Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH “SMC”, NEW DELHI
Before: SHRI H.S. SIDHU
ORDER Assessee has filed this Appeal against the impugned Order dated 10.08.2018 passed by the Ld. CIT(A)-8, New Delhi relevant to assessment year 2015-16 on the following grounds:-
1. That the AO has erred in making disallowance of interest expenses of Rs. 36,77,902/- and also erred in making the disallowance of Rs. 7,45,247/- u/s. 14A read with Rule 8D and Ld. CIT(A) has erred in confirming the disallowance of Rs. 23,80,000/- to the extent of exempt income earned by the appellant, ignoring the fact that appellant has not debited / incurred any expenditure on exempt income.
2. That the order of the AO and the Ld. CIT(A) are bad in law as well as on the facts of the appellant’s case. 3. That the appellant craves its right to add, annul, amend, alter, withdraw and / or substitute any / of all of the grounds of appeal before the finalization of the appeal.
2. The brief facts of the case are that Assessee is engaged in the business of trading and import of iron and steel. The assessee has filed its return of income for AY 2015-16 on 31.10.2015, declaring income of Rs. 66,473/-. The case of the assessee was taken up for scrutiny and assessment u/s. 143(3) of the Income Tax Act, 1961 (in short “Act”) was completed vide assessment order dated 21.12.2017, determining the assessed income at Rs. 44,89,622/-, by making disallowance of Rs. 44,23,149/- u/s. 14A of the Income Tax Act, 1961 read with Rule 8D. Against the addition, assessee appealed before the Ld. CIT(A), who vide his impugned order dated 10.8.2018 has partly allowed the appeal of the assessee and restricted the addition to Rs. 23,80,000/-. Against the impugned order of the Ld. CIT(A), assessee has filed the Appeal before the Tribunal.
3. Ld. Counsel for the assessee submitted that the AO has erred in making disallowance of interest expenses of Rs. 36,77,902/- and also erred in making the disallowance of Rs. 7,45,247/- u/s. 14A read with Rule 8D and Ld. CIT(A) has erred in confirming the disallowance of Rs. 23,80,000/- to the extent of exempt income earned by the assessee, ignoring the fact that assessee has not debited / incurred any expenditure on exempt income. She filed the copy of decision of the Hon’ble Supreme Court of India in the case of Maxopps Investment Ltd. Vs. CIT (2018) 91 taxmann.com 154 (SC); Hon’ble Delhi High Court in the case of CIT vs. Indian Sugar Exim Corporation Ltd. (2012) 19 taxmann.com 158 (Delhi) and Hon’ble Delhi High Court decision in the case of Pr. CIT vs. Bharti Overseas P Ltd. (2015) 64 taxmmann.com 340 (Delhi) and relied upon the same. Besides above, she filed the copy of written submissions, which read as under :-
“That the appellant company is a regular Income tax assessee and filed its return of income on 31.10.2015 case was selected for scrutiny Assessment u/s 143(3) of the Income Tax Act 1961 and assessment was completed on 22.12.2017 after making disallowance of Rs. 44,23,149/- u/s 14A of the Income Tax Act, 1961.
That during the relevant assessment year, assessee company had received the dividend of Rs. 23,80,000/- against its old investment in shares of National Stock Exchange (amount of investment is Rs. 12,73,17,435/- and date of investment is 30th April, 2008) and claimed the above said dividend income of Rs. 23,80,000/- as exempt income.
Against exempt income of Rs. 23,80,000/- learned assessing officer has made the disallowance of Rs. 44,23,149/-. Disallowance calculated by learned assessing officer u/s 14A read with rule 80 is as under:
Rule Particulars Amount (Rs.) 8D(i) Expenses directly attributable to exempt 36,77,902 income. A*B/C 8D(ii) A Interest expense Rs. 55,83,414 B Average investments Rs. 14,90,49,373 (153549372+144549373)/2 C Average Assets Rs. 22,62,71,505 (216995351+235549659)/2 8D(iii) 0.5% of average investment 7,45,247 (153549372+144549373)/2*0.5%
Total disallowance u/s. 14A 44,23,149 a. Regarding disallowance u/r 80 (in against interest expenses
Your honor, while calculating the disallowances per Rule 8D(2)(ii) learned assessing officer has wrongly taken the interest expense of Rs. 55,83,414/- into calculation, ignoring the fact that interest expense was directly attributable to taxable revenue activity of appellant.
That in the assessment year: 2014-15 appellant company has taken a loan of Rs. 25 Crore from HSBC Invesdirect Financial Services Ltd. to purchase the DWS maturity fund on 22.07.2013 of Rs. 25 Crore, sale and purchase of same was reflecting as revenue from operation under profit & loss account of the appellant company, kindly refer page 6 (Profit & Loss Statement for the year ended on 31 st March, 2015) and page no. 23 - DWS mutual Fund Statement) of the paper book.
This was explained and submitted vide letter dated 14.12.2017 filed during the assessment proceedings u/s 143(3) stating "that Interest was paid on loan from HSBC against DWS mutual fund. That DWS mutual fund is a part of business activity and part of stock in trade of assessee company and dividend /interest / capital gain, etc. earned (if any) from that venture /activity be taxable."
Copy of letter dated 14.12.2017 is enclosed at page no. 25 of paper book. 4
Your honor, the learned assessing officer invoked the section 14A alleging that DWS mutual fund is not a part of business activity and its shown under the head non-current investment (last three lines of para 3.(ii) on page 2 of the assessment order).
The allegation of learned assessing officer is not correct and contrary to the facts of the case. It is verifiable as under: i) DWS mutual fund was a part of inventory - units 13,16,930 (Note :12 Inventory -Notes Forming Integral Part of the Balance Sheet as at March 31, 2015 - page 8 of the paper book) ; ii) Copy of profit & loss account (page no, 6 of the paper book) showing the sale of DWS mutual fund as revenue from operations at Rs. 7,08,39,992/-; iii) Tax Audit report of AY. 2015-16, point no. 35(a) of report (page 43 of the paper book) showing holding details of DWS under the head inventory/stock in trade opening stock, purchase & sale during the year and closing balance of units 13,16,930/- as on 31.03.2015.
B. Regarding disallowance of Rs. 23,80,000/- upto exempt income.
Your honor, for making disallowance u/s14A assessee must have incurred the expenditure in relation to earning income which is exempt under Income Tax Act. 5
Appellant has debited following expenses into P&L alc, kindly refer page 6 - P&L account and page 9 - Note 17 Other Administrative expenses of the paper book:
Particulars Expenses Debited Expenses Remarks in P&L Allowable as per Income Tax provo Finance Cost 55,83,414 55,83,414 Directly Related to revenue activity Administrative 21,12,401 4,97,321 Including stamp Expenses duty Expenses of Rs. 4,03,770 paid to ROC against Demerger.
Depreciation and 6,21,031 Nil Added back to Amoritization Taxable income. (3,11,605+3,09,426)
1. Your honour, when disallowance be calculated against indirect expenses, it cannot exceed the actual expenses claimed for income tax purposes. Indirect expenses claimed by the appellant excluding the expenses of finance cost and demerger expenses was only Rs. 93,551/- which are as under:
Audit Fees 33,708 Bank Charqes 12,159 Misc. Expenses 5,755 ROC Filing Fees 32,400 Travellinq Expenses 9,529 Total 93,551
2. Your honour, the same view was upheld in following judqments : i) THE HIGH COURT OF DELHI AT NEW DELHI (ITA 953/2015)
PRADEEP KHANNA versus ACIT CIRCLE 30(1) DELHI dated 11.08.2016 holding - If indeed the tax exempted income was earned without the interference of any employee but rather through the solicitation and advertisement of the bank the question of attributing any expenditure cannot arise at all. ii) The Delhi High court in the case of Maxopp Investment Ltd. Vs. CIT [TS-668-HC-2011 (Del)] observed, "While we agree that the expression 'expenditure incurred' refers to actual expenditure and not to some imagined expenditure, we would like to make it clear that the 'actual' expenditure that is in contemplation uls 14A (1) of the Act is the actual expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made u/s 14A of the said Act."
Your honor, the disallowance u/s 14A r.w.r. 80 is Nil. The disallowance is calculated as under:
Rule Particulars Amount (Rs.)
8D (i) Expense directly attributable to exempt income Nil 8D(ii) Expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt Nil 8D (iii) 0.5% of average investment Nil
(153549373+144549373)/2*0.5% = 7,45,247, it will be taken as NIL because no expenditure has been incurred to earn exempted dividend income.
Total disallowance u/s 14A NIL In view of above, your honour is requested to kindly delete the addition of Rs. 23,80,000/- u/s 14A r.w.r. 8D.”
On the other hand, Ld. DR relied upon the orders of the authorities below and stated that they have passed the well reasoned order, which does not need any interference.
I have gone through the orders passed by the revenue authorities as well as the documentary evidences filed by the assessee in the shape of Paper Books alongwith Written Submissions filed by the Ld. Counsel for the assessee. I am of the considered view that AO has to establish that the assessee has incurred expenditure to earn the exempt income only, when the explanation of the assessee is not satisfactory then the AO can apply section 14A of the Act and Rule 8D(i) of the Rules. In the present case, AO has not recorded the satisfaction which is mandatory and disallowance in dispute has been made which has wrongly been partly sustained by the Ld. CIT(A). After examining the written submissions alongwith documentary evidences filed by the Ld. Counsel for the assessee, I am of the view that assessee has not incurred any expenditure relating to the exempt income, therefore, no disallowance can be made u/s. 14A of the Act. Keeping in view of the facts and circumstances of the case, I hereby delete the addition in dispute by accepting the appeal filed by the assessee. My aforesaid view is fortified by the decision of the Hon’ble High Court of Delhi in the case of Maxopp Investment Ltd. Vs. CIT (TS-688-HC-2011(Del.), wherein it has been held that if no expenditure is incurred in relation to the exempt income, no disallowance can be made u/s. 14A of the said Act.
In the result, the Appeal filed by the Assessee stands allowed.