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Facts
The assessee, engaged in manufacturing tea and other agricultural products, filed its return for AY 2017-18. The Assessing Officer made a disallowance under Section 14A read with Rule 8D(2)(ii) concerning investments in HDFC Medium Term Opportunity Fund and HDFC Capital Builder Fund. The A.O. and CIT(A) included these investments, treating their income as exempt long-term capital gains u/s 10(38), which the assessee disputed, claiming the funds had changed names and their income was taxable.
Held
The tribunal noted the assessee's contention that the funds' names and nature (growth funds with taxable income) had changed and directed the A.O. to re-examine whether these funds are debt or equity-oriented and if their income is taxable. If the income from these funds forms part of total income, the investments are to be excluded from the average value for disallowance computation under Rule 8D(2)(iii). The assessee is directed to provide necessary details.
Key Issues
Whether specific mutual fund investments (HDFC Medium Term Opportunity Fund and HDFC Capital Builder Fund) should be included in computing the average value of investments for disallowance under Section 14A, depending on their classification as debt or equity-oriented funds and whether their income is taxable or exempt.
Sections Cited
14A, 143(3), 10(38)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI JAGADISH
आदेश / O R D E R
PER JAGADISH, A.M : Aforesaid appeal filed by the assessee for Assessment Year (AY) 2017-18 arises out of the order of Learned Commissioner of Income Tax, National Faceless Appeal Centre (NFAC), Delhi [hereinafter “CIT(A)”] dated 14.03.2024 in the matter of assessment framed by the Assessing Officer [AO] u/s. 143(3) of the Income-tax Act,1961 (hereinafter “the Act”) on 05.12.2019.
The effective ground of appeal in this appeal of assessee is against confirming the order of A.O holding that the investments made by the assessee in HDFC Medium Term Opportunity Fund and HDFC Capital Builder Fund are to be included in computing average value of investments for the purpose of disallowances under section 14A as
per Rule 8D(2)(ii) of the Income Tax Rules, 1963 (hereinafter “the Rules “).
The assessee is a company engaged in the business of manufacturing of tea, growing of cardamom and pepper and generation of wind energy and filed its return of income on 27.10.2017 admitting total income of Rs.1,76,51,000/-. The A.O has passed assessment order making disallowance u/s. 14A of the Act as per Rule 8D of the Rules of Rs.45,68,180/-. The A.O while computing the disallowance as per Rule 8D(2)(ii) of the Rules has taken the average value of investment at Rs.61,01,07,796/- and computed 1% of average investment as disallowance u/s. 14A of the Act. The assessee has objected to adopt the investment value at Rs.61,01,07,796/- as the investment made in the equity share and tax free bonds, would only be considered for computing average investment, while making 1% of disallowance as per Rule 8D of the Rules u/s. 14A of the Act. The assessee has contended that the investment which is in mutual funds both current investments and the non current investments namely Medium Term Opportunity Fund and HDFC Capital Builder Fund growth will not be included in the investment. The Ld. CIT(A) did not accept the contention of the assessee and held that Medium Term Opportunity Fund and HDFC Capital Builder Fund are growth funds and may not yield any dividend, but sale of the same results in long term capital gains, which is exempt u/s. 10(38) of the Act and therefore should be included in the computation of average value of investment for making disallowance under Rule 8D of the Rules. Aggrieved, the assessee is in appeal before us.
The Ld. Authorized Representative (A.R) of the assessee has argued that the name of HDFC Capital Builder Fund has been changed as HDFC Capital Builder Value fund and HDFC Medium Term Opportunities fund has been changed as HDFC Corporate Bond Fund and these two funds are growth funds income of which is not exempt from tax and therefore, the A.O and Ld. CIT(A) was not justified to include the above investment for the purpose of computation of average value of investment while making disallowance under rule 8D(2) of the Rules.
The Ld. Departmental Representative (DR), on the other hand, has relied on the orders of lower authorities.
We have heard the rival submissions, and perused the materials available on record. The A.O while computing the disallowance under Rule 8D(2) of the Rules has taken average value of investment at Rs.61,01,07,796/-. The A.O has included all the investment including HDFC Medium Term Opportunity Fund and HDFC Capital Builder Fund, income from which is claimed to be taxable and forms part of income. The Ld CIT(A) has held that there is no scheme by the name of HDFC Medium Term Opportunity Fund and the assessee has not submitted any details. The Ld CIT(A) therefore , considered this fund as HDFC Mid Cap Opportunity Fund which is equity oriented fund, and income of which as long term capital gain is exempt u/s 10(38) of the Act. The Ld CIT(A), similarly in the case of HDFC Capital Builder Fund held it equity oriented fund, income of which is exempt u/s 10(38) of the Act. The Ld. AR before us has submitted that name of HDFC Capital Builder Fund has been changed as HDFC Capital Builder Value fund and HDFC Medium Term Opportunities Fund has been changed as HDFC Corporate Bond Fund and these two funds are growth funds income of which is not exempt. The assessee has not provided these details before A.O or Ld CIT(A). We therefore, restore the matter to the file of AO to examine, whether these funds are debt fund or equity oriented fund and whether income from these funds form part of total income. In case income from these funds form part of total income, the investments are to be excluded in computing average value of investment as per Rule 8D(2)(iii) of the Rules. The assessee is directed to submit all the details in support of its contentions before the A.O.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced on 03rd January, 2025.