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Income Tax Appellate Tribunal, ‘C’ BENCH, KOLKATA
Before: Shri Rajpal Yadav, Vice-(KZ) & Shri Girish Agrawal
Per Rajpal Yadav, Vice-President (KZ):- The Revenue is in appeal before the Tribunal against the order of ld. Commissioner of Income Tax (Appeals)-3, Kolkata dated 31.07.2019 passed for the assessment year 2014-15. The Revenue has taken four grounds of appeal, which read as under:- (1) “That on the fact and circumstances of the case, the Ld. CIT(A) erred in deleting the addition made U/S.14A read with Rule 8D to the amount of Rs. 46,78,00,920/- even when the facts of the case justified its application.” (2) “That on the fact and circumstances of the case, the Ld. CIT(A) did not consider the fact that the assessee did not discharge its onus to establish the one-to-one nexus between investment and 1 Assessment Year : 2014-2015 M/s. Damodar Valley Corporation source thereof and therefore the assessee could not prove that the investment were not made out of borrowed funds. In view of this, the AO was justified in making addition u/s.!4A r.w. Rule 8D(2)(ii) and 8D(2)(iii).” (3) “That on the fact and circumstances of the case, the Ld.CIT(A) erred in deleting the addition made u/s. I4A r.w. Rule 8D(2) both from the total income computed as computational provision as also from the book profit u/s.l I5JB of the Act.” (4) “That the department craves leave to add to and/or alter, amend, modify or rescind the grounds hereinabove before or hearing of this appeal.”
Brief facts of the case are that the assessee-company was engaged in the business of generation and distribution of electricity and also in irrigation and flood control. It is a Government Undertaking owned by the Central Government and the States of Bihar and West Bengal. It has filed its return of income on 24.09.2014, which was later revised to a total loss of Rs.2344,53,45,245/- and a Book Loss of Rs.1066,66,06,672/-. The case of the assessee was selected for scrutiny assessment and notices under section 143(2) and 142(1) were issued and served upon the assessee. On scrutiny of the accounts, it revealed to the Assessing Officer that the assessee has tax-free income. Therefore, the issue regarding disallowance of expenditure relatable to earning of such income is required to be verified as contemplated in section 14A read with Rule 8D. The ld. Assessing Officer thereafter gone through the financial figures of the assessee and ultimately made a disallowance of Rs.46,78,00,920/-. The working made by the ld. Assessing Officer is available in paragraphs no. 3.2 and 3.3 of the impugned order, which read as under:- “3.2. In view of the above CBDT Circular, I hold that provisions of section 14A is applicable in the instant case and therefore, compute the disallowance u/s 14A read with Rule 8D as below:- 8D Particulars Amount Amount Amount (i) Direct Expenses NIL A. (ii) Interest 2156,53,00,000 expenses B. Average 965,70,50,000/- value of investment C. Average 49465,61,50,000/- value of total 2 Assessment Year : 2014-2015 M/s. Damodar Valley Corporation
assets A*B/C 2156,53,00,000 x 42,10,14,032/- 965,70,50,000/- / 49465,61,50,000 (iii) 0.5% of 0.5% x 965,70,50,000/- 4,82,85,250/- average investment 46,92,99,282/- Less: Suo 14,98,362/- motu disallowed by the assessee concern Amount 46,78,00,920/- disallowed u/s 14A read with Rule 8D [Add: Rs.46,78,00,920/-] 3.3 Section 14A disallowance read with Rule 8D has also to be applied while computing book profit under section 115JB of the I T Act, 1961, as has been held in the case of CIT vs. Goetze (India) Ltd (Delhi High Court). Accordingly, the expense incurred for earning the exempted income calculated at Rs.46,78,00,920/- is added back with the book profit of the Assessee Company. [ Add : Rs. 46,78,00,920/-]”.
Dissatisfied with the above disallowance, the assessee carried the matter in appeal before the ld. CIT(Appeals). Since this was the only issue disputed before the ld. 1st Appellate Authority, the ld. CIT(Appeals) has considered the issue elaborately in the impugned order and after making reference to the past history of such tax-free income as well as the explanation of the assessee, she deleted the disallowance. The finding recorded by the ld. CIT(Appeals) reads as under:- “Decision : The issue in this case is disallowance made by the AO u/s.14 applying Rule 8D. The disallowance made by the AO under Rule 8D are as follows:- Disallowance under Rule 8D(2)(ii) Rs.42,10,14,032/- Disallowance under Rule 8D(2)(iii) Rs. 4,82,85,250/- Total : Rs.46,92,99,282/- Thereafter, the AO deducted the amount of suo moto disallowance of Rs. 14,98,362/- and made the net addition U/S.14A of Rs.46,78,00,920/-.
The appellant is a statutory corporation consisting of 3 participants namely: (a) The Union Government (b) State Governments of West Bengal and (c) State Government of Jharkhand. The assessee had earned following incomes not chargeable to tax :
Assessment Year : 2014-2015 M/s. Damodar Valley Corporation (a) Dividend on shares (b) Dividend on tax free bonds (c) Interest on Provident Fund Investments.
The appellant has over 10000 employees on their pay roll. Each of the such employee is entitled for statutory benefits such as provident fund, pension, etc. The assessee has formed a separate division for dealing with the matters concerning the management of staff provident fund. It is observed that 20% of the expenses i.e.Rs. 14,98,362/- , incurred by the appellant on salary and emoluments of the employees managing investments of the provident fund, has been offered by the appellant as a suo moto disallowance u/s.l4A. It has been submitted that this has been a consistent practice followed by the assessee in the past.
IV. Further, as regards the disallowance under Rule 8D(2)(ii) the Hon’ble ITAT Kolkata has decided the issue in assessee’s own cases in A. Yrs. 2008- 09 and 2009-10 in favour of the assessee. The observations of the Hon’ble jurisdictional ITAT, on this issue, in assessee’s own case, in and 451/Kol/2013 for A.Yrs. 2008-09 and 2009-10 are as follows:
“4.8.1. We find that the assessee had disallowed a sum of Rs. 11,08,315/- u/s 14A of the Act (being 20% of employee cost of provident fund cell employees) with some rational basis in consonance with the consistent method followed by the assessee over the years. The Learned AR also stated that similar disallowance made by assessee has been accepted by the Learned AO in earlier and in subsequent years. We also find from the scrutiny assessment order for the Asst Year 2010-11, the disallowance u/s 14A of the Act made by the assessee was not disturbed by the Learned AO. We also find that the Learned AO had directly embarked on Rule 8D(2) without recording satisfaction in terms of Rule 8D(1) of the Rules with cogent reasons as to why the figure disallowed by the assessee u/s 14 A of the Act is incorrect. We also find that the interest income earned by the assessee corporation of Rs. 248.78 crores is more than the total interest paid on loans amounting to Rs. 211.01 crores thereby making a net interest income of Rs. 37.77 crores which is offered to tax. In this scenario, it has to be seen whether the interest expenditure was relatable to the investment activity is to be looked into. We also find from the balance sheet of the assessee that it has got sufficient own funds to the tune of Rs. 16270,34,38,528/- (16270 crores) and whereas the investments made by the assessee is only Rs. 1466.15 crores including the investments in tax free bonds of RBI and investment in Bokaro Power Supply Co Ltd and Power Trading Corporation
4.8.2. On availability of own funds with the assessee for making investments We also find that the assessee has got sufficient own funds to make these investments and the Learned AO had not brought any nexus between the borrowed funds vis a vis the investments made by the assessee. Without doing the same, Assessment Year : 2014-2015 M/s. Damodar Valley Corporation he cannot directly presume that the investments were made out of borrowed funds. If the action of the Learned AO and Learned CITA are to be upheld, then no assessee could make any investments when there is a interest bearing loan to be repaid. The fact of making the investments has to be viewed from the point of commercial expediency and from the point of view of businessman and not from the view point of the revenue. It is well settled that businessman knows his interest best. We place reliance on the decision of Hon'ble Bombay High Court in the case of CIT vs Reliance Utilities & Power Ltd ( 313 ITR 340 ) (Bom) in support of our view that if the own funds are available with the assesee and if the same are more than the investments made by the assessee, then it has to be presumed that the investments were made out of own funds and not out of borrowed funds. Hence the provisions of Rule 8D(2)(ii) cannot be invoked in these circumstances. ”
It is observed that the issue has been decided by the Hon’ble ITAT in the favour of the assessee. It is noted that the overall investments in tax-free bonds and shares till A.Yr. 2008-09 was Rs. 1466.15 Crores. This investment has been reduced to Rs. 894.92 Crores as on 31.03.2014. The investments which produced tax free income during the impugned year were held prior to A.Y. 2008-09. The said investments have come down to Rs. 894.92 Crores from the figure of Rs. 1466.15 Crores in A.Y. 2008-09. In A.Y. 2008-09 the Hon’ble Tribunal has deleted the disallowance under Rule 8D (2)(ii) on the ground that the appellant’s own funds were substantially more than the investments in tax free instruments and that the AO failed to prove the direct nexus between the borrowed funds and the r investments in tax free bonds. The facts are similar in this year.
Respectfully following the decision of the Hon’ble Tribunal, the disallowance of Rs. 42,10,14,032/- made under Rule 8D(2)(ii) is hereby deleted.
V. The other issue is regarding disallowance of Rs. 4,82,85,250/- made by the AO under Rule 8D (2)(iii).
The A/R of the assessee of the assessee has stated that this issue has been allowed by the AO in A.Yr. 2010-11. Further, the A/R during appellant proceedings has stated that this issue has been decided by the Ld. CIT (A)-16, Kol in its favour. The Ld. CIT(A)-16, Kol, in Appeal No. 827/CIT(A)- 16/Kol/2015- 16/09(1), A.Yr. 2013-14, vide order dated 06.01.2017, has observed as follows:
“7. As regards administrative expenses disallowed under Rule 8D (2)(Hi) I find that the AO did not bring on record any material or evidence to corelate any specific expense which the assessee can be said to have incurred for the purpose of earning interest on tax- free bonds & dividend. On the other hand the assessee pointed out that the interest on tax-free bonds was paid directly to the assessee’s Bank A/c by RBI on six monthly basis and no expenses were incurred on collection of such interest. The interest was received only on 2 occasions in a year from Bokaro Power Supply Assessment Year : 2014-2015 M/s. Damodar Valley Corporation
Co. Ltd & Power Trading Corporation and such dividend was also received through ECS by credit to assessee’s Bank A/c. Keeping in mind the number of transactions involved in receiving tax-free income I find force in the A/R’s submissions that there was no necessity for the assessee to incur expenses of Rs. 5,52,69,466/- on earning or making of tax-free income particularly when only the investments brought forward from the earlier years had produced the tax-free income during the relevant year. I further note on the identical facts which prevailed in A.Y. 2008-09 to 2010-11 no disallowance as per Rule 8D(2) was sustained. In the circumstances respectfully following the decision of the IT AT Kolkata in the assessee ’s own case the AO is directed to delete the disallowances of Rs. 36,86,72,174/- as made in the impugned order. Ground Nos. 1 to 4 are allowed. ”
It is observed that this issue is similar to the issue discussed by the Ld. CIT(A)- 16, Kol above. The issue has been decided by the Ld. CIT(A)-16, Kolkata in the favour of the assessee. Moreover, the AO in A.Yr. 2010-11, has accepted the suo moto disallowance offered by the appellant of Rs. 20,00,665/- being 20% of the gross salary paid to the employees of PF section engaged for monitoring of the investments. Further, the Hon’ble ITAT, “A” Bench,Kolkata in 1TA No.438/Kol/2017 order dated 21.08.2018 for the AYr.2013-14 , in assessee’s own case has held as under :-
We have heard rival submissions and gone through the facts and circumstances of the case. We note that the Ld DR strongly relied on the findings of the AO. Per contra, the Id AR brought to our attention that investment which had yielded tax free income were also held by the assessee in A Ys. 2008-09 and 2009-10 as well. In this matter also the AO made disallowance U/S.14A out of interest and administrative expenses inconformity with Rule 8D which was deleted by this Tribunal vide its order dated 31.01.2016 for both the assessment years(supra). He, therefore, submitted that the investments which had yielded the tax free interest and dividend were also held in the A Ys 2008-09 and 2009-10 and since the factual matrix during the year under consideration remained unchanged, the order of the Id C1T(A) deserves to be upheld. After considering the submissions of the parties, we find that the Ld CIT(A) has considered the facts of the assessee’s case as prevailing in the relevant assessment :year-2008-09 and 2009-10 and the facts discussed by this Tribunal in assessee's case for A Ys 2008- ' 09 and 2009-10, which the Ld C1T(A) has recorded in his following findings : "5. I have carefully considered the submissions of the A/R and AO’s findings in the impugned order. I have also examined the relevant investment schedule of the assessee and the appellate order passed by the IT AT in the appellant’s own case for the AYs 2008-09 & 2009-10 wherein this issue was adjudicated in asssessee ’s favour. The basic facts are in narrow compass and not in dispute. For the AY.2013-14 the average cost of investment was Rs. 1105.39 Crores which principally comprised of tax-free bonds of RBI and investment in shares of Companies. From the appellate order passed by the IT A T for the A Y 2008-09 & 2009-10 it was Assessment Year : 2014-2015 M/s. Damodar Valley Corporation noted that the composition of investment in the relevant years as also in year under consideration was same and indentical. In the A Ys 2008-09 & 2009-10 also the assessee had offered 20% of the gross salary paid to employees of Provident Fund Section as expenditure incurred in relation to income exempt u/s. 10(25) of the Act. In respect of income which the assessee earned in the form of interest on tax-free bonds and dividend on shares the AO however invoked provisions of Rule 8D and made the disallowance out of interest paid and administrative expenses on the ground that it was not possible to hold that the assessee had not incurred these expenses in relation to earning of such tax free income. In the course of appellate proceedings, the appellant had argued on the same lines as in the foregoing paragraph extracted above. After examining the assessee ”s submissions and the assessee’s audited accounts for the year ended 31st March 2008 the IT AT found that no material available to substantiate AO’s charge that the loan funds were utilized for acquiring tax free bonds or investments in share shares of Companies jointly promoted by the assessee for strategic business purposes. After examining the assessee’s Balance sheet the Tribunal noted that the assessee had sufficient own funds to the extent of Rs. 16270,34,38,528/- whereas investment of the assessee in tax free bonds & shares was only to the extent of Rs. 1466.15 crores. On these facts therefore the ITAT held that provisions of Rule 8D(2)(ii) could not be invoked in the assessee’s case. Accordingly the disallowance made under Rule 8D(2)(ii) was held to be unsustainable.
In the AY.2013-14, composition of investment continued to remain same as in AY.2008-09. I also find that in its order the ITAT had taken note of the fact that in the assessment order for AY.2010-11 the AO himself had accepted the asses see "s basis of offering disallowance U/S.14A and no resort was made to Rule 8D in that year. In the circumstances, I find that the factual matrix of the assessee’s case in AY2013-14 was similar to AYs2008-09 & 2009-10 when the disallowance under Rule 8D(2)(ii) was deleted by the ITAT. It is further noted that as compared with the average investment of Rs. 1466.15 crores held in AY.2008-09 the investment the investment in AY.2013-14 was substantially lower at Rs. 1105.39 crores. In the above facts and circumstances of the case therefore I have no hesitation in holding that the ratio laid down by the ITAT Kolkata in the assessee’s own case continued to be applicable in AY.2013-14 as well since the AO himself was not able to bring on record any evidence to prove the nexus between use of borrowed funds being & acquisition of new investment.
As regards administrative expenses disallowed under Rule 8D(2)(iii) I find that the AO did not bring on record any material or evidence to co-relate any specific expense which the assessee can be said to have incurred for the purpose of earning interest on tax free bonds & dividend. On the other hand the assessee pointed out that tfie interest on tax free bonds was paid directly to the assessee’s Bank A/c by RBI on six monthly basis and no expenses Assessment Year : 2014-2015 M/s. Damodar Valley Corporation were incurred on collection of such interest. The interest was received only on 2 occasions in a year and interest was credited without incurring bank or collection charges. Similarly the dividend was eanred only once in ay ear from Bokaro Power Supply Co. Ltd & Power Trading Corporation and such dividend was also received through ECS by credit to assessee’s Bank A/c. Keeping in mind the number of transactions involved in receiving tax free income I find force in the A/R’s submissions that there was no necessity for the assessee to incur expenses of Rs. 5,52,69,466/- on earning or making of tax free income particularly when only the investments brought forward from the earlier years had produced the tax free income during the relevant year. 1 further note on the identical facts which prevailed in A Y. 2008-09 to 2010-11 no disallowance as per Rule 8D(2) was sustained. In the circumstances respectfully following the decision of the ITAT Kolkata in the assessee’s own case the AO is directed to delete the disallowances of Rs.36,86,72,174/- as made in the impugned order. Ground Nos.l to 4 are allowed.
At the time of hearing, the Ld DR was unable to controvert the factual finding recorded by the Ld CIT(A). We also find that the issue at hand was decided in assessee’s favour in assessee’s own case for A Y 2008-09 and respectfully following the appellate order passed by this Tribunal, we confirm the order of Ld C1T(A) and dismiss the appeal of the revenue. “
There is no change in any material fact on this issue, in the impugned year of appeal. Moreover, the issue has been decided by jurisdictional ITAT in favour of the assessee. Respectfully, following the said decision, the disallowance of Rs. 4,82,85,250/- made under Rule 8D(2)(iii) is hereby deleted. In the result, the appeal of the appellant is treated as allowed”.
The ld. CIT(DR) relied upon the order of the Assessing Officer. Whereas on the other hand, the ld. counsel for the assessee submitted that in the same facts and circumstances in earlier years either no disallowance was made by the ld. Assessing Officer or if any disallowance was made then such disallowance was deleted by the ld. CIT(Appeals). The Revenue did not challenge that order of the ld. CIT(Appeals) but in any year if it was challenged, then Tribunal confirmed the order of the ld. CIT(Appeals). He compiled the details from assessment year 2010-11 onwards in tabular form and placed before us. Such disallowance reads as under:- “DAMODAR VALLEY CORPORATION ASSESSMENT YEAR: 2014-15 Assessment Year : 2014-2015 M/s. Damodar Valley Corporation
APPEAL BY : DEPARTMENT Assessment Disallowance Addition made to Remarks Year made by AO u/s book profit u/s 14A under 115JB on account normal of disallowance provisions u/s 14 2010-11 NIL NIL No addition made by the Assessing Officer u/s 14A
The appeal of the Revenue before the Hon’ble Calcutta High Court on applicability of section 115JB to the assessee Corporation was dismissed in IA No. GA/1/2021 for AY 2010-11 dated 03.12.2021 2011-12 Rs.20,35,78,496/- Rs.20,35,78,496/- Disallowance made by the AO u/s 14A was deleted by the CIT(A)-3, in Appeal No. 1853/CIT(A)- 3/R-9/14-15/ vide order dated 05.10.2017
The Department did not file appeal against the said order of the CIT(A) before the Tribunal. 2012-13 Rs.24,73,67,352/- Rs.24,73,67,352/- Assessee has filed appeal bfore the CIT(A), NFAC bearing Appeal No. CIT(A), Kolkata - 3/15785/2015-16 which is pending disposal. 2013-14 Rs.36,86,72,174/- Rs.36,86,72,174/- CIT(A)-16, Kolkata deleted the addition made by the AO in Appeal No. 827/CIT(A)- 16/KOL/2015- 16/C-9(1) vide order dated 06.01.2017.
Appeal of the department to the ITAT, Kolkata against the aforesaid order of the CIT(A) was dismissed by the Tribunal in Appeal No. 438/KOL/2017 Assessment Year : 2014-2015 M/s. Damodar Valley Corporation