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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED
आदेश / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)–2, Vadodara [CIT(A) in short] vide appeal no.CAB/(A)-2/211/15-16 dated 20.09.2016 arising in the matter of assessment order passed under Sec.143(3) of the Income Tax Act, 1961(here-in-after referred to as "the Act") dated 26.11.2015 relevant to Assessment Year (AY) 2013-14.
ITA No.3408/Ahd/2016 M/s. M.C. Davar Holdings Pvt Ltd. DCIT A.Y. 2013-14
- 2 - 2. The grounds of appeal raised by the assessee are as under:- “1. The learned Commissioner of Income Tax (Appeals) - 2, [CIT(A)J erred in confirming the disallowance of interest expenses at Rs. 18,15,956 as against Rs.6,95,653 worked out by the appellant as interest expenditure attributable to income exempt u/s 10 applying provisions of section 14A r.w. Rule 8D(2)(ii) and thereby making an addition of Rs. 11,20,303.
Your appellant submits that the above disallowance is wrongly made under the facts of the Appellant's case and the same ought to be deleted.
The Learned CIT(A) erred in confirming disallowance of expenses at Rs. 2,71,704 as against Rs. 1,30,302 worked out by the appellant as interest expenditure attributable to income exempt u/s 10 applying provisions of section 14A r.w. Rule 8D(2)(iii) and thereby making an addition of Rs. 1,41,402.
Your appellant submits that the above disallowance is wrongly made under the facts of the Appellant's case and the same ought to be deleted.
The learned CIT(A) erred in concluding that long-term investments amounting to Rs. 2,08,24,270 are not made out of own funds of the appellant.
Your appellant submits that the aforesaid finding of the CIT(A) is erroneous under the facts and circumstances of the appellant's case.
The learned CIT(A) erred in considering strategic investments at the time of computation of disallowance u/s. 14A r.w. Rule 8D.
Your appellant submits that under the facts and circumstances of the appellant's case, strategic investments ought to be excluded at the time of working out disallowance under section 14A r.w, Rule 8D.
ITA No.3408/Ahd/2016 M/s. M.C. Davar Holdings Pvt Ltd. DCIT A.Y. 2013-14
- 3 - 5. The learned CIT(A) erred in confirming the action of the Assessing Officer of considering investments amounting to Rs. 4,59,503 in form of Cash & Cash Equivalents at the time of working of disallowance of interest expenditure by applying the provisions of section 14A r.w. Rule 8D. Your appellant submits that under the facts and circumstances of your appellant's case the aforesaid investments ought to be excluded at the time of working of disallowance u/s. 14A r.w. Rule 8D. 6. Without prejudice to the above, the appellant submits that the disallowance u/s.14A is excessive and the same ought to be reduced substantially. 7. Your appellant craves leaves to add to, alter, amend or vary all or any of the of aforesaid grounds of appeal as they/their representative may deem fit.”
The assessee has raised as many as seven grounds of appeal but the interconnected issue raised by the assessee is against the disallowance confirmed by the ld. CIT(A) u/s 14A r.w.r. 8D of the Income Tax Act.
Briefly stated facts are that the assessee is a private limited company and engaged in the business of investment and granting of loans as Non-Banking Financial Corporation.
4.1 The assessee during the year has earned dividend income and share of profit from the partnership firm of Rs. 2,05,09,772/- and 18,08,617/- respectively which were claimed as exempted u/s 10(34) and 10(2A) of the Act.
ITA No.3408/Ahd/2016 M/s. M.C. Davar Holdings Pvt Ltd. DCIT A.Y. 2013-14
- 4 - 4.2 The assessee against such income has made the disallowance of Rs. 2,41,355/- u/s 14A of the Act.
4.3 The assessee during the assessment proceedings on the direction of the AO furnished the working of the disallowance of the expenses in relation to exempted income under the provision of Section 14A r.w.r 8D of the Act for Rs.8,25,955/-.
4.4 The assessee also claimed that the investment was made by it out of its own fund. Therefore, all the investments cannot be considered for the purpose of computation of disallowance of expenses u/s14A.
However, the AO disregarded the contention of the assessee by observing that the assessee failed to justify the source of fund utilized in making the impugned investment. Accordingly, the AO invoked the provision of Section 14A r.w.r 8D of the Act and made the following disallowances.
Sr No. Particulars Amount i. Direct Expenses under Rule 8D(2)(i) Nil ii. Interest Expenses under Rule 8D(2)(ii) 18,15,956/- iii. Administrative Expenses under Rule 8D(2)(iii) 2,71,074/- Total 20,87,030/- In view of above, the AO has made the disallowances of Rs.18,45,695/- (20,87,030 – 2,41,335 amount already disallowed) and added to the total income of the assessee.
ITA No.3408/Ahd/2016 M/s. M.C. Davar Holdings Pvt Ltd. DCIT A.Y. 2013-14
- 5 - 5. Aggrieved, assessee preferred an appeal to ld. CIT(A) who has partly confirmed the order of AO by observing as under: “d) The arguments of own funds in the form of share capital an Reserve Surplus have been also carefully considered and it is noticed that the appellant company has invested in fixed assets and long term loan and advances at Rs.6.70 crores and Rs.32.67 crores respectively. Thus the investment in fixed assets and long term loan and advances totaling to Rs.39.37 crores exceeded the own funds available in the form of share capital and reserve & surplus amounting to Rs.32.35 crores. Undisputedly, the appellant could not prove utilization of own funds for investment in the assets resulting into exempted income. It may also be noted that the appellant itself has admitted revised disallowance u/s 14A r.w. Rule 8D at Rs.8,25,955/-and hence it emerges that the funds of the appellant are mixed fund. The Hon'ble ITAT Chandigarh in the case of Anilkumar Singhania Vs ACIT (2014) 51 taxmaan.com 98 has held that the theory of disallowance u/s 14A r.w. Rule 8D on proportionate basis itself is based on concept of mixed funds and hence in case of mixed fund, disallowance has to be made. Hon'ble High Court in the case of Avon Cycles Ltd Vs CIT (2015) 53 taxmaan.com 297 (P&H), has also held that in case of mixed fund, interest paid on borrowed fund was also relatable to investment made in tax free assets and hence proportionate disallowance u/s 14A r.w. Rule 8D (2)(ii) is justified. The ratio laid down in these decisions is clearly applicable in the case of appellant.” Being aggrieved by the order of ld. CIT(A) assessee is in appeal before us.
The ld. AR before us submitted that in the identical facts and circumstances the Hon’ble ITAT in the own case of the assessee in ITA No.968/Ahd/2014 & 974/Ahd/2016 pertaining to the A.Y. 2010-11 and 2012-13 had decided the issue in favor of the assessee.
ITA No.3408/Ahd/2016 M/s. M.C. Davar Holdings Pvt Ltd. DCIT A.Y. 2013-14
- 6 - 7. On the other hand ld. DR vehemently supported the order of authorities below.
We have heard the rival contentions and perused the materials available on record. At the outset, we find that in the identical facts and circumstances the Hon’ble ITAT in the own case of the assessee has allowed the appeal in ITA No.974/Ahd/2016 wherein it was held as under: "4. I have carefully considered the facts on record and submission of the Ld. AR. Ground No.1 pertains to disallowance of Rs.3,80,764/- u/s 14A r.w. Ride 8D. in addition to the disallowance of Rs. 13,22,660/- already made by the appellant. Since the appellant has made the disallowance out of interest expenditure as per the provisions of Section 14A r.w. Rule 8D. the applicability of this rule has been conclusively established. Undisputedly, the appellant has not maintained separate set of accounts for investments and earning of exempted income. During the course of appellate proceedings, the Id.AR has raised mainly t\vo contentions that the investments made in certain companies being a strategic investment amounting to Rs.1,08,24,270/- should be excluded from the average value of investments while computing the disallowance and such investments were made out of own funds. On perusal of the details furnished, I find that there is no direct nexus between the investments and non-interest bearing funds and hence this argument of the appellant is not acceptable. Further, under the provisions of Section 14A r.w. Rule 8D, there is no exception provided for exclusion of the strategic investments, in fact, all the investments made by the appellant company are resulting into dividend income which is exempted from the income tax and hence in my considered view all the investments resulting into exempted income to be considered for disallowance as per Rule 8D. It may also be noted that CIT(A)-III, Baroda vide his order dated 28.01.2014 contained in Appeal No. CAB/III-2S4/2012-13 (2010-11) has confirmed the disallowance of interest on all the investments for detailed reasons mentioned in paras
ITA No.3408/Ahd/2016 M/s. M.C. Davar Holdings Pvt Ltd. DCIT A.Y. 2013-14
- 7 - 4.3 to 4.3.5 of the order. Therefore, in view of the above facts, the disallowance made by the AO at Rs.3,80,764/- in addition to the disallowance already made by the appellant, is confirmed. Thus, appellant fails in respect of Ground No. 1.
Learned Authorized Representative vehemently contends during the course of hearing that the lower appellate authority has erred in law as well as on facts in affirming the impugned disallowance. The assessee files before us a coordinate bench's order in ITA No.968/And/2014 in its own case for preceding assessment year 2010-11 decided on 28.04.2017 as follows:
"4. We have heard the rival contentions, perused the material on record, and duly considered facts of the case in the light of the applicable legal position. We find that there is no dispute that rule 8D comes into play in this case but essentially dispute revolves around as to how much portion of interest expenses are to be disallowed under that rule. It is on this point that there are varying perceptions. While the assessee has offered disallowance of Rs 7,70,830 (in addition to 0.5% of average investments yielding tax exempt income, which works out to Rs.2,20,714) by taking into account only such investments on which tax exempt income was actually earned, the Assessing Officer has computed this portion of disallowance at Rs 13,86,103 by taking into account entire investments yielding tax exempt income-Irrespective of whether or not there was any tax exempt income in the relevant previous year or not. Learned counsel has, however, gives a new twist to the case now. She submits that the interest free funds available to the assessee are far in excess of the investments yielding tax exempt income and these investments are carried forward from an earlier point of time much before the related borrowings were resorted to. He contention is that, in view of this factual position, as a matter of no part of interest expenditure cannot be disallowed under section, and, accordingly, the disallowance offered by the assessee on its own was far more than adequate. While learned Departmental Representative has not disputed the factual elements embedded in her arguments, he nonetheless relies upon the stand of the authorities below.
ITA No.3408/Ahd/2016 M/s. M.C. Davar Holdings Pvt Ltd. DCIT A.Y. 2013-14
- 8 - 5. The plea of the learned counsel is indeed well taken, particularly as it is beyond any doubt or controversy that the interest free funds available to the assessee were far in excess of the investments yielding tax exempt income. We find that firstly, in view of The fact that the assessee has interest free funds far in excess of the investments yielding tax exempt income, a presumption is necessarily to be taken that the investments were made out of interest free funds. That position is supported by Hon'ble Bombay High Court's decision in the case of CIT Vs Reliance Utilities & Power Ltd [ (2009) 313 JTR 340 (Bom)], and a series of the orders passed by various coordinate benches of this Tribunal have applied the same in She present context as well. As a corollary to this presumption, no part of interest payment can be said to be attributable to the investments yielding tax exempt income. In such a position, so far as interest disallowance under rule 8D is concerned, no part of interest expenses can be disallowed under section 8 D at all. This proposition finds support from a decision of coordinate bench in the case of ACIT Vs Champion Commercial Co Ltd [(2012) 139 ITD 108 (Kol)J, which now stands specifically approved by Hon'ble Delhi High Court in the case of PCIT Vs Bharti Overseas Limited 1(2015) 64 taxinann.com 340 (Del)]. In the said case, the coordinate bench, speaking through one of us, had observed as follows:
There is no dispute about working of this method so far as rule 8D(2)(i) and (Hi) is concerned. It is only with regard to the computation under rule 8D(2)(ii) that the Assessing Officer and the CIT(A) have different approaches. This provision admittedly deals with a situation in which "the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt". Clearly, therefore, this sub clause seeks to allocate 'common interest expenses' to taxable income and tax exempt income. In other words, going by the plain wordings of rule 8D(2)(ii) what is sought to be allocated is "expenditure by way of interested which is not directly attributable to any particular income or receipt" and the only categories of income and receipt, so far as scheme of rule 8D is concerned, are mutually exclusive categories of 'tax exempt income and receipt' and 'taxable income and receipt'. No other classification is germane to the context in which rule 8D is set out, nor does the scheme of Section 14 A leave any ambiguity about it.
ITA No.3408/Ahd/2016 M/s. M.C. Davar Holdings Pvt Ltd. DCIT A.Y. 2013-14
- 9 - 12. Ironically, however, the definition of variable 'A' embedded in formula under rule 8D(2)(ii) is clearly incongruous inasmuch while it specifically excludes interest expenditure directly related to tax exempt income, it does not exclude interest expenditure directly related to taxable income. Resultantly, while rule 8D(2)(ii) admittedly seeks to allocate "expenditure by way of interest, which is not directly attributable to any particular income or receipt" it ends up allocating "expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income" [Emphasis supplied]. This incongruity will be more glaring with the help of following simple example:
In the case of A & Co Ltd, total interest expenditure is Rs. 1,00,000, out of which interest expenditure in respect of acquiring shares from which tax free dividend earned is Rs. 10,000. Out of the balance Rs. 90,000, the assessee has paid interest of Rs. 80,000 for factory building construction which clearly relates to the taxable income. The interest expenditure which is "not directly attributable to any-particular receipt or income" is thus only Rs. 10,000.
However, in terms of the formula in rule 8D(2)(ii), allocation of interest which is not directly attributable to any particular income or receipt will be for Rs. 90,000 because, as per formula the value of A (i.e. such interest expenses to be allocated between tax exempt and taxable income) will be "A = amount of expenditure by way of interest other than the amount of interest included in clause (i) [i.e. direct interest expenses for tax exempt income] incurred during the previous year".
Let us say the assets relating to taxable income and lax exempt income are in the ratio of 4:1, In such a case, the interest (Unallowable under rule 8D(2)(ii) will be Rs. 18,000 whereas entire common interest expenditure will only be Rs. 10,000.
The incongruity arises because, as the wordings of rule 8D(2)(ii) exist, out of total interest expenses, interest expenses directly relatable
ITA No.3408/Ahd/2016 M/s. M.C. Davar Holdings Pvt Ltd. DCIT A.Y. 2013-14
- 10 - to tax exempt income are excluded, interest expenses directly relatable to taxable income, even if any are not excluded.
The question then arises whether we can tinker with the formula prescribed under rule 8D(2)(ii) of the Income Tax Rules, or construe it any other manner other than what is supported by plain words of the rule
We find that notwithstanding the rigid words of Rule 8D(2)(ii), the stand taken by the revenue authorities about its application, as was before Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy.CIT [2010] 328 ITR 81 / 194 Taxman 203 when constitutional validity of rule 8D was in challenge, is that "It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example- any aspect of the assessee's business such as plant/machinery etc.)". Therefore, if is not only the interest directly attributable to tax exempt income, i.e. under rule 8D(2)(i), but also interest directly relatable to taxable income, which is to be excluded from the definition of variable 'A' in formula as per rule 8D(2)(ii), and rightly so, because it is only then that common interest expenses, which are to be allocated as indirectly relatable w taxable income and tax exempt income, can he computed. This is clear from the following observations made by Their Lordships of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra):
In the affidavit-in-reply that has been filed on behalf of the Revenue an explanation has been provided of the rationale underlying r. 8D. In the written submissions which have been filed by the Addl. Solicitor General it has been stated, with reference to r. 8D(2)ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax-free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest
ITA No.3408/Ahd/2016 M/s. M.C. Davar Holdings Pvt Ltd. DCIT A.Y. 2013-14
- 11 - which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc. The justification that has been offered in support of the rationale for r. 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in the method'.
Once the revenue authorities have taken a particular stand about the applicability of formula set out in rule 8D(2)(ii), and based on such a stand constitutional validity is upheld by Hon'ble High Court, it cannot be open to revenue authorities to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Viewed thus, the correct application of the formula set out in rule 8D(2)(ii) is that, as has been noted by Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), "amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example- any aspect of the assessee's business such as plant/machinery etc.)". Accordingly, even by revenue's own admission, interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii).
To the above extent, therefore, we have to proceed on the basis that rigour of rule 8D(2)(ii) is relaxed in actual implementation, and revenue authorities, having taken that stand when constitutional validity of rule 8D was in challenge before Hon'ble High Court, cannot now decline the same. Ideally, it is far the Central Board of Direct Taxes to make the position clear one way or the other either by initiating suitable amendment to rule 8D(2)(ii) or by adopting an interpretation as per plain words of the said rule, but even on the face of things as they are at present, in our humble understanding, revenue authorities cannot lake one stand when demonstrating lack of 'perversity, caprice or irrationality' in rule 8D before Hon'ble High Court, and take another
ITA No.3408/Ahd/2016 M/s. M.C. Davar Holdings Pvt Ltd. DCIT A.Y. 2013-14
- 12 - stand when it comes to actual implementation of the rule in real life situations. Therefore, even as we are alive to the fact that the stand of the learned Departmental Representative is in accordance with the strict wording of rule 8D(2)(ii), we have to hold that, for the reasons set out above, this rigid stand cannot be applied in practice. 6. Clearly, therefore, no interest was warranted on account of interest component. The disallowance offered by the assessee was certainly much more than adequate-particularly as the factual elements embedded in learned counsel's contentions are not even disputed before us. We, therefore, vacate the impugned disallowance of Rs 7,23,166. The assessee gets the relief to this extent. " 4. It has therefore come on record that the above co-ordinate bench has already adjudicated the very issue in assessee's favour. This factual position has gone unrebutted from the Revenue side. We therefore adopt judicial consistency in the impugned assessment year as well to affirm CIT(A)'s findings under challenge.”
Respectfully, following the same, we reverse the order of authorities below and direct the AO to delete the addition made by him. Hence the grounds of appeal of the assessee are allowed.
In the result, appeal of the assessee is allowed. This Order pronounced in Open Court on 15/11/2018
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ITA No.3408/Ahd/2016 M/s. M.C. Davar Holdings Pvt Ltd. DCIT A.Y. 2013-14
- 13 - Priti Yadav, Sr.PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-2, Vadodara. 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad. 6. गाड� फाईल / Guard file. आदेशानुसार/BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad