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Income Tax Appellate Tribunal, “A” Bench, Mumbai
O R D E R Per Shamim Yahya (AM) :- These are appeals by the assessee for A.Y. 2012-13 and Revenue’s appeal for A.Y. 2013-14 & 2014-15. appeal for A.Y. 2012-13 :- The grounds of appeal read as under :- GROUND NO. I: DISALLOWANCE U/S 14A OF THE ACT: RS. 91,55,480/-
1. On the facts and the circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the action of the Ld. AO in disallowing a sum of Rs. 91,55,480/- u/s 14A of the Act being the disallowance computed as per Rule 8D of the Income Tax Rules, 1962 ("the Rules").
2 M/s. Archway Investment Company Limited 2. The Appellant prays that the AO be directed to delete the disallowance u/s 14A of the Act amounting to Rs. 91,55,480/- or the disallowance be appropriately reduced.
Without prejudice to above, where assessee has sufficient interest free funds exceeding tax free investments, it is presumed that investments are made out of such interest free funds and therefore no disallowance u/s. 14A r.w.r 8D(2)(ii) of the Rules is called for;
4. Without prejudice to above, while computing average investments for the purpose of Rule 8D of the Rules, only those investment from which exempt income has been earned during the year should be considered;
5. Without prejudice to above, while computing average investments for the purpose of Rule 8D of the Rules, investments which are strategic in nature are to be excluded.
6. Without prejudice to above, for the purpose of calculation of disallowance as per Rule 8D of the Rules, it is only the net interest debited to Profit and Loss Account which should be considered and not the gross interest as considered by the AO;
Without prejudice to above, total expenses which can be indirectly be attributable to earning income which does not form part of total income, should be restricted to amount which have been actually debited to P&L account and claimed in the return of income.
appeal for A.Y. 2013-14 :- Grounds of appeal read as under :- 1. "On the Facts and Circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to exclude the strategic investments made in group/associate companies for the purpose of disallowance u/s 14A r.w.r. 8D."
2. "On the facts and in the circumstances of the case and in law, the Ld. C1T(A) has erred in directing to exclude the value of investment in D. B. Reality for the purpose of computation of disallowance u/s 14A, on assessee's contention that no dividend was earned from such investments, when such investment may yield dividend income in future which is exempt from tax."
3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing that the computation under clause (f) of Explanation to section 115JB(2) is to he made without resorting to the computation as contemplated u/s 14A r.w. Rule 80 of the I.T. Rules, 1961."
Revenue’s appeal for A.Y. 2014-15 :- Grounds of appeal read as under :-
3 M/s. Archway Investment Company Limited
CIT(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below:
"On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance u/s 14A r.w.r. 8D(2)(ii) considering that the assessee made investment from its own funds and interest expenses are not attributable to earn exempt income, when the assessee has invested total fund at Rs. 101 crores as against its borrowed fund of Rs. 86 crores." 2. "On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance to Rs. 2,15,738/-holding that the disallowance cannot be more than the actual expenses debited in the P&L account."
3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred not considering the decision of the Supreme Court in Maxopp Investment Ltd. vs. CIT [TS-5170-SC-2018-0] and in the case of Avon Cycles Ltd. vs. CIT [TS-6251-HC-2014(P&H-0)] wherein apportionment principle was upheld in the case of mixed funding of investment."
4. "On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance u/s 14A made for the purpose of computing book profit u/s 115JB of the Act relying on the ITAT special bench, Delhi in the case of Pr. CIT v/s Vireet Investments without considering the fact that the issue has not reached judicial finality."
5. "For these and other grounds that may be urged at the time of hearing, the decision of the CIT(A) may be set aside and that of the AO be restored."
The assessee has raised additional ground of appeal which read as under :-
“ADDITIONAL GROUND NO. I: ADDITION OF RS. 91,55,480/- MADE UNDER SECTION 14A READ WITH RULE 8D CANNOT BE MADE WHILE COMPUTING BOOK PROFITS UNDER SECTION 115JB OF THE ACT.
On the facts and the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming that the disallowance made u/s. 14A read with Rule 8D of Rs. 91,55,480/- also ought to be added to the book profit under section 115JB of the Act.”
Assessment year 12-13 During the year assessee company has earned exempt dividend income of Rs. 2,16,75,690/-. The Assessing Officer made disallowance under section 14 A of the I.T. Act amounting to Rs. 91,55,480/-.
4 M/s. Archway Investment Company Limited
7. Upon assessee's appeal learned CIT(A) confirmed the same observing as under:-
“I have considered the findings of the Assessing Officer as well as rival submission of the appellant, carefully. It is seen from the profit & loss account that the Appellant has shown dividend on shares of Rs.2,16,75,690/- as revenue from operations and not as income from other sources. It can be seen from the evidence on record that the Appellant is a Non-Banking Financial Company, engaged in lending and borrowing money and making investment. Thus, it is evident that whatever investment has been made which is in the course of business activities, therefore, when entire investment is made out of own funds as well as short-term borrowings by the other current liabilities, such investment is definitely having finance cost. The Appellant has shown finance cost as interest expenditure of Rs.89,53,630/- and bank charges of Rs.1,550/- and furthermore, there is an administrative expenses debited in Profit & loss Account of Rs.1,06,815/-. Thus, it cannot be said that the dividend is earned without any element of expenditure. Contrary to the arguments of Ld. A.R., it is very evident that expenditure has been incurred for earning such dividend. I find no merit in the arguments that the Ld. Assessing Officer has not recorded her satisfaction for invoking Sec.14A of the l.T.Act, 1961. On the contrary, in Para 3.1, the Ld. Assessing Officer has rightly mentioned that assessee has shown investment of Rs.53,90,42,813/-, however, it has not shown expenditure hence, the Appellant was asked as to why expenditure should not be disallowed by applying Rule 8D of the Income-tax Rule, 1962. Thus, there is a recording of reason that the Assessee has not shown any expenditure, therefore, the various case laws referred to and relied upon by the Ld. A.R. in written submission are not at all applicable to the facts of the case. There is no need to discuss each & every case when facts are visible from assessment order itself. Further contention that the investment of Rs.52,72,20,197/- is strategic investment, same to be excluded while working disallowable expenditure under Rule 8D of the Income-tax Rule, 1962, it is pertinent to mention that when the Appellant claims that it is Non-Banking Financial Company and is engaged in the business of lending & borrowing money and making investments. Such investments are not at all strategic investment. It is very evident that in Profit & Loss A/c., the Appellant has shown revenue from operation of Rs.3,17,55,020/- which includes interest on inter- corporate deposit of Rs.1,00,79,330/- and dividend on shares of Rs.2,16,75,690/-, it means there is no strategic investment but entire investment has been made for business purpose or for earning dividend that is why as compared to interest income, dividend is on higher side. Therefore, the Appellant's case is suitable case where Rule 8D of the Income-tax Rule, 1962 is to be applied. The Ld. Assessing Officer has rightly refuted the contention of the Appellant that there is a strategic investment and Sec.14A does not apply. Therefore, I find no infirmity in the finding of the Ld. Assessing Officer.
5 M/s. Archway Investment Company Limited Considering the facts of the case, nature of business, nature of investment and applicability of Rule 8D, I find that Rule 8D has rightly calculated the disallowable expense as provided in Rule 8D and therefore, has rightly disallowed an amount of Rs.91,55,480/- under Rule 8D. Thus, disallowance of expenditure is sustained.”
Against this order assessee is in appeal before us. We have heard both the parties and perused the records.
We find that the assessee's plea of investment being strategic in nature is no more sustainable in view of honourable Supreme Court decision in the case of Maxopp Investment Ltd v/s CIT 402 ITR 640. Hence, this ground is dismissed.
The assessee's plea that when interest free funds are available, which are more than the impugned investment then no disallowance under section 8D(ii) of the Act is permissible is sustainable on the touchstone of honourable jurisdictional High Court decision in the case of HDFC Bank Ltd. (366 ITR 505) and Reliance Capital Asset Management Ltd. (Income Tax Appeal No. 487 OF 2015 dated 19.9.2017). Hence this ground is allowed.
As regards the disallowance under section 8D(iii) only those investments are to be considered which have earned exempt income on the touchstone of ITAT special men decision in the case of Vireet Investment P. Ltd.(supra).
As regards disallowance under section 115JB by importing the provisions of section 14A the same is not sustainable on the touchstone of ITAT Special Bench decision in the case of Vireet Investment (P.) Ltd. (ITA No.502 of 2012).
Assessment year 13-14 During the year assessee company has earned exempt dividend income of Rs.2,16,76,190/-. The assessing officer made further disallowance under section 14A of the Act amounting to Rs. 3,52,73,379/-.
6 M/s. Archway Investment Company Limited
Upon assessee's appeal learned CIT(A) adjudicated the same observing as under :-
5.4 I have carefully considered the facts of the case as well as oral contentions and written submission of the assessee. It is seen that the Hon'ble ITAT in appellant's own case in ITA N0.8461/M/2010 and 5598/M/2011 and 7215/M/2012 & 6013/M/2011 for A.Yrs.2007-08 and 2008-09 in their combined order have decided the issue pertaining to disallowance u/s.14A in the case of the assessee. From para 18, page 6 to para 23, page 9 of the said order deals with the issue wherein after dealing with the facts and the related decisions, Hon'ble ITAT have directed to exclude the strategic investments made in group/associate companies for the purposes of computation of disallowance u/s.14A r.w.r.SD. Respectfully following such decision of the Hon'ble ITAT in the appellant's own case, the Assessing Officer is directed to exclude the strategic investments made in the group/associate companies for the purposes of computation of disallowance u/s.14A r.w.r.SD of the Income-tax Rules. The appellant has further stated that the remaining investment is in the case of D B Realty Ltd. from where they have not earned dividend during the year. The AO is accordingly directed to verify such investment of the assessee and if there is no exempt income earned during the year from such investment, then as per the jurisprudence prevailing on the issue, the AO is directed to exclude the value of such investments for the purposes of computation of disallowance u/s.14A r.w.r.SD. Accordingly, these grounds of appeal are treated as partly allowed subject to computation of disallowance by the AO as directed hereinabove.
I have carefully considered the facts of the case as well as oral contentions and written submission of the assessee. The issue on hand has been decided by the Hon'ble Special Bench, New Delhi in the case of ACIT.Circle-17(1), New Delhi v. Vireet Investment (P.) Ltd. (ITA No.502 of 2012) wherein it has been held that the computation under clause (f) of Explanation to section 115JB(2) is to be made without resorting to the computation as contemplated under section 14A read with Rule 8D of the Income-tax Rules, 1962. Respectfully following the same, the ground of appeal raised by the appellant is allowed.”
Against the above order revenue is in appeal before us.
We have heard both the parties and perused the records. As regards revenues ground that learned CIT(A) has erred in holding that no disallowance under section 14A is to be done when the investments are strategic in nature, the same is sustainable on the touchstone of honourable Supreme Court
7 M/s. Archway Investment Company Limited decision in the case of Maxopp Investment Ltd v/s CIT (402 ITR 640). Accordingly this limber of adjudication of learned CIT(A) is reversed.
The decision of learned CIT(A) that disallowance under section 8D(ii) is not permissible if the interest free funds available are more than the impugned investment is sustainable on the touchstone of reasoning in our decision for assessment year 12-13 as above.
The learned CIT(A) decision that disallowance under section 14A of the Act should not be imported under section 115 JB of the Act is also sustainable on the touchstone of ITAT Special Bench decision in the case of Vireet Investment (P) Ltd.(supra). Learned counsel of the assessee has also made the submission under Rule 27 of the ITAT Rules that for disallowance under section 8D(iii) of the Act only those investments should be considered which have earned exempt income. This plea is also sustainable on the touchstone of ITAT special bench decision in the case of the Vireet Investment (P) Ltd.(supra). The assessee’s plea that only net interest should be considered is not sustainable when assessee is already taking benefit of the decision of Hon'ble Bombay High Court in the case of HDFC Bank Ltd. (366 ITR 505) and Vireet Investment P. Ltd. (supra).
Assessment year 2014-15 The facts and issues are similar to assessment year 2013-14 above. Our adjudication for assessment year 2013-14 applies mutatis mutandis to A.Y. 2014-15 also.
In the result, the appeals are partly allowed as above.