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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI G. MANJUNATHA & SHRI ANIKESH BANERJEE
PER BENCH :
This bunch of 10 cross appeals filed by the assessee as
well as the Revenue are directed against separate, but
identical orders of learned Commissioner of Income
Tax(Appeals)-15, Chennai even dated 28.02.2018, 28.12.2018,
29.04.2019, 30.04.2019 / 27.08.2018, 26.11.2018 and pertain
to assessment years 2011-12 to 2016-17. Since, facts are
2 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
identical and issues are common, for the sake of convenience,
these appeals filed by the assessee as well as the Revenue
are heard together and are being disposed off, by this
consolidated order.
At the outset, learned AR for the assessee and learned
DR for the Revenue submitted that the appeals in ITA
No.1888/Chny/2018 & 3219/Chny/2018 filed by the assessee
and the Revenue respectively, are time barred by 19 / 31days
for which necessary petition for condonation of delay along
with affidavit explaining the reasons for the delay has been
filed. The AR further submitted that the assessee could not
file appeal within the time allowed under the Act, due to the fact
that the Managing Director was out of station which caused
delay of 19 days. The delay in filing appeal is neither
intentional nor willful but for the unavoidable reasons,
therefore, delay may be condoned in the interest of
advancement of substantial justice.
The learned DR submitted that the Department could not
file appeal within the time allowed under the Act, due to the fact
of mixing of appeal papers with other files and thus, there was
3 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
delay in filing of appeal by the Revenue and prayed that the
delay may be condoned.
Having heard both sides and considered the petition filed
by the assessee and Revenue for condonation of delay, we
are of the considered view that reasons given by the assessee
and the Revenue for not filing the appeals within the time
allowed under the Act comes under reasonable cause as
provided under the Act for condonation of delay and hence,
delay in filing of these two appeals is condoned and appeals
filed by the assessee & the Revenue are admitted for
adjudication.
The Revenue has raised more or less common grounds
of appeal for all assessment years, however, major issues
challenged by the Revenue for all assessment years are
disallowance of deduction u/s.36(1)(viii) of Income Tax Act,
1961, disallowance of expenditure relatable to exempt income
u/s.14A r.w. Rule 8D of the I.T. Rules, 1962 and disallowance
of employees contribution to PF & ESI u/s.36(1)(v) r.w.s 43B of
the Income Tax Act, 1961. Therefore, we deem it not
necessary to reproduce grounds of appeal filed by the
4 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
Revenue. Similarly, the assessee has more or less raised
common grounds of appeal for all assessment years and only
issue that came up for our consideration from appeals filed by
the assessee from all assessment years is disallowance
u/s.14A of the Act and thus, we deem it not necessary to
reproduce grounds of appeal filed by the assessee for all
assessment years.
The first issue that came up for our consideration from
appeals filed by the Revenue from all assessment years is
disallowance of deduction u/s.36(1)(viii) of the Income Tax Act,
1961. The facts with regard to impugned dispute are that the
assessee is into business of long term finance for eligible
business, has claimed deduction @ 20% of profit derived from
eligible business. i.e., business of providing long term finance
for construction or purchase of house in India for residential
purposes. The assessee while working out deduction
u/s.36(1)(viii) has excluded profit from non-housing portfolio as
well as profit from housing loan given for period less than five
years from profits of business and has arrived at profit from
eligible business. Further, while computing deduction
u/s.36(1)(viii), the assessee has considered certain incomes
5 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
which are in the nature of income from other sources, like
investment income, profit on sale of current investments, other
operating income, interest receipts, profit on sale of fixed
assets and miscellaneous income as part of income derived
from eligible business . The Assessing Officer has recomputed
deduction u/s.36(1)(viii) of the Act by excluding other income
reported by the assessee in the financial statements for the
relevant assessment years on the ground that eligible profit for
the purpose of section 36(1)(viii) means profit derived from
business of providing long term finance, but it does not include
other income like interest income, profit on sale of current
investments etc. On appeal, the learned CIT(A) by following
decision of the ITAT .,Chennai in assessee’s own case for the
assessment year 2005-06 deleted additions made by the
Assessing Officer towards disallowance u/s. 36(1)(viii) of the
Act. Aggrieved by the learned CIT(A) order, the Revenue is in
appeal before us.
The learned DR referring to financial statements filed by
the assessee for financial year 2011-12 to 2016-17 submitted
that the assessee has computed deduction u/s.36(1)(viii) by
including other income like interest income from Govt. securities
6 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
(SLR) other investments income, provision on standard
asset, interest on short term deposit, investment income, profit
on sale of current investments, interest receipts, profit on sale
of fixed assets and miscellaneous income etc. As per provisions
of section 36(1)(viii) of the Act, it is very clear that deduction
u/s.36(1)(viii) shall be allowed @ 20% on the profits derived
from eligible business computed under the head ‘profits &
gains of business or profession’. The learned DR further
submitted that although, there is no dispute about nature of
business of the assessee and its entitlement for deduction
u/s.36(1)(viii), but when it comes to computation of deduction
on eligible profit, the assessee has included other income,
which is not derived from main business activity of providing
long term finance for the construction or purchase of house in
India for residential purpose, including interest income and on
profit on sale of fixed assets etc. The Assessing Officer, after
considering relevant facts has rightly excluded other income
reported in financial statements for relevant assessment years
while computing deduction u/s.36(1)(viii) of the Act. However,
the learned CIT(A) without appreciating facts has deleted
additions made by the Assessing Officer by following decision
7 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
of the ITAT., Chennai in assessee’s own case for the
assessment year 2005-06, even though, the Tribunal for the
assessment year 2005-06 has considered only one segment of
income from SLR securities. The learned DR further referring to
decision of the Hon’ble Delhi High Court in the case of National
Co-operative Development Corporation Vs. ACIT (2011) 16
taxmann.com 251, submitted that dividend received in respect
of redeemable preference shares does not amount to profits
derived from providing long term finance within the meaning of
36(1)(viii). Likewise, interest income from securities, profit on
sale of investments, profit on sale of fixed assets cannot be at
any stretch of imagination be considered as profit derived from
eligible business. Therefore, the learned DR submitted that the
learned CIT(A) has deleted additions made by the Assessing
Officer without considering necessary facts and thus, issue may
be set aside to the file of the Assessing Officer to reconsider in
light of findings given by the Tribunal for the assessment year
2005-06. In this regard, the learned DR has filed detailed
written submissions which has been reproduced as under:-
“In all the above Departmental appeals, the main ground was excess claim of deduction u/s 36(1)(viii) of the I.T. Act, that was restricted by the A.O and that was subsequently allowed by the CIT(A). As this issue involves several facts and substantial question of law this written submission is made for appreciating the facts in
8 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
this case. Section 36(1)(viii) of the I.T. Act is placed under Chapter IV — “Computation of Business income”. As per this section, the deductions provided in various clauses of section 36(1) of the I.T. Act shall be allowed in respect of the matters dealt with therein, in computing the income referred in section 28. Section 36(1)(viii) deals with deduction, In respect of any special reserve created and maintained by a specified entity, an amount not exceeding 20% of the pro/Its derived from eligible business computed under the head “profits and gains of business or profession” carried to such reserve account. “Specified entity” means,
(i) A finance corporation specified in sec 4(A) of Company’s Act. (ii)A finance corporation which is a public sector company. (iii)A banking company. (iv)A cooperative bank other than primary agricultural credit society or primary cooperative agricultural and rural development bank. (v)A housing finance company and (vi)Any other financial corporation including a public company.
“Eligible business” means, (i) in respect of the specified entity referred to in sub-clause(i) or sub-clause(ii) or sub-clause(iii) or sub-clause(iv) of clause (a), the business of providing long- term finance for -
(A). Industrial or agricultural development (B) Development of infrastructure facility in India or (C) Development of housing in India
In the present case, there is no dispute on the explanation “specified entity”. The main dispute is computation of profit derived out of the eligible business. The method adopted by the appellant company was questioned by the AO in all the assessment orders. It is once again reiterated that, - the assessee should carry out “eligible business” - and derive the profit from that eligible business - and that profit has to be computed under the head “Profits and gains on business or profession”.
With this back ground, the assessee company’s audited financials have been examined by the A.O and he found that they claimed excess deduction of 36(1)(viii) on some of the profits that was not
9 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
derived out of eligible business. As per the AO some of the income or profit or gain were not assessable under the head “Profits and gains on business or profession”. They were assessable under the head “income from other sources” and “capital gains”. The AY wise deduction claimed, deduction allowed, excess claim disallowed are as under:
10 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
As per the A.O, all the above said income are nothing to do with eligible business of providing long finance for development of Housing. 2. As per the audited financials the assessee company had clubbed all its housing and non-housing finance business together and declared net profit of the business of company. On that declared net profit, total income for the purpose of various heads were computed in the computation of income. 3. In that computation of income there was a separate computation of total income under the head Business or profession (including eligible and ineligible business), income from other sources and Capital gain. 4. Computation of profit derived out of eligible business is enclosed separately. This computation did not have any basis as they did not have any separate accounts. Flow this profit was arrived could not be explained. 3. Analysis of the financials and Computation of income:
3.1 AY 2012-13 As per the audited financials the net profit was Rs. 130,50,00,921/. It includes profit of both eligible and non- eligible business. On this net profit, the company made various adjustments in computation of income to determine the gross total income of various heads i.e. business or profession, income from other sources, capital gain etc. They determined the gross total income of each head. In the next sheet another calculation was given for net profit for the purpose of section 36(1)(viii) of the IT Act. As per that sheet a sum of Rs. 95,86,50,010/- was calculated as profit derived out of eligible business. This was not in accordance with provisions of IT Act and that was questioned by the AO. AO had reduced some of the ineligible profits out that profit calculated by the appellant company unscientifically without any basis. This critical fact was not examined by the CIT(A) while allowing the appeal of the assessee. 3.2 AY 20 13-1 The net profit as per the P&L A/C (annual report) was Rs. 176,67,78,000. This includes eligible as well as non-eligible profit. The company started computing the business profit (including eligible and ineligible business) starting with Rs. 176,67,78,000/- by making various adjustments. It includes profit on sale on fixed assets, profit on sale on investment, income from other sources etc that were separately declared under the head “Capital Gain” and “Income from other sources”. In this assessment year, the profit from housing finance business of Rs. 100,79,37,210/ was
11 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
determined indirectly without having any separate accounts. Prima facie, this profit computation was questioned.
On this 20% was claimed as deduction. In the computation of income, provision on standard asset- non housing (including commercial) of Rs.4,24,24,306/- was added back which the AO held that it was not related to eligible business. The AO observed that Rs.9,33,35,652/- as investment income related to non- housing. This was excluded.
3.3 AY 2014-15 The net profit as per the P&L A/C (annual report) was Rs. 2 15,12,69,504/. This includes eligible as well as non-eligible profit. The company starts its profit and gain from business or profession with Rs. 215,12,69,504/ and making various adjustments. It includes profit on sale on fixed assets, profit on sale on investment, income from other sources, Interest on NHB tax free bonds etc that were separately declared under the head “Capital Gain” and “Income from other sources”. In this assessment year, the profit from housing finance business of Rs. 130,36,47,790/- was determined indirectly without having any separate accounts. On this 20% was claimed as deduction. The AO observed that investment income, profit on sale of current investment, other operating income, interest receipts, profit on sale of fixed assets, miscellaneous income etc were not pertaining to eligible business as per section 36(1)(viii). This was excluded.
3.4 AY 2015-16. In this assessment year the profit as per the P&L A/C (annual report) was Rs. 2,19,26,14,063. This includes eligible as well as non-eligible profit. The company started computing its profit and gain with Rs. 2,19,26,14,063/ by making various adjustments. It includes profit on sale on fixed assets, profit on sale on investment, income from other sources, Interest on NHB tax free bonds etc that were separately declared under the head “Capital Gain” and “ Income from other sources”. In this assessment year also, the income from housing finance business of Rs. 119,48,21,859/- was determined indirectly without having any separate accounts. On this 20% was claimed as deduction. The AO observed •that investment income, profit on sale of current investment, other operating income, interest receipts, profit on sale of fixed assets, miscellaneous income etc were not pertaining to eligible business as per section 36(1)(viii). This was excluded.
12 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
3.5 AY 2016-17:
In this assessment year the net profit as per the P&L A/C (annual report) was Rs. 233,29,72,616/. This includes eligible as well as non-eligible profit. The company started computing profit and gain from business or profession with Rs.233,29,72,6l6/ and making various adjustments. It includes profit on sale on fixed assets, profit on sale on investment, income from other sources, Interest on NHB tax free bonds etc that were separately declared under the head “Capital Gain” and “Income from other sources”. In this assessment year also, the income from housing finance business of Rs. 13 8,11,30,267/- was determined indirectly without having any separate accounts. On this 20% was claimed as deduction. The AO observed that investment income, profit on sale of current investment, other operating income, interest receipts, profit on sale of fixed assets, miscellaneous income etc were not pertaining to eligible business as per section 36(1)(viii). This was excluded.
Judicial pronouncements on this issue: 1. In the case of South Indian Bank Limited Vs ACIT, [2019] 104 taxmann.com 452 Hon’ble ITAT Cochin Tribunal held that section allows deduction only to specified entity providing long term finance for development of housing in India and not for individual residential houses. Hence the law laid down by Hon’ble ITAT touches the root of the matter. Annexure -1
Hon’ble High Court of Delhi in the case of National Co-operative Development Corporation Vs. Assistant Commissioner of Income- tax, Circle 13(1)12011116 taxmann.com 251 (Delhi) held that Dividend received in respect of redeemable preference shares does not amount to profits derived from providing long term finance within meaning of section 36(l)(viii). Annexure-2
Hon’ble ITAT Delhi Bench in the case of Tourism Finance Corporation of India Ltd. Vs. Joint Commissioner of Income-tax in [20101 2 ITR(TRiB.) 1 (DELHI) held that Interest on equipment credit scheme, lease rental and financial charge, dividends, profits on sale of investment, miscellaneous income, interest on deposits, other fees and charges do not fall within ambit of income derived from long-term finance and, as such, no deduction in respect
13 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
thereof will be allowable under section 36(l)(viii) of the IT Act. Annexure-3.
In the present case the appellant had mixed up every business under one basket and prepared their annual report and published. In the computation of income various adjustments were done for each head of income. The manner in which the profit derived out of eligible business as contemplated in section 36(l)(viii) of the IT Act was questioned by AO in all the assessment orders.
Summary and Prayer: In all the assessment years the grounds of appeal of the revenue is revolving around this particular factual aspect. The appellant company computed the profit derived from eligible business indirectly without having any books of accounts for that eligible business. Their financials revealed a fact that they were into so many other businesses apart from providing long term finance for housing. Many of the ineligible income/profit/gain were also clubbed together and net profit of the company was published in the annual report.
The manner in which the net profit of the eligible business was calculated by the company in computation of income raised serious doubts to the revenue and AO had removed some of the ineligible profits out of those computation. The C1T(A) unilaterally calculated deduction u/s 36(1)(viii) of the IT Act without appreciating all the facts narrated above. Hence his order was treated as erroneous on fact and law by the revenue.
It is for this reason the revenue has moved appeal that many of the income/profit/gain are not falling under the head profits and gains of business or profession and such income/gain/profit is not eligible for deduction u/s 36(1)(viii) of the IT Act. Hence it is prayed that the CIT(A) order may be set aside..”
The learned A.R for the assessee, on the other hand,
supporting order of the learned CIT(A) submitted that the issue
is squarely covered in favour of the assessee by the decision
14 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
of ITAT., Chennai in the assessee’s own case for the
assessment year 2005-06, where the Tribunal, after
considering relevant facts and also provisions of section
36(1)(viii) of the Act, held that interest income received on
SLR investments is eligible for deduction u/s.36(1)(viii) of the
Act. The learned A.R further submitted that although, the
assessee has claimed deduction on other income like profit on
sale of current investments, investments income, investment
income on mortgaged back security and interest etc., but the
learned CIT(A) by following decision of the ITAT., Chennai in
the assessee’s own case has directed the Assessing Officer to
consider only net income for the purpose of excluding other
income, while computing deduction u/s.36(1)(viii) of the Act and
the assessee has accepted findings of the learned CIT(A).
Therefore, there is no reason for the Revenue to agitate order
of the learned CIT(A) on the issue of deduction claimed
u/s.36(1)(viii) of the Act. Therefore, the learned AR submitted
that the issue is squarely covered in favour of the assessee and
therefore, there is no need to set aside the issue to the file of
the Assessing Officer for further verification.
15 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
We have heard both the parties, perused material
available on record and gone through orders of the authorities
below . The provisions of section 36(1)(viii) deals with deduction
in respect of any special reserve created and maintained by
specified entity, an amount not exceeding 20% of profits
derived from eligible business computed under the head
‘profits & gains of business or profession’ carried to such
reserve account. From plain reading of section 36(1)(viii), it is
abundantly clear that deduction is available in respect of
reserve created and maintained by specified entity, amount not
exceeding 20% of profits derived from eligible business
computed under the head ‘profits & gains of business or
profession’. Therefore, eligible entity is entitled for deduction
u/s. 36(1)(viii) in respect of profit derived from eligible business
computed under the head ‘profits & gains of business or
profession’. In other words, any other income reported under
other heads, other than the head ‘profits & gains of business or
profession’ is not eligible for deduction, even though said
income is incidental to carry out eligible business. In this case,
there is no dispute with regard to business activity carried out
by the assessee and its entitlement for deduction u/s.36(1)(viii)
16 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
of the Income Tax Act, 1961. In fact, the Assessing Officer has
categorically admitted that the assessee is entitled for
deduction u/s. 36(1)(viii) of the Income Tax Act, 1961. The only
dispute is with regard to manner in which such deduction
should be computed. The assessee has included certain other
incomes like interest earned on SLR securities, profit on sale
of current investments, other operating income, interest
receipts, profit on sale of fixed assets and miscellaneous
income etc. It was claim of the assessee before the Assessing
Officer that interest income from Government securities–SLR is
derived from eligible business, because as per statutory
requirements, the assessee is required to maintain SLR ratio
and said investment is required to be deposited in Govt.
securities and thus, interest, if any, earned from SLR securities
is also eligible for deduction u/s.36(1)(viii) of the Income Tax
Act, 1961. Likewise, the assessee has canvassed deduction for
other income like profit on sale of current investments, profit on
sale of fixed assets etc. The Assessing Officer has denied
deduction claimed u/s.36(1)(viii) in respect of other income,
including interest earned from Govt. securities-SLR.
17 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
We have given our thoughtful consideration to the
reasons given by the Assessing Officer in light of various
arguments advanced by the learned A.R for the assessee and
we find that in respect of interest earned on Govt. securities
(SLR), issue has been settled by the Tribunal in assessee’s
own case for earlier assessment year, where the Tribunal held
that interest earned from Govt. securities (SLR) is eligible for
deduction u/s.36(1)(viii) of the Income Tax Act, 1961.
Therefore, to this extent, we find that reasons given by the
Assessing Officer to disallow deduction claimed on interest
earned from SLR securities is not in line with settled position as
per decision of the Tribunal and thus, we reject arguments of
the learned DR for the Revenue.
As regards, deduction claimed towards other income like
other investments income, provision on standard asset, interest
on short term deposits, investment income, profit on sale of
current investments, profit on sale of fixed assets and
miscellaneous income, we find that the assessee has reported
all those incomes under ‘other income’ category in the financial
statement prepared for relevant assessment years. However,
claimed that although, those incomes are reported under ‘other
18 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
income’, but all incomes are incidental to main business activity
of lending long term finance for housing sector and further, the
assessee has disclosed all those incomes under the head
‘profits & gains of business or profession’ in the computation of
total income for relevant assessment years and thus, above
incomes are eligible for deduction u/s.36(1)(viii) of the Income
Tax Act, 1961. We find that law is very clear inasmuch as the
assessee is entitled for 20% deduction towards reserve created
and maintained on the profits derived from eligible business
computed under the head ‘profits & gains of business or
profession’ and thus, any other income, including incidental
income reported under ‘other income’ is not entitled for
deduction u/s.36(1)(viii) of the Income Tax Act, 1961. However,
fact remains that the assessee argument was that the
Assessing Officer has considered total income derived under
the head ‘other income’, including income derived from non-
eligible business, while computing deduction u/s.36(1)(viii) of
the Income Tax Act, 1961. The learned CIT(A) has directed the
Assessing Officer to exclude only income pertains to business
segment of providing long term finance to housing sector and
the assessee has accepted findings of the learned
19 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
CIT(A).Although, there is merit in the arguments advanced by
the learned A.R for the assessee that only ‘other income’
relatable to eligible business sector needs to be excluded,
while computing deduction u/s.36(1)(viii) of the Income Tax Act,
1961, but from the records, it is not clear whether the assessee
has apportioned ‘other income’ to eligible business and non-
eligible business or not. Therefore, to ascertain facts with
regard to apportionment of income to eligible business and to
compute deduction u/s.36(1)(viii) of the Income Tax Act, 1961,
the issue needs to go back to file of the Assessing Officer.
Therefore, we set aside the issue to file of the Assessing Officer
for limited purpose of examining claim of the assessee that the
learned CIT(A) has restricted deduction only to other income
which relates to eligible business, we direct the Assessing
Officer to examine claim of the assessee and while computing
deduction u/s.36(1)(viii) of the Income Tax Act, 1961 by
following directions given by the Tribunal in assessee’s own
case for the assessment year 2005-06 and decide the issue in
accordance with law for the impugned assessment years.
The next common issue that came up for our
consideration from the assessee as well as the Revenue
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appeal is disallowance u/s.14A r.w. Rule 8D of I.T.Rules, 1962.
The assessee has earned exempt income in the form of
dividend from investments and interest from NHB bonds and
claimed exemption u/s.10(34) of the Income Tax Act, 1961,
however, has not made any suo motu disallowances u/s.14A
read with Rule 8D of I.T. Rules, 1962 in respect of expenditure
incurred in relation to exempt income. The Assessing Officer
has computed disallowance u/s.14A by invoking Rule 8D and
determined disallowance of interest and other expenses. The
learned CIT(A) has upheld computation of disallowance u/s.14A
by invoking Rule 8D of I.T. Rules, 1962, but restricted
disallowances computed by the Assessing Officer to the extent
of exempt income earned for the relevant assessment year by
following decision of the Hon’ble Delhi High Court in the case of
Joint Investments Pvt. Ltd. 372 ITR 694. Aggrieved by the
learned CIT(A) order, the assessee and Revenue are in appeal
before us.
The learned A.R for the assessee submitted that the
learned CIT(A) erred in restricting disallowances u/s.14A to the
extent of exempt income, even though the assessee has
demonstrated with necessary evidences that it does not incur
21 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
any expenditure towards earning exempt income. The learned
A.R for the assessee further submitted that in respect of interest
disallowances under Rule 8D2(ii), the assessee had sufficient
own funds in the form of capital and reserves, which is in
excess of investments made in dividend yielding securities
and thus, question of disallowance of interest expenses does
not arise. The learned AR further submitted that in respect of
other expenses under Rule 8D(2)(iii), it is well settled principle
of law, only those investments which yield exempt income
needs to be considered for the purpose of disallowance. The
learned CIT(A) without appreciating above facts has simply
restricted disallowances to the extent of exempt income .
The learned DR, on the other hand, submitted that the
learned CIT(A) has erred in restricting disallowances u/s.14A to
the extent of exempt income without appreciating fact that
disallowance us/.14A is mandatory and thus, once there is
exempt income, the Assessing Officer is bound to compute
disallowance by applying prescribed procedure provided under
Rule 8D of I.T. Rules, 1962. Therefore, it is incorrect on the part
of the learned CIT(A) to restrict disallowances to the extent of
exempt income.
22 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
We have heard both the parties, perused material
available on record and gone through orders of the authorities
below. There is no dispute with regard to fact that the assessee
has earned exempt income in the form of dividend and
interest from NHB bonds which has been claimed as exempt
u/s.10(34) of the Income Tax Act, 1961. It is also an admitted
fact that the assessee has not made any suo motu
disallowance of expenditure relatable to exempt income u/s.14A
of the Income Tax Act, 1961. Although, the assessee claims to
have not incurred any expenditure in respect of exempt income,
but when the assessee has maintained common set of books
of accounts for taxable and exempt income, possibility of
incurring common expenditure for both segments cannot be
ruled out and therefore, we are of the considered view that
there is no error in the reasons given by the Assessing Officer
to invoke Rule 8D of Income Rules, 1962 to compute
disallowance u/s.14A of the Income Tax Act, 1961 and thus, we
reject arguments of the assessee.
Having said so, let us examine second contention of the
assessee with regard to interest disallowance under Rule
8D(2)(ii) of Income Tax Rules, 1962. It was explanation of the
23 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
assessee that it has sufficient own funds in excess of
investments made in exempt income yielding investments and
thus, interest disallowances cannot be made. We find that law
is very settled by the decisions of various High Courts, including
decision of the Hon’ble Bombay High Court in the case of CIT
Vs. HDFC Bank Ltd. 366 ITR 505 and CIT Vs. Reliance Utilities
& Power Ltd., 313 ITR 340 (Bom), where it has been held that
once the assessee proves that investment is made out of
mixed funds, including own funds and borrowed funds, then
presumption goes in favour of the assessee that investments is
made out of own funds. In this case, claim of the assessee is
that it has sufficient own funds in excess of investments made
in shares and securities which yield exempt income. But, facts
are not clear and the assessee has not filed any cash flow
statement to prove availability of own funds when those
investments were made during the relevant assessment years.
Therefore, we are of the considered view that this issue needs
to go back to the file of the Assessing Officer to verify facts
with regard to availability of own funds to explain investments
made in shares & securities which yield exempt income.
24 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
As regards, second arguments of the assessee that only
those investments which yielded exempt income needs to be
considered for working out disallowance under Rule 8D(2)(iii)
of the I.T. Rules, 1962, we find that this legal principle is
supported by plethora of judicial precedents, including decision
of the Hon’ble Delhi High Court in the case of Cheminvest Ltd.
Vs. DCIT 378 ITR 33 (Del), where it has been very clearly held
that only those investments which yielded exempt income for
relevant assessment year needs to be considered for
disallowing other expenses under Rule 8D(2)(iii) of the Income
Tax Rules, 1962. In this case, it was claim of the assessee that
Assessing Officer has considered total investments, including
investments which does not yield any exempt income for
relevant assessment years. Further, the assessee had also filed
computation explaining disallowances to be made under section
14A r.w. Rule 8D(2)(iii) of the Income Tax Rules, 1962, which
is part of paper book filed by the assessee. But, fact remains
that these details are not forthcoming from the orders of the
lower authorities and further, the assessee has filed
computation explaining manner and method of computing
disallowance under Rule 8D(2)(iii) for the first time before this
25 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
Tribunal. Therefore, we are of the considered view that this
issue also needs to go back to file of the Assessing Officer for
further verification.
In this view of the matter and considering facts and
circumstances of the case, we are of the considered view that
issue of disallowance u/s.14A needs to go back to file of the
Assessing Officer for fresh consideration. Hence, we set aside
the issue to the file of the Assessing Officer and direct the A.O.
to re-examine claim of the assessee in light of various
averments made by the assessee, including availability of own
funds to explain source of investments to compute disallowance
of interest under Rule 8D(2)(ii) and also to verify details of
investments to ascertain and segregate investments which
yield exempt income for the relevant assessment years to
compute disallowance under Rule 8D(2)(iii) of I.T. Rules, 1962.
The Assessing Officer is directed to examine claim of the
assessee and recompute disallowance in line with our
discussions given hereinabove and restrict disallowances to
the extent of exempt income, in case, disallowance computed
by the Assessing Officer for any assessment year exceeds
exempt income in light of decision of the Hon’ble Delhi High
26 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
Court in the case of Joint Investments Vs CIT 372 ITR
694(Del).
The next issue that came up for our consideration from
Revenue appeal for the assessment year 2013-14 is
disallowance of employees contribution to PF & ESI u/s.
36(1)(va) r.w.s 43B of the Income Tax Act, 1961. The
Assessing Officer has disallowed employees contribution to
ESI and added back as income of the assessee u/s.2(24)(x)
read with section 36(1)(va) of the Income Tax Act, 1961, on the
ground that the assessee has remitted employees contribution
to ESI beyond due date specified under respective Acts. It was
explanation of the assessee before the Assessing Officer that
employees contribution to ESI although, remitted beyond due
date specified under respective Acts, but paid within date for
filing of return of income u/s.139(1) of the Act for the relevant
assessment year and thus, same cannot be disallowed
u/s.36(1)(va) r.w.s. 2(24)(x) of the Act.
Having heard both the sides and considered relevant
materials on record, we find that this issue is squarely covered
in favor of the assessee by the decision of the ITAT., Chennai
27 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
in the case of M/s. Adyar Ananda Bhavan Sweets India Ltd., in
ITA Nos.402 & 403/Chny/2021 dated 08.12.2022, where the
Tribunal after considering amendment made to the provisions of
Sec.36(1)(va) of the Act, by the Finance Act, 2020, held that
amendment brought u/s.36(1)(va) of the Act, is applicable from
assessment year 2020-21 and employees contribution to
approved funds including PF & ESI remitted beyond due date
specified under respective Acts, but paid within due date for
filing return of income u/s.139(1) of the Act cannot be
disallowed u/s.36(1)(va) of the Income Tax Act, 1961. In this
case, it was claim of the assessee that all payments have been
made on or before due date for filing return of income for the
relevant assessment years, however, no such details have
been filed before us. Therefore, we are of the considered view
that this issue needs to go back to the file of the Assessing
Officer for verification. Hence, we set aside the issue to file of
the Assessing Officer to verify dates of payment of employees
contribution to ESI and in case, the assessee has remitted the
amount on or before due date for filing return of income
u/s.139(1) of the Act, then additions made u/s.36(1)(va) r.w.s.2(24)(x) should be deleted.
28 ITA Nos.1888/Chny/2018, 929, 2149 & 2150/Chny/2019 3219 & 1513/Chny/2018, 301, 829, 2077 & 2078/Chny/2019
In the result, all these appeals filed by the assessee and
the Revenue are treated as allowed for statistical purposes. Order pronounced in the open court on 15th June, 2022
Sd/- Sd/- (जी. मंजुनाथ) (अ"नकेश बनज%) (Anikesh Banerjee) (G.Manjunatha) %या�यक सद'य /Judicial Member लेखा सद'य / Accountant Member
चे%नई/Chennai, *दनांक/Dated 15th June, 2022 DS आदेश क� ��त,ल-प अ.े-षत/Copy to: 1. Appellant 2. Respondent 3. आयकर आयु/त (अपील)/CIT(A) 4. आयकर आयु/त/CIT 5. -वभागीय ��त�न3ध/DR 6. गाड� फाईल/GF.