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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”, HYDERABAD
Before: SHRI D. MANMOHAN & SHRI B. RAMAKOTAIAH
PER B. RAMAKOTAIAH, A.M. :
This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-3, Hyderabad, dated 21-09-2017 on the issue of disallowance u/s. 14A of the Income Tax Act [Act].
Briefly stated, assessee-company is engaged in the business of manufacture of PP Woven Sacks and Pet Preforms, filed its return of income for the AY. 2013-14 on 27-09-2013 declaring loss of Rs. 2,37,95,774/- under normal provisions and a book profit of Rs. 1,68,23,934/-. The case was completed u/s. 143(3) of the Act by making a disallowance of Rs. 11,82,310/- u/s. 14A of the Act.
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AO has disallowed 0.5% of the average investments u/s. 8D(iii) to an extent of Rs. 11,82,310/-.
Ld.CIT(A) has confirmed the same by stating as under:
“(VII). Ground No.2(a) and 2(b) relates to disallowance of Rs. 11,82,310/- u/s.14A read with Rule 8D(2)(iii).
Keeping in view the facts, issue and circumstances, the instant case was seen. From the balance sheet of the appellant it is seen that the appellant had made investments and treated the dividend income as exempt. During the course of proceedings, it was submitted that the appellant had not borrowed any funds for the purpose of investment in shares of various companies. The appellant had further stated it had invested from interest free funds of the reserves and surplus. It was submitted that the appellant company had not directly or indirectly incurred any interest or finance charges on account of investments in shares. This issue was duly considered. The appellant company could not clearly establish that the investments were not intended for earning exempt income and no administrative expenditure was expended in managing such investments. Hence, 0.5% of the average value of the investments was considered for disallowance by the Assessing Officer and added to the total income of the appellant in terms of Rule 8D(2)(iii) of the Income Tax Rules, 1962. Further, for the provisions of Section 115JB, book profit means net profit as shown in the P&L account for the relevant previous year as increased by the amounts referred to in clauses (a) to (i) below Explanation-l to Sub-Section (2) and has reduced by the amounts referred to in clauses (i) to (viii) below Explanation-1 to Sub-Section (2) of Section 115JB of the Income Tax Act. The adjustment to book profit in clause (f) to the Explanation-l below Sub- Section (2) of Section 115JB reads as under:
The amount or amounts of expenditure relatable to any income to which Section 10 applies (other than the provisions contained in clause (38) thereof or Section 11 or Section 12).
As per this aforesaid clause, expenditure relatable to earning of exempt income as per Section 10 (say if that provided in Section 10(38)) requires to be added to the book profit. In the appellant's case the appellant made investments in equity shares wherein the dividend income was exempt u/s.10(34). Therefore, the expenditure considered for disallowance u/s.14A r.w.r 8D(2)(iii) is to be added back for the purpose of determination of tax liability u/s. 115JB. The findings of the Assessing
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Officer on this count holds merit and is accordingly upheld. Hence, Ground Nos.2(a) and 2(b) in appeal are dismissed”.
It was the contention that investment was made in group concern and no expenditure was incurred. Alternatively, it was submitted that the disallowance can be restricted to dividend earned of Rs. 5,30,512/- only, following the Co-ordinate Bench decision in ITA No. 460/Hyd/2017 in the case of M/s. Kamadhenu Sukrit Pvt. Ltd., Vs. Income Tax Officer, dt. 22-11-2017. Ld. Counsel for assessee has relied on the following case law:
a. Pr.Commissioner of Income Tax Vs. Empire Package Pvt. Ltd., [286 CTR 457 (P & H-HC)]; b. Joint Investments Pvt. Ltd., Vs. CIT [372 ITR 694 (Del-HC)]; c. K. Ratanchand & Co., Vs. ITO [45 ITR (Trib) 608 (Ahd-Trib); d. Pest Control India Pvt. Ltd., Vs. DCIT, ITAT Mumbai dated 31-10-2017; e. TGV Projects & Investments Pvt. Ltd., Vs. ACIT ITAT, Hyderabad, dated 28-02-2017 (SMC); f. Avshesh Mercantile (P) Ltd., Vs. DCIT [26 taxmann.com 43 (Mumbai)/(2012) 54 SOT 19]; g. CIT Vs. Oriental Structural Engineers P. Ltd., [35 taxmann.com 210 (Delhi-HC); h. CIT Vs. Holcim India (P) Ltd., [57 taxmann.com 28) (Delhi)]; i. M/s. Kamadhenu Sukrit Pvt. Ltd., Vs. ITO, ITAT Hyderabad Bench, dated 22-11-2017;
Ld.DR, however, relied on the orders of the CIT(A).
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We have considered the rival contentions and perused the facts on record and the case law relied upon. As seen from the order of the AO as well as the CIT(A), there is no finding that assessee has incurred any expenditure for earning the said dividend income. There was no diversion of borrowed funds, hence there is no disallowance interest under Rule 8D(2)(ii). The disallowance was only under Rule 8D(2)(iii).
6.1. Coming to the disallowance of ½% of average value of investment, some proportionate expenditure can be disallowed but in no case, it should exceed the amount earned claiming exemption. The Hon'ble High Court of Punjab & Haryana in the case of Pr. Commissioner of Income Tax Vs. Empire Package Pvt. Ltd., (supra), answered the question raised by Revenue in negative, wherein the Revenue has raised ‘whether in the facts and circumstances of the case, the Hon'ble Tribunal is justified in law to hold the disallowance made u/s. 14A r.w. Rule 8D cannot exceed the exempt income in the absence of any such restriction being there in the relevant section or rule’. Similar opinion was also expressed by the Hon'ble Delhi High Court in the case of Joint Investments Pvt. Ltd., Vs. CIT (supra), wherein the Hon'ble Delhi High Court has clearly held that the proportionate or portion of the tax exempt income surely cannot swallow the entire amount as happened in this case. The Co-ordinate Bench in the case of M/s. Kamadhenu Sukrit Pvt. Ltd., Vs. ITO (supra) relied on another decision in the case of Sahara India Financial Corpn. Ltd., Vs. DCIT [41 taxmann.com 251] (Delhi-Trib) and has held as under:
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“8.1. As can be seen from the nature of expenditure, there is no indication even that the above expenditure is expended for earning dividend income. AO without giving any satisfactory reason, just invoked Rule 8D(iii) and disallowed the amount.
The Co-ordinate Bench in the case of Sahara India Financial Corpn. Ltd., Vs. DCIT (supra) has held in para 81 as under:
“We have heard the rival contentions and perused the material available on record. It has not been disputed that the administration, expenses and books of account of investment division are separately carried out and maintained by the assessee. No infirmity has been found by the department in this behalf. One of the main issue is on whom lies the onus to establish nexus of available funds with free and taxable income. Similarly courts have held that a finding in objective terms about assessee working being unsatisfactory is to be recorded by AO in the order. Chandigarh Bench of the Tribunal in the case of Punjab State Co-op. & Marketing Fed. Ltd. (supra) has held that in any case the disallowance u/s 14A cannot exceed tax free income of the assessee. If mechanical method of rule 8D is applied, it leads to manifestly absurd results in as much as for tax free income of Rs.68,37,583/- disallowance of Rs.2,16,51,917 (enhanced by CIT(A) at Rs. 2,19,47,772) is made u/s 14A which is way too much than the exempt income. As the interpretation of provisions of sec. 14A r/w rule 8D is leading to unanticipated absurdities which cannot be the intention of legislature. Under these circumstances help of external aids of construction for interpretation of statute is called for. Looking at the varying interpretation offered by various courts and benches of tribunal in relation to sec. 14A, it is quite arduous to precisely decide the issue. In given facts and circumstances without going into all the issues, in our view it is appropriate to take guidance from Chandigarh bench judgment in the case of Punjab State Co-opt Marketing Fed. Ltd. (supra) holding that the disallowance of expenditure in any case cannot exceed the income earned. In our view this judgment takes a holistic view that disallowance in terms of sec. 14A can be maximum to the extent of exempt income, there is no dispute that in this case which is at Rs. 68,37,583/-. This judgment implies that reasonable expenditure less than the exempt income can be disallowed. In our considered opinion, in the interest of justice, it will be reasonable to estimate and disallow, 50% of exempt) income (Rs.68,37,583/-) as relatable to exempt income u/s 14A r/w rule 8D. We do not go into various plea taken by both sides offering diverse views based on judicial citations. This ground of the assessee is partly allowed”.
Respectfully following the above principles, as the disallowance made by AO has resulted in absurd situation of disallowing genuine other business expenditure, on which assessee earned more than Rs. 19 Lakhs income (as against Rs. 8,100/- of dividend), I am satisfied that the disallowance u/s. 14A should be restricted to the income earned of Rs. 8,100/-. AO is directed accordingly”.
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6.2. Respectfully following the principles laid down in various judgments of the Hon'ble High Courts and the decisions of the Co-ordinate Benches, we are of the opinion that the disallowance under Rule 8D cannot exceed the dividend income earned and claimed as exempt. Therefore, the disallowance worked out under Rule 8D(iii) being administrative expenditure is restricted to the amount of dividend earned. AO is directed to modify accordingly. Ground is partly allowed.
In the result, appeal of assessee is partly allowed.
Order pronounced in the open court on 11th May, 2018
Sd/- Sd/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER Hyderabad, Dated 11th May, 2018 TNMM
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Copy to :
SNJ Synthetics Limited, # 311/A, Block-II, 1st Floor, MLA Colony, Road No. 12, Banjara Hills, Hyderabad.
Deputy Commissioner of Income Tax, Circle-3(2), Hyderabad.
CIT(Appeals)-3, Hyderabad.
Pr.CIT-3, Hyderabad.
D.R. ITAT, Hyderabad.
Guard File.