same. Hence, Revenue’s appeal is thus devoid of any merit and thus dismissed.
In the result, the Revenue appeal is dismissed.
[Order pronounced in the Court on 25-03-2019.]
Sd/- Sd/- (AMARJIT SINGH) (MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 25/03/2019 Tanmay True Copy आदेशक���त�ल�पअ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent. 3. संबं�धतआयकरआयु�त/ Concerned CIT 4. आयकरआयु�त(अपील) / The CIT(A) 5. �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण/ DR, ITAT, 6. गाड�फाईल / Guard file.
आदेशानुसार/ BY ORDER,
उप/सहायकपंजीकार (Dy./Asstt.Registrar) आयकरअपील�यअ�धकरण, अहमदाबाद / ITAT, Ahmedabad