ACIT, CIRCLE- 30(1), NEW DELHI vs. KRISHAK BHARATI COOPERATIVE LTD.,, NEW DELHI

Brief facts of the case as could be culled out from the record and the arguments are that, the assessee is a co-operative Society registered in India under the provisions of Multistate Co-operative Societies Act, 2002 under the administrative control of Department of Fertilizers, Ministry of Agriculture and Cooperation, Government of India with its principal business of manufacture of Fertilizers like Urea and Ammonia.

For the assessment year 2012-13 the assessee filed its return of income on 26.09.2012 showing loss of Rs.62,47,36,376/-. Assessment under section 143(3) of the Income Tax Act, 1961 (for short “the Act”) was however, completed by order dated 28.03.2016 with the additions by way of disallowance under section 14A of the Act read with Rule 8D of the Income Tax Rules1962 (“the Rules”), in respect of amortization of lease rent and the dividend amount received from OMIFCO.

Aggrieved by such an action of the learned Assessing Officer, assessee preferred appeal before the Ld. CIT(A) and the Ld. CIT(A), by way of impugned order deleted the addition made on account of the dividend income received by the assessee from OMIFCO, Oman and also 3 ITA.Nos.5711 & 5754/Del./2017 Krishak Bharati Cooperative Ltd., New Delhi.

Assessee preferred appeal in challenging the addition of Rs.45,75,672/- as upheld by the Ld. CIT(A) in respect of the amortization of lease payment, sustaining the disallowance to the tune of Rs.1,12,50,439/- out of the disallowance by invoking section 14A of the I.T. Act, 1961 read with Rule 8D of the Rules; whereas the Revenue challenged in ITA No.5754/Del./2017, the deletion of the dividend income received by the assessee from OMIFCO, Oman and the consequential allowance of the demo tax credit under the Indo Oman DTAA and also the deletion of the balance disallowance under section 14A of the Act read with Rule 8D of the Rules.

Coming to ground Nos.1 and 2 of assessee’s appeal in respect of the disallowance of Rs.45,75,672/-being the amortisable portion of lease premium payment, it could be seen from the record that out of such payment an amount of Rs.6,17,364/- was in respect of the land at Noida wherein the office building of the assessee is situated, and the balance of Rs.39,58,308/- was in respect of the land at Visakhapatnam for construction of Rural Godown leased from Port Trust, Visakhapatnam and also the land Tuticorin for construction of Godown leased from the Port Trust, Tuticorin.

Insofar as the amortisable portion of the lease taken from the Noida Authority is concerned, Ld. AR fairly admitted that this issue is covered against the assessee by the order of the Hon’ble Delhi High Court in dated 12.07.2012 pertaining to the assessment year 2004-05, and though the assessee is in appeal before the Hon’ble Supreme Court on that issue, as the things stand today the assessee is bound by the order of the Hon’ble Delhi High Court.

Assessee is, therefore, confining the challenge in respect of the land at Visakhapatnam into Tuticorin, which issue is quite different from the issue relating to the Noida land. On this aspect it is the submission of the Ld. AR that in assessee’s own case for the assessment year 2008-09 in ITA numbers.2304 and 2321/Del./2012, a Coordinate Bench of this Tribunal considered the same and after careful consideration thereof it was observed that the nature of lease, the location of the land, the terms and conditions of lease etc, for example, it is located in the Porto premises, the entry and exit of which is with Port Security, land used only for storage during transit etc., that the assessee has in its long time lease with Visakhapatnam Port trust is different from the terms and conditions of lease from Noida Authority; that the principle on the issue whether the rent in question is to be allowed as Revenue expenditure or not, is laid down by the Hon’ble High Court in assessee’s own case for earlier assessment years and this depends on the facts of each case; that the issue was to be examined in the interest of Justice; that no prejudice would be caused to the Revenue in examining the matter once again; and therefore, the issue was set aside to the file of the learned Assessing Officer for considering the arguments of the assessee de novo in 5 ITA.Nos.5711 & 5754/Del./2017 Krishak Bharati Cooperative Ltd., New Delhi.

Ld. AR, in all fairness, submits that the same course as adopted for the assessment year 2008-09 may also be followed for this assessment year in restoring the issue to the file of the learned Assessing Officer for considering the facts and circumstances relevant for this particular assessment year and to take a call de novo. Ld. DR reports no objection for sending it back to the learned Assessing Officer. Recording the same, we allow this ground for statistical purpose, by restoring the issue to the file of the learned Assessing Officer to take a view de novo for this particular assessment year after hearing the assessee de novo in accordance with law.

Ground Nos 3 to 5 of assessee’s appeal and Ground Nos. 4 and 5 of Revenue’s appeal relate to the disallowance under section 14A of the Act read with Rule 8D of the Rules. 10.1. Brief facts relating to the issue are that during the year the assessee earned dividend income of Rs.3,42,56,718/- and claimed exemption under section 10(34) of the Act. The entire dividend was earned from 2 companies only, namely, Rs.1 crore from Nagarjuna Fertilisers and Chemicals Ltd and Rs.2,42,56,718/- from Gujarat State Energy Ltd. Other investments either have not yielded any dividend are that if any dividend was earned, it was offered to tax.

Learned Assessing Officer, however, computed the disallowance under 14A of the Act read with Rule 8D of the Rules at Rs. 10,35,89,041/- but restricted to the quantum of dividend received, i.e., at Rs.3,42,56,718/- by disallowing a sum of Rs.5,51,76,156/- under rule

Ld. CIT(A), however, while upholding the disallowance made by the assessing officer by invoking section 14A of the Act read with Rule 8D of the Rules, has confined the working of disallowance only in respect of those tax-free income building investments in two companies and reached the quantum of disallowance at Rs.1,12,50,439/-which he upheld, by granting relief to the tune of Rs.2,30,06,275/-.

Grievance of the assessee is two-fold. Firstly, that the learned Assessing Officer has not recorded any satisfaction to discard the assessee’s explanation and to embark upon the determination of the disallowance by invoking section 14A of the Act read with Rule 8D of the Rules and secondly, that the learned Assessing Officer should not have disallowed any interest component under rule 8D(2)(ii) of the Rules inasmuch as the assessee has own funds and secondly that only tax-free income yielding investments alone should have considered under rule 8D(2)(iii) of the Rules.

Per contra, it is the submission on behalf of the Revenue that the learned Assessing Officer had elaborately considered the submissions made by the assessee vide paragraph numbers 3 to 10 of his order and more particularly he observed that inasmuch as the assessee claims to have incurred no expenditure at all to earn the exempt income, it is not necessary to pinpoint the expenditure, and he, therefore, while recording that the contentions of the assessee are not acceptable in view of his

We have gone through the orders of the authorities below in the light of the submissions made on either side. It could be seen from the assessment order that the learned Assessing Officer called upon the assessee to furnish the details of income claimed as exempt and expenditure incurred for earning thereof in order to ascertain the allowability of expenses under section 14A of the Act read with Rule 8D of the Rules, besides asking the assessee to submit their computation of disallowance under such provisions, and also to furnish the explanation why section 14A of the Act may not be applied in respect of the expenses incurred for earning these exempt income in accordance with rule 8D of the rules. Assessee furnished elaborate information, as extracted by the learned Assessing Officer vide paragraph No. 2 of the order.

Learned Assessing Officer recorded that he had considered the entire submissions of the assessee and went on to discuss the legal position on section 14A of the Act. Then the assessing officer advert to the P & L Account and the interest expenditure debited therein to the tune of Rs.24,92,66,283/- for the assessment year 2012-13. Then the assessing officer adverted to the entries in the Balance Sheet in order to 8 ITA.Nos.5711 & 5754/Del./2017 Krishak Bharati Cooperative Ltd., New Delhi.

Coming to the alternative plea of the assessee, insofar as the interest component under rule 8D(2)(ii) of the Rules is concerned, the plea taken by the assessee is that the assessee invested their own funds and, therefore, no interest expense could be disallowed. On this aspect no material is produced before us to establish that the assessee invested out of its own funds comprising of share capital and reserves and no interest-bearing funds were invested during the year, or to show that there is no nexus between the deployment of the interest-bearing loans and investments. It is a verifiable fact. We, therefore, direct the learned Assessing Officer to verify whether the own funds of the assessee exceed the investments during the year, and whether the borrowed funds were utilised for the purpose for which they were borrowed during the year and in either case let there not be any disallowance on account of rule 8D(2)(ii) of the Rules. Insofar as the disallowance under rule 8D(2)(iii) of the Rules is concerned, we do not find any ground to interfere with the same.

Now coming to grounds No. 1 to 3 and 6 to 9, which relate to the dividend income received by the assessee from OMIFCO Oman and the consequential deemed tax credit relief allowed by the Ld. CIT(A) under the Indo Oman DTAA, at the outset, it is the submission by the Ld. AR that the issue is squarely covered in favour of the assessee by the orders of the Hon’ble Delhi High Court in the case of assessee for the assessment years 2010-11 and 2011-12. Ld.

DR does not dispute this factual submission made on behalf of the assessee.

We have gone through the order dated 21/4/2017 in and 579/2016 of the Hon’ble Delhi High Court reported in (2017) 395 ITR 572 (Delhi) in assessee’s own case wherein the Hon’ble High Court considered at length the question whether the dividend income was taxable but exempt under Omani law to entitle the assessee to the benefits of the Indo Oman DTAA and upheld the findings of the learned Assessing Officer therein to the effect that the assessee is entitled for the tax credit for the deemed dividend tax by virtue of the provisions of DTAA read with section 90 of the Act to delete the clarification issued by the Sultanate of Oman and the assessment made under the Omani laws.

For the sake of completeness, we deem it necessary to reproduce the relevant observations of the Hon’ble High Court, which read thus,-

In the result, both the appeals are allowed in part and for statistical purpose.