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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B” (SMC
Before: SMT. P. MADHAVI DEVI
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B” (SMC), HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
I.T.A. No. 237/HYD/2016 Assessment Year: 2009-10
Sri Kode Finvest Income Tax Officer, Private Limited, Vs Ward-3(1), HYDERABAD HYDERABAD [PAN: AAACK9656P] (Appellant) (Respondent)
For Assessee : Shri V. Raghavendra Rao, AR For Revenue : Smt. N. Swapna, DR
Date of Hearing : 14-03-2018 Date of Pronouncement : 28-03-2018
O R D E R This is an appeal filed by the assessee for the AY. 2009-10 against the order of the Commissioner of Income Tax (Appeals)-3, Hyderabad, dated 28-12-2015, confirming the disallowance made by the Assessing Officer (AO) u/s. 14A r.w. Rule 8D of the Income Tax Rules.
Brief facts of the case are that the assessee-company being an investment company, e-filed its return of income for the AY. 2009-10 on 30-09-2009 admitting total income of Rs. 6,13,656/-. During the assessment proceedings u/s. 143(3) of the Income Tax Act [Act], the information regarding investments made by the assessee and the exempt income earned therefrom was called for. The assessee appeared and
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furnished the required information along with its books of account. The AO observed that in the P&L A/c, the assessee- company reported the following income Rs. 73,09,278/- before claiming expenditure:
i. Income from Mutual Funds : Rs. 27,05,667 ii. Dividend received : Rs. 20,28,315 iii. Other Income : Rs. 25,75,296 ------------------ Rs. 73,09,278 ------------------ 2.1. AO observed that the income from Mutual Funds and Dividend were claimed as exempt u/s. 10 of the Act and in the computation of total income, the gross total income of Rs. 11,45,480/- was admitted after making suitable adjustments. After setting-off of brought forward losses, total income of Rs. 6,13,656/- was offered to tax.
Observing that assessee is in receipt of substantial income which is not forming part of the total income, the AO proposed to invoke the provisions of Section 14A of the Act to disallow the expenditure relatable to the exempt income. The assessee filed its written objections dt. 25-11-2011 stating that there is no disallowable expenditure u/s. 14A since the investment in shares and Mutual Funds was not made out of borrowed funds and no direct expenditure can be attributable to earning of dividend (exempt) income. AO did not accept the contention of assessee on the ground that making investments is a substantial part of the assessee-company’s activity and that it is difficult to believe that no expenditure was incurred
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for earning of such income. Therefore, he invoked the provisions of Section 14A r.w. Rule 8D of the Income Tax Rules and disallowed ½ % of average value of investments which amounted to Rs. 8,55,666/- and accordingly disallowed the same u/s. 14A of the Act. Aggrieved, assessee went in appeal before the CIT(A), who confirmed the order of the AO and the assessee is in second appeal before us.
The assessee has raised the following grounds of appeal in Form-36:
“1. The Learned Commissioner of Income Tax (Appeals), Hyderabad [CIT (A)] has erred on facts and in law.
Learned CIT (A) has failed to note that the satisfaction as required u/s.14A of the IT Act has not been reached by the ITO (A.O). 3. The lower authorities have both failed to appreciate the import of judgment of the Bombay High Court in the case of Godrej & Boyce Manufacturing Company Pvt Ltd Vs. DCIT [328 ITR 81] according to which the satisfaction of the A.O must exist in order to apply the provisions of sec. 14A of the IT Act.
The Learned CIT (A) is not justified in sustaining the disallowance of Rs.8,55,666/- without establishment by the A.O of the nexus between the exempt income and the expenditure.
The Learned CIT (A) is not justified in sustaining the order of the Learned A.O applying sec.14A on the basis of surmise & conjecture of the A.O. The ratio of the order of the jurisdictional Hyderabad Bench in the case of DCIT Vs. AP Industrial Development Corporation in ITA No.858/Hyd/2008 dt.09-01-2009 has been ignored. 6. For these and any other grounds of appeal that may be raised at or before the date of hearing, it is prayed that the addition made by way of disallowance of Rs.8,55,666/ - be deleted”.
4.1. In addition to the above, assessee filed a letter stating that the Ground Nos. 2 & 3 raised in Form 36 may be treated
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as additional Grounds 1 & 2 as they were not raised before the CIT(A). Further, the assessee raised the following:
“3. Lower authorities are not justified in taking average of all the investments for computation of deduction under Rule 8D(2)(iii) of I.T. Rules. Only investments from which exempt income has been earned should have been considered for average investment”.
The assessee, therefore prayed to admit the above additional ground(s) and adjudicate the same.
In support of Grounds 2 & 3, Ld. Counsel for the assessee submitted that before invoking the provisions of Section 14A, r.w. Rule 8D(2), the AO has to record a satisfaction that the books of account maintained by the assessee are not reliable and thereafter only the AO can make the disallowance u/s. 14A. It is submitted that the AO, in the case before us, has not carried out any such exercise and therefore, the disallowance u/s. 14A is not sustainable.
5.1. Further, he also submitted that the disallowance under Rule 8D(2)(iii) should be only of the average of the investments which have yielded dividend income during the year and not on the average of the total of the investments made by the assessee. In support of his contentions, Ld. Counsel for the assessee placed reliance up on the following decisions:
i. ITA No. 1846/Hyd/2014 (AY. 2010-11) in the case of Srinivasa Cystine Pvt. Ltd., Vs. Income Tax Officer, dt. 18-01-2017;
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ii. ITA Nos. 1436, 1643/Mds/2014 & 910/Mds/2015 in the case of M/s. Ambattur Clothing Ltd., Vs. Joint Commissioner of Income Tax, dt. 28-12-2015;
Ld.DR, on the other hand, supported the orders of the authorities below and submitted that irrespective of whether the assessee has or has not incurred any expenditure for earning of the exempt income, the disallowance u/s. 14A is to be made as Rule 8D is applicable w.e.f. AY. 2009-10. She submitted that the decisions relied upon by the Ld. Counsel are relevant for the assessment years prior to AY. 2009-10. In support of her contentions, she placed reliance upon the following decisions:
i. Bellwether Microfinance Fund (P.) Ltd., Vs. ITO [47 taxmann.com 260 (Hyderabad-Trib.);
ii. ITA No. 1653/Hyd/2012 (AY. 2009-10) in the case of Spandana Sphoorty Financial Ltd., Vs. Addl. CIT, dt. 10-10-2014;
Having regard to the rival contentions and material on record, I find that the additional grounds raised by the assessee and the Ground Nos. 2 & 3 of the original grounds are the same and are legal grounds and therefore they need to be admitted and adjudicated first. The Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Pvt. Ltd., Vs. DCIT [328 ITR 81] for the AY. 2002-03 was considering the applicability of Rule 8D to the assessment
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years prior to AY. 2009-10 and it was in these circumstances that the Hon'ble High Court had held that before invoking the provisions of Section 14A, AO has to record his satisfaction with regard to the correctness of the claim of assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. Sub-section (3) of Section 14A provides that provisions of Sub-section 2 would also apply in relation to a case where assessee claims that no expenditure has been incurred by him in relation to income, which does not form part of the income under this Act. I find that in the case before us, the AO had issued a show cause notice to the assessee and after considering assessee’s written objections dt. 25-11-2011 and not being satisfied with the same, has held that the disallowance u/s. 14A r.w. Rule 8D is to be made. The Hon'ble Bombay High Court has held that Rule 8D is applicable from the AY. 2009-10. Therefore, the grounds of appeal Nos. 2 & 3 as well as additional Ground Nos. 1 & 2 are rejected.
7.1. As regards the additional ground of appeal No. 3, I find that this issue also needs no verification of any fresh facts and therefore, the same is admitted. I find that this issue is covered in favour of the assessee by the decision of Co-ordinate Bench of this Tribunal in ITA No. 1846/Hyd/2014 (AY. 2010- 11) in the case of Srinivasa Cystine Pvt. Ltd., Vs. ITO dt. 18-01- 2017(supra), wherein it was held as under:
“15. Considered the rival submissions and perused the material facts on record. The assessee is aggrieved because CIT(A) has sustained the disallowance u/r 8D(2)(iii). The mute question before us is whether the investment which has not generated income should also be
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considered to calculate the quantum of disallowance or the whole investment as per balance sheet should be applied to disallowance as per rule 8D. In our considered view, the view expressed by the coordinate bench of Kolkotta is on the same subject and we agree with the findings that in applying the formula prescribed under rule 8D(2)(iii) of the Rules, the AO has included all investments, whether it yielded any tax free income or not. It is only the investments which yield tax free income that has to be considered for applying the formula prescribed under rule 8D(2)(iii). Similar view was also taken by this Bench in other cases also. Considering this view, we direct the AO to consider only the investments, which yielded the exempt income in the formula under rule 8D(2)(iii) and accordingly, disallow the expenses relating to exempt income”.
7.2. Respectfully following the same, I allow the additional ground of appeal No. 3 and direct the AO to consider only the investments which have yielded exempt income during the relevant financial year for working out the disallowance u/s. 8D(2)(iii) of the Act.
7.3. The other Grounds of appeal, i.e., Ground Nos. 4 to 6 need no adjudication in view of my decision above. They are accordingly rejected.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 28th March, 2018
Sd/- (P. MADHAVI DEVI) JUDICIAL MEMBER Hyderabad, Dated 28th March, 2018 TNMM
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Copy to :
Sri Kode Finvest Private Limited, 3rd Floor, Mohans Plaza, Plot No. 733, Road No. 36, Jubilee Hills, Hyderabad.
The Income Tax Officer, Ward-3(1), Hyderabad.
CIT(Appeals)-3, Hyderabad.
Pr.CIT-3, Hyderabad.
D.R. ITAT, Hyderabad.
Guard File.