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Income Tax Appellate Tribunal, DELHI BENCH ‘G’, NEW DELHI
Before: Sh. Kuldip SinghDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the orders of the ld. CIT(A)-10, New Delhi dated 29.09.2016.
Following grounds have been raised by the assessee:
1. That on the facts and law involved the Ld. Commissioner of Income Tax (Appeals) [Ld. CIT(A)] erred in upholding the additional disallowance of a sum of Rs.5,92,587/- made by the Assessing Officer [Ld. AO] u/s 14A of the Act read with the Rule 8D.
2. That the Ld. CIT (A) erred in upholding disallowance of prorate interest expenses of Rs. 1,87,028/- under section 14A estimated to have been incurred to earn tax-free dividend income though the assesses has huge owned funds and huge cash profits far in excess of tax-free investments.
3. The Ld. CIT(A) erred in upholding disallowance of prorate administrative expenses worked out as per
Taurus Home Furnishings Ltd. Rule 8D at Rs. 5,25,559/- estimated to have been incurred to earn the tax-free dividend income.
The Ld. CIT(A) erred in note directing the Ld. A.O. to exclude the amount of investments in shares on which no dividend income was received while computing the average value of investments yielding exempt income.
The Ld. CIT(A) erred in note directing the Ld. A.O. to exclude the amount of investment in capital account of the firm while computing the average value of investments yielding exempt income. Ld. CIT(A) failed to appreciate the fact that as per the provisions of Partnerships Act, 1932 the profit share of a partner is not dependent on the capital contribution of the partner in the firm and interest if any received on capital, is taxable as business income of the partner.
The brief facts of the case are that the assessee is a company registered under Indian companies act and engaged in the business of manufacturing, exporter, importer, traders, representatives, consultants, distributors, buyers and sellers of Home Furnishing items like cushions, bed covers, quilts etc. During the year, Rs. 58,87,382/- was received by the assessee as dividend from its investments.
4. The only issue in all these grounds of appeal relate to confirmation of additional disallowance u/s 14A r.w. Rule 8D of Rs.5,92,587/- by the Commissioner of Income tax (Appeals) which was made by the Assessing Officer as against disallowance u/s 14A of Rs.1,48,140/- computed by the assessee, the Assessing Officer computed disallowance of Rs.7,40,727/- by application of Rule 8D.
Taurus Home Furnishings Ltd. 5. The net disallowance of Rs. 5,92,587/- has been worked out by the Assessing Officer by applying sub-Rule (i), (ii) & (iii) of Rule 8D, after allowing credit for Rs.1,48,140/- disallowed by the assessee as per its own computation.
The disallowance of Rs. 5,92,587/- u/s 14A as made by the Assessing Officer is bifurcated as under: a. Disallowance of proportionate interest (out of interest on Working Capital Loan) Rs.187,028/-; b. Additional disallowance of indirect admin expenses – Rs.3,38,531/-.
Regarding the disallowance of interest, it was submitted that investments in shares and mutual funds was made by the assessee out of its own funds. There is no increase in investments yielding tax free income. Rather there is decrease in total investments in mutual funds and shares by Rs. 3.47 Crores and stands as on 31.3.2012 of Rs. 6.47 Crore as against Rs. 9.94 Crore as on 31.3.2011. It was reiterated that investment was made out of surplus funds and not borrowed funds. There is no increase in the working capital loan this year. The loan was raised in earlier years. Total balance as on 31.3.2012 was Rs. 2.45 Crore as against Rs. 3 Crore on 31.3.2011. The profit before tax is Rs. 4.96 crores and Share Capital Plus Reserves & Surplus as on 31.3.2011 and 31.3.2012 respectively are Rs. 30.11 crore and Rs 34.13 crore, thus proving that the assessee has got sufficient own funds. The facts in brief are as under:
Taurus Home Furnishings Ltd. Particulars Amount as on Amount as on 31/3/2012 31/3/2011 (Rs.) (Rs.) Investments Investment in 6,47,18,125 9,94,30,099 Mutual Funds and Shares Investment in 1,00,000 4,59,75,568 partnership firm Total 6,48,18,125 14,54,05,667 investments Working Capital 2,45,93,933 3,00,78,528 Loan Axis Bank Shareholder's 34,13,35,788 30,11,43,714 Funds (Share Capital + Reserves & Surplus
From the above, it can be observed that the assessee is already having its own surplus fund much more than the investment made and it can be presumed that investments have been made out of own funds and there is no need of making any disallowance of expenditure in respect of interest.
Reliance is placed on the following judgments: � PCIT v Sintex Industries Ltd. (2017) 82 taxmann.com 171 (Gujarat) � HT Media Ltd. v PCIT (2017) 85 taxmann.com 113 (Delhi) � CIT v. HDFC Bank Limited (2014) 49 taxmann.com 335 (Bom.)
In view of above, the allocation of interest of Rs.1,87,028/- is not warranted and the disallowance deserves to be deleted.
Taurus Home Furnishings Ltd. 11. Regarding the disallowance of expenses, the assessee has disallowed the same as under: DP charges & STT - Rs.28,140 Indirect expenses - Rs.1,20,000
The total investments as considered by AO for calculation of disallowance u/s 14A r.w. Rule 8D include investments in partnership firm of Rs 1 lakh as on 31.3.2012 (Note No. 11) on which no exempt income was received during the year.
In this regard, the basis of principles laid down to determine the quantum of disallowance on issue under consideration by the Hon’ble High Court of Bombay in the case of Godrej & Boyee Mfg. Co. Ltd. v. DCIT in & WP 2010, which fan be enumerated as under: “i) The provisions of section 14A and Rule 8D are constitutionally valid. ii) The basis object of Section 14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income. iii) The insertion of Section 14A was curative and declaratory of the intent of the Parliament. The basis principle of taxation is that only net income, namely, gross income minus expenditure that is taxable. Once the test of proximate cause, based on the relationship of the expenditure with tax exempt income is established, a disallowance would have to be effected under Section 14A. iv) What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claim to have incurred in Taurus Home Furnishings Ltd. relation to income which does not forming part of the total income. The satisfaction of the Assessing officer must be arrived as on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. v) In the event the Assessing Officer is not satisfied with the correction of the claim made by the assessee, he must record reasons for his conclusion. vi) The effect of Section 14A is to widen the theory of the appointment of expenditure. vii) Sub section (2) and (3) of Section 14A are intended to enforce and implement the provisions of Sub section (1). viii) Even in the absence of sub-section (2) of Section 14A, the Assessing Officer would have to apportion the expenditure after following a reasonable method consistent with what the circumstances of the case would warrant and having regard to all relevant facts and circumstances to disallow the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. ix) The expenditure incurred u/s 14A would include direct and indirect but relationship with exempted income must be proximate. x) Where the expenditure incurred cannot be related to either takable income or exempted income, the provisions of section 14A would be attracted and therefore, AO would be justified in making disallowance in accordance with provisions of sub section (2) & (3) r/w Rule 8D.”
From the above, it can be deciphered that Rule 8D is not mandatory, the Assessing Officer must record his satisfaction that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure for cogent reasons. Satisfaction of the Assessing Officer has to be arrived at, having
Taurus Home Furnishings Ltd. regard to the accounts of the assessed as enunciated in the case of Maxopp Investment Ltd. v CIT 402 ITR 640 (SC) and Godrej Boyce v DCIT (2017) 394 ITR 449 (SC).
From the records or from the arguments of the ld. DR, we find that the invocation of sub-Section (2) of Section 14A is conspicuously absent and hence re-computation of the disallowance is not legally valid. And considering the investments in mutual funds and in shares are through PMS, hardly any expense is incurred. As such the estimated disallowance made by assessee suo moto is reasonable as it meets the expenses on account of STT as well as in direct expenses. Hence, we hereby hold that no additional disallowance is called for by invoking Rule 8D. All the grounds are treated as adjudicated as the core issues has been dealt in the above paragraphs.