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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B R BASKARAN
Per N.V. Vasudevan, Vice President
This is an appeal by the assessee against the order dated 24.01.2020 of the CIT(Appeals)10, Bengaluru relating to assessment year 2011-12.
The only issue that arises for consideration in this appeal is with regard to the correctness of the determination of quantum of disallowance made by the revenue authorities in terms of section 14A of the Income-tax Act, 1961 [the Act] r.w. Rule 8D of the Income-tax Rules, 1962 [the Rules].
The grounds of appeal raised by the assessee are as follows:-
Based on the facts and circumstances of the case and in law, the Appellant, respectfully craves leave to prefer an appeal against the order passed by the Commissioner of Income tax Appeals - 10 [hereinafter referred to as the CIT(A)"] under section 250 of the Income-tax Act, 1961 ("Act") for Assessment Year ("AY") 2011-12 dated 24 January 2020, inter-alia on the following grounds, which are without prejudice to each other:
That on the facts and circumstances of the case and in law:
1. 1. The order of the Learned CIT(A) is bad in law and hence liable to be quashed.
2. The Learned CIT(A) erred in confirming the disallowance under section 14A read with Rule 8D amounting to Rs. 28,44,12,626.
3. The learned CIT(A) erred in law and on facts, in not considering the fact that the disallowance under Section 14A of the Act, cannot exceed the amount of actual exempt income earned during the subject year, i.e. Rs. 57,04,390.
The learned CIT(A) has erred in law and on facts, in not appreciating that only those investments which yield tax free income during the subject year should be considered for the purpose of disallowance under Section 14A of the Act.
The learned CIT(A) has failed to appreciate that when assessee's own funds far exceeds the exempt income yielding assets, the presumption is that the assessee has earned exempt income from its own funds and hence no disallowance under section 14A is called for.
The learned CIT(A) has erred in law and on facts in holding that interest and other cost of Rs.28,44,12,626 were incurred for purposes of earning exempt income.
7. Without prejudice to the above, the learned CIT(A) has erred in law and on facts, in not excluding the interest on term loans and other interest expenses on the borrowed fund utilized for specific purpose, for the purpose of determining disallowance under Section 14A of the Act, since such term loans/borrowed funds were obtained for specific purpose and were not taken for the purpose of earning exempt income.
8. Without prejudice to the above, the learned CIT(A) has erred in law and on facts, in not considering the net interest expenditure (net of interest earned) instead of gross interest expenditure incurred by the Appellant while applying Rule 8D.
The Appellant submits that each of above grounds is independent and without prejudice to one another.
The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.”
4. The assessee is a public limited company engaged in manufacture, sale and distribution of beverage alcohol. During the course of scrutiny proceedings, the AO made a disallowance under section 14A of the Act amounting to Rs.28,44,12,626 by applying Rule 8D of the Rules. The AO disallowed interest under section 14A of the Act by applying Rule 8D by applying clause (ii) and (iii) of Rule 8D, on the basis that interest and administrative costs were incurred towards investments made by the Company, which gives rise to exempt income.
5. On the basis of the above, disallowance of a sum of Rs.25,47,78,831 was made under Rule 8D(ii) on the gross amount of interest in proportion to average value of exempted investments (excluding investments in foreign subsidiaries) which bears to average value of total assets. Further, disallowance of a sum of Rs.2,96,33,795 was made under Rule 8D(iii) on 0.5% of the average value of exempted investments (excluding investments in foreign subsidiaries. The CIT(Appeals) confirmed the order of the AO.
6. Before the Tribunal, it is submitted that during FY 2010-11, the Company has received exempt dividend income amounting to Rs. 57,04,390. The quantum of exempt income being Rs. 57,04,390 is evident from the Schedule El of the return of income and the detailed written submission dated 17.2.2014 was filed before the AO and CIT(A). It was submitted that for the purpose of calculating average value of investments under Rule 8D(2)(ii) & (iii), only those investments which yielded dividend income during the previous year should be taken. In this connection it is seen that the issue of disallowance u/s. 14A was also a subject matter of dispute in AY 2012-13 in assessee's own case. The matter has been decided by the ITAT vide its order dated 29 May 2020 in IT(TP)A No.489/Bang/2017, wherein the ITAT has accepted the below mentioned arguments of USL:
• Disallowance under section 14A cannot exceed the exempt income earned. • Only those investments to be considered for the purpose of disallowance under section 14A which yield tax free income during the year. • Where no separate books of accounts are maintained for earning tax free income and taxable income and value of own funds exceed the value of investments, then no disallowance under section 14A is called for.
The ITAT held as under:- 36. We heard the parties on this issue and perused the record. The Ld A.R made various contentions and hence this issue requires to be restored to the file of the AO for examining it afresh in the light of various contentions of Ld A. R, which are summarized below:- (a) It is the contention of Ld A.R that the own funds available with it is in excess of the investments. The jurisdictional Hon'ble Karnataka High Court in the case of CIT vs. Microlabs Limited (2016)(383 ITR 490) has dealt with an identical issue. The High Court extracted following decision rendered by the Tribunal:- "40. We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee's paperbook and the same is enclosed as ANNEXURE-Ill to this order. It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income.
The Hon'ble Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd., of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made.
In the light of above said decisions, we are of the view that disallowance of interest expenses in the present case of Rs.49,42,473 made under Rule 80(2)(ii) of the I. T Rules should be deleted. We order accordingly." Thereafter, it was held by Hon'ble Karnataka High Court as under:- "The aforesaid shows that the Tribunal has followed a decision of the Bombay High Court in the case of CIT v. HDFC Bank Ltd. [2014] 366 ITR 505/226 Taxman 132 (Mag.)/49 taxmann.com 335. When the issue is already covered by a decision of the High Court of Bombay with which we concur, we do not find any substantial question of law would arise for consideration as canvassed." Accordingly, we direct the AO to examine the claim of the assessee and if it is found that the own funds available with the assessee is in excess of the value of investments, then no disallowance u/r 8D(2)(ii) out of interest expenditure is called for. (b) In the alternative, the assessee has also submitted that the loan funds were taken for specific purposes and utilised the same for those purposes. Accordingly, it was contended that, when the assessee would be able to show the nexus between the interest expenditure and its utilization for specific purposes, no interest disallowance is called for. In this regard, it is stated that it has paid interest on security deposits, cash credits/overdrafts, working capital demand loan, bill discounting facilities. When the disallowance is worked out under rule 8D(2)(ii), this contention of the assessee would lose its significance.
(c) The Ld A.R submitted that, for the purpose of computing average value of investments, the AO should consider only those investments which have actually yielded exempt dividend income. We notice that this argument of the assessee finds support from the decision rendered by the Special bench in the case of Vireet Investments P Ltd (165 ITD 27)(Delhi- SB). Accordingly, we direct the AO to exclude investments, which did not yield exempt income, while computing average value of investments. (d) The Ld AR also contended that the disallowance should not exceed the amount of exempt income. In this regard, he placed his reliance on the decision rendered by jurisdictional High Court in the case of Pragathi Krishna Gramin Bank vs. JCIT (2018)(95 taxmann.com 41). We direct the AO to take into consideration above said binding decision while examining this issue. Accordingly, we restore this issue to the file of the AO for examining it afresh in the light of discussions made supra.”
We are of the view that similar direction to the AO to decide the issue afresh in line with the directions of the Tribunal in AY 2012-13 would be just and appropriate in this assessment year also. We hold and direct accordingly.
In the result, the appeal of the assessee is treated as allowed for statistical purposes.
Pronounced in the open court on this 24th day of June, 2020.