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Income Tax Appellate Tribunal, [ DELHI BENCH “E”: NEW DELHI ]
Before: SHRI PRASHANT MAHARISHI & SHRI K. N. CHARY
O R D E R PER PRASHANT MAHARISHI, A. M.
This appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals)–8, Mumbai, (CIT – A) dated 27.02.2015, for assessment year 2010-11, wherein the disallowance of Rs. 4,12,57,744/- on account of disallowance under Section 14A of the Income Tax Act, 1961 (the Act) was confirmed. This is the only issue in appeal.
Briefly stated the facts of the case are that assessee is a company engaged in power generation, distribution, trading, transmission and other ancillary and gifts. It filed its return of income for assessment 2010-11 declaring total income of Rs. 14,42,18,987/- on 11.10.2010. Subsequently the return was revised on 17.02.2012 at Rs. 14,34,37,237/-.
During the course of assessment proceedings assessee has shown a dividend income of Rs. 29,22,77,694/- and assessee has made disallowance under Section 14A of the Act of Rs. 5,87,643/-. Assessing Officer noted that the disallowance made by the assessee is not according to rule 8D. The assessee was questioned to furnish the details of expenses incurred for earning exempt income. The assessee submitted that it has worked out disallowance of Rs. 5,87,642/- being the proportionate salary of 2 executives, who are assigned task of maintaining the same. Assessee also stated that investments have been made from its own funds and no borrowed funds were used.
The ld. Assessing Officer held that the suo moto disallowance offered by the assessee is not properly explained. He noted that bank statement of the assessee with HDFC Bank the assessee has utilized funds from that bank account. The Assessing Officer noted that assessee has paid interest expenditure of Rs. 2,92,58,246/- and claimed it as an allowable expenditure. He also referred to the cash flow statement submitted by the assessee. He further referred to the HDFC Bank and stated that the interest-bearing funds have been utilised to make investment in the units of mutual fund income from which the dividend is exempt from the tax is earned. With respect to the argument of the owned funds the learned AO held that assessee did not consider that such funds are deployed other than investment activity. He rejected the argument of the assessee that it has used its own funds for making such investments. Therefore, on examination of the cash flow statement of the assessee for the year ended on 31st of March 2010 he held that assessee has utilised its funds for making substantial investment in the form of investment in mutual funds the income from which is exempt from tax. It was further noted that assessee has also made certain investments in equity shares of its subsidiary companies. The AO noted that the cash flow by way of proceeds from issue of equity shares amounting to ₹ 1625 crores out of which substantial amount of ₹ 200 crores has been refunded to state bank of India for non-allotment of shares along with interest of ₹ 24,657,534/–. The quantum of money deployed for investment activity when compared to the activity other than investment is very high hence; the contention of the assessee that entire sale allotment money has been used for the purpose of the business is not maintainable. Thereafter he analyzed the HDFC bank account of the assessee and concluded that the entire funds received of ₹ 200 crores from the state bank of India has been utilized for making investment in mutual funds. Therefore he rejected the contention of the assessee that only a sum of ₹ 587,643/– is this allowable u/s 14 A with rule 8D of the income tax rules. Thereafter he computed the disallowance as per rule 8D of the income tax rules 1962. He computed the expenses directly attributable to exempt income in the form of interest paid to state bank of India of ₹ 24,657,534/– with respect to the indirect expenses he computed a sum of ₹ 163,920/–. With respect to the 0.5% of the average value of investment on the opening and closing day of the previous year he computed such disallowance at Rs 171,87,853/– accordingly the aggregate of all these three components of rule 8D was determined at ₹ 42,009,307. Accordingly the above disallowance was made and the total income was computed at ₹ 184,858,920/–. Identical addition was also made to the book profit of the assessee for computation of minimum alternative tax u/s 115JB of the act. Such assessment order was passed on 24th of March 2013.
Aggrieved, assessee preferred an appeal before the learned CIT – A wherein the addition of ₹ 163,920/– made by the AO Under rule 8D (2) (ii) was deleted. With respect to the disallowance of ₹ 24,657,534 made by the AO Under rule 8D (2) (i) was confirmed. He also confirmed disallowance out of the enemy administrative expenditure of Rs. 1 71, 87,853/–. Assessee is aggrieved with the order of the learned CIT – A – preferred an appeal before us.
The learned authorised representative submitted that:- a. When interest free funds available with the assessee are much higher than the amount of investment made the presumption lies in favour of the assessee that the amount of investment made for earning of the exempt income is utilized out of interest free funds available. He referred to the paragraph number 5.1 of the order of the learned CIT – A wherein it is mentioned that the interest free owned funds available with the assessee was to the tune of ₹ 3920 crores whereas the total investment made was only ₹ 1343 crores. b. Only those investments are to be considered for the purpose of disallowance under rule 8D He submitted that the opening balance of the investments which yielded tax-free income as well as the closing balance of the investment which yielded tax-free income is Rs. nil on both the dates. Therefore, average of such investment at the beginning of the year and at the close of the year is also nil. Hence, there cannot be any disallowance under that clause. c. Even otherwise, he submitted that that interest disallowance could not have been made under rule 8D (2) (i) in the case of the assessee for the simple reason that the learned assessing officer has merely taken the source of fund from the HDFC bank account of the assessee. He submitted that this is the normal bank account of the assessee and it is a case of mixed funds available with the assessee. d. He otherwise submitted that the interest expenditure paid to the state bank of India, which was refunded for non-allotment of shares, could not have been imputed to the exempt income earned by the assessee from redemption of reliance mutual fund. He further stated that assessee has received ₹ 1625 crores from the state bank of India and out of which only ₹ 200 crores has been refunded. Therefore assessee has availability of 1425 crores which are non-interest-bearing which have been utilized by the assessee for the purpose of purchase of the mutual fund. Therefore, the interest imputed by the learned assessing officer is devoid of any merit. e. He relied upon plethora of judicial precedents to support his contentions. f. He also referred to the various documents filed in the paper book submitted before us
7. Learned departmental representative vehemently supported the orders of the lower authorities. It was submitted that the learned assessing officer has correctly recorded the satisfaction about the disallowance offered by the assessee. It was further stated that as assessee has utilized the funds which are available with the assessee and HDFC bank for the investment in the mutual funds which yielded exempt income, the learned assessing officer has correctly disallowed a sum of Rs 2 46,57,534 as interest expenses directly attributable to the exempt income earned by the assessee. It was further stated that 0.5% of the average value of investment has been correctly computed by the learned assessing officer therefore, there is no infirmity in the same. It was further stated that the learned CIT – A has also correctly appreciated the fact and deleted the partition/disallowance. He thus supported the orders of the lower authorities.
We have carefully considered the rival contention and perused the orders of the lower authorities. In the present case, the facts clearly shows that the assessee has earned and tax free income of ₹ 292,277,694/– which is exempt u/s 10 of the income tax act. The assessee has offered disallowance of ₹ 587,643/– u/s 14A of the act. The disallowance offered by assessee was considered by learned assessing officer. In addition, the same was rejected giving proper reasoning. Therefore it is apparent that the learned assessing officer has recorded proper satisfaction for invoking the provisions of rule 8D of the income tax rules 1962 for working of the disallowance u/s 14 A of the act. 9. Now we come to the disallowance u/r 8D (2)(i) . This sub rule provides that the amount of any expenditure directly relating to income, which does not form part of total income, is required to be disallowed. On careful analysis of the facts stated before us, we find that assessee has interest free owned funds of ₹ 3920 crores as on 31st of March 2010. The total investment made by the assessee in which tax-free income could have been earned is ₹ 1343 crores as on that date. Further, that investment from which exempt income has been actually earned during the year is only ₹ 605 crores. Furthermore, the investment made by the assessee is out of the mixed funds, as it did not maintain the books of account of the earning exempt income as well as taxable income separately. The honourable Supreme Court in case of Commissioner of income tax versus Reliance industries Ltd [2019] 102 taxmann.com 52 (SC)/[2019] 261 Taxman 165 (SC)has held as Under:-
Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03.
8. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question. 10. Therefore, in view of the above facts, we hold that there cannot be any interest disallowance in the case of the assessee. Accordingly, the interest disallowance made under rule 8D (2) (i) of the act of ₹ 24,657,534/– deserves to be deleted, hence, we direct the learned assessing officer to delete the same. 11. Coming to the disallowance under rule 8D (2) (iii) the amount equal to ½% of the average value of the investment Income from which does not or shall not farm part of the total income as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. The assessee has submitted that the honourable Delhi High Court in ACB India Ltd versus Asst Commissioner of income tax (2015) 374 ITR 108 (Delhi) wherein it has been held that the for the purpose of Section 14 A, instead of taking into account total investment, investment activity but to dividend was required to be adopted and thereafter disallowance was to be arrived at. The claim of the assessee is that the opening balance and closing balance of the investments on which exempt income is received during the year is Rs Nil. The assessee has submitted the various accounts of such investments before us. In case if the opening balance and the closing balance of such investments from which exempt income is received during the year is rupees nil, naturally the average of such investment would also be Nil and therefore the consequent disallowance would also be Nil. In view of the above fact, we hold that there cannot be any disallowance under rule 8D (2) (iii) of the act is also Nil. Accordingly, we direct the learned assessing officer to delete the disallowance under rule 8D (2)(iii) of the act. Accordingly we direct the Page | 6 learned assessing officer to delete the disallowance under that sub rule amounting to Rs 1 71,87,853/–. 12. Accordingly we direct the learned assessing officer to delete the disallowances confirmed by the learned CIT – A of Rs 246,57,534/– being the interest expenses stated by the learned assessing officer to be directly attributable to the earning of the exempt income as well as a sum of Rs 1 71,87,853/– being 0.5% of the average value of investment on the opening and closing day of the previous year. 13. Accordingly, ground number 1 of the appeal of the assessee is allowed.
Order pronounced in the open court on : 17/11/2021.