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Income Tax Appellate Tribunal, ‘’ B’’ BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED & SHRI T.R. SENTHIL LUMAR
आदेश/O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned two appeals have been filed at the instance of Assessee and the Revenue against the common order of the Learned Commissioner of Income Tax (Appeals)-11, Ahmedabad, dated 15/10/2019 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in- after referred to as "the Act") relevant to the Assessment Year 2016-2017.
First, we take up Assessee
The only issue raised by the assessee is that the learned CIT(A) erred in sustaining the part disallowance of Rs. 4,72,83,868/- made by the AO under the provision of section 14A read with rule 8D of Income Tax Rules.
The facts in brief are that the assessee is a public company and engaged in the business of Printing & Publishing and Manufacturing & Trading activity. The AO during the assessment proceeding found that the assessee has made investment aggregating to Rs. 1093,54,05,787/- in mutual funds, equity shares and gold deposits on which it earned exempted income of Rs. 10,51,88,705/- only. The assessee has suo-motu has made disallowance under section 14A of the Act for Rs. 18,59,309/- only. However, the AO was of the view that disallowance should be made as per the procedure prescribed under rule 8D(2) of Income Tax Rule. Accordingly, the AO sought an explanation from the assessee by issuing show cause notice. 3.1 The assessee in response thereto submitted that it had its own fund of Rs. 1306,00,28,895/- which is sufficient enough to make investment of Rs. 1093,54,05,787/- from which it earned both taxable as well as exempted income. & 9/AHD/2019-2020 A.Y. 2016-17 3 Against the exempted income, it has made suo-motu disallowances by identifying specific expenses, therefore, no further disallowance needs to be made.
3.2 The assessee further contended that no disallowance under section 14A of the Act is required to be made of interest expenses as well administrative expenses in case assessee is having sufficient own fund to make such investment. The assessee in support of it contention placed reliance on the judgment of Hon’ble Gujarat High Court in case of PCIT vs. Sintex Industries Ltd reported in 82 taxmann.com 171.
3.3 It was also contended by the assessee that the expenses were incurred in the ordinary course of business and not to earn exempted income. The expenses claimed would have to be incurred anyway whether there being any exempted income or not. Therefore, the expenses incurred in the ordinary course of business cannot be disallowed on presumptive basis without having direct nexus with the investment.
3.4 The assessee also contended that the provision of section 14A is applied in case of exempted income whereas dividend is not exempted under provision of the Act. As such the dividend is not taxable in the hand of recipients for the reason that tax on the same has already been paid by the payee.
4. However, the submission and contention of the assessee was not found to be acceptable by the AO. The AO found that the assessee has not maintained separate books of accounts for income generated from regular business and income from investment. It is also not possible that the resources of the assessee has not been utilized for looking after the investment. The major portion of suo-motu disallowances by the assessee only represent the disallowances of 5% of salary expenses paid to 3 employee. Therefore the AO invoked the provision of rule 8D(2) of the Income Tax Rule and worked out the amount of disallowances at Rs. & 9/AHD/2019-2020 A.Y. 2016-17 4 4,91,43,177/- containing interest expenses of Rs. 26,914/- only and administrative expenses of Rs. 4,91,16,263/- only. Thus the AO made addition of Rs. 4,72,83,868/- only after adjusting suo-motu disallowances made by the assessee for Rs. 18,59,309/- only.
The aggrieved assessee preferred an appeal to the learned CIT(A).
The assessee before the learned CIT(A) submitted that it has made investment in equity shares, Mutual fund and Gold. The majority of exempted income was earned form the investment in equity shares. There is no change in investment in equity shares and gold in the year under consideration. The transaction of sale and purchases was only carried out in the year under consideration with respect to Mutual Fund only. Thus, the business resources have been utilized only in investment in Mutual where fresh transactions carried out were yielding very meager exempted income in its hand. The provision section 14A of the Act requires to disallow the expenditure incurred in connection with earning of the exempted income. Considering the fact that the majority of exempted income earned from the investment in equity shares in which there is no change in holding or no new investment made, the suo-motu disallowances made is sufficient.
6.1 The assessee further contended that under the provision of section 14A read with rule 8D only net interest expenditure should be considered. In its case besides having sufficient interest free own fund, it has earned interest income of Rs. 2,08,49,920/- which is far more than the interest expenditure of Rs. 37,231/- incurred. Hence no disallowances of interest expense is required.
6.2 The assessee further submitted that the AO while computing the disallowance of administrative expenses considered entire investment instead of considering only those investment which yielded exempted income in the year under consideration. & 9/AHD/2019-2020 A.Y. 2016-17 5
The learned CIT(A) after considering the facts in totality deleted the disallowances of interest expenses whereas with regard to disallowances of administrative directed the AO to re-compute the disallowance after considering only those investment which yielded income during the year under consideration.
8. Being aggrieved by the order of the learned CIT(A) both the assessee and the Revenue are in appeal before us. The assessee is appeal against the confirmation of disallowances of administrative expenses as per rule 8D of Income Tax Rules, whereas the Revenue is in appeal against the direction of the CIT(A) to re-compute the disallowance considering only those investment which yielded exempted income. The relevant grounds of appeal
of the Revenue in reads as under:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in law and on facts in holding that only those investment out of which exempt income is earned would be considered while computing disallowance u/s 14A r.w. Rule 8D of I.T. Rule, even though, there is no such provisions for computing disallowance u/s 14A of the Act.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT{A) has erred in law and on facts in directing the A.O. to re-compute the disallowance u/s 14A of the Act after considering the average of those investments out of which exempt income is earned.
The learned AR before us contended that the AO has resorted to the provisions of rule 8D of income tax rules without rejecting the disallowance made by the assessee suo- moto against the exempted income. The learned AR further contended that the ITAT in the consolidated order dated 27th July 2021 in the own case of the assessee for assessment years 2011-12 to 2015-16 bearing to 133 , 178 & 741/Ahd/2018 involving identical facts and circumstances has allowed the appeal in favour of the assessee.
On the other hand the learned DR before us contended that the AO has clearly recorded his dissatisfaction with respect to the correctness of the claim made by the assessee for the expenses against the exempted income. According to the learned DR, the assessee has not made any disallowance with respect to the & 9/AHD/2019-2020 A.Y. 2016-17 6 administrative expenses except the salary expenses which is not possible in the given facts and circumstances.
Both the learned DR and the AR before us vehemently supported the order of the authorities below to the extent favourable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. The provisions of section 14A of the Act provides that the assessee cannot claim the deduction of the expenditure incurred in relation to the income which is exempted from tax. Generally, the provisions of section 14A of the Act is applicable in a situation where the assessee carries on the business, the income of which is taxable and simultaneous has the income from exempted sources. In such a situation, there is a possibility that the assessee might have incurred certain expenses in relation to the exempted income which will be claimed as deduction against the taxable income. Thus, the provisions of section 14A restricts the deduction of the expenses incurred by the assessee in relation to the exempted income against the taxable income. Generally, the assessee does not maintain separate books of accounts with respect to exempted as well as taxable income. In most of the cases, even the common bank account is used for the transactions relating to taxable and exempted income. Accordingly, it has become an ongoing dispute between the taxpayer and the revenue with respect to the determination of the expenditures which are not eligible for deduction against the taxable income as the expenditure pertains to the exempted income. To overcome with this issue, a method was prescribed under rule 8D(2) of Income Tax Rule to work out the expenditure in relation to the exempted income. But the revenue cannot resort to rule 8D(2) of Income Tax Rule automatically. As such, to determine the disallowance of the expenditure as per rule 8D(2) of Income Tax Rule, the AO has to record his dissatisfaction after having regard to the books of accounts for the correctness of the claim made by the assessee for the expenditures incurred in relation to the exempted income. There is no standard format for the AO to record & 9/AHD/2019-2020 A.Y. 2016-17 7 the dissatisfaction as provided under section 14A of the Act. But, it is necessary for the AO to record the dissatisfaction after referring the books of accounts of the assessee. There can be a situation where the disallowance to be made under the provisions of rule 8D(2) is greater or exorbitant than the actual expenses claimed by the assessee in the profit and loss account. Thus in such a situation, it becomes sine quo non to refer the books of accounts of the assessee before resorting to the provisions specified under rule 8D(2) of income tax rule.
12.1 Now coming to the case on hand, there is no dispute to the fact that the own fund of the assessee exceeds the amount of investment. The own fund of the assessee as on 1st April 2015 and 31st of March 2016 stands at Rs. 1135.72 crores & Rs. 1306.16 crores respectively whereas the investment as on 1 April 2015 and 31 March 2015 stands at Rs. 871.10 crores & Rs. 1093.54 crores respectively. In this regard we note that the Hon’ble Supreme Court in case of CIT vs. Reliance Industries Ltd reported in 410 ITR 466 held that if interest free fund available with the assessee are sufficient to meet the investment then it could be presumed that the investment was made out of interest free fund available with the assessee. The relevant finding of the Hon’ble Supreme court is extracted as under: 7. Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03.
In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.
12.2 In view of the above, we can safely hold that there cannot be any disallowance of interest expenses under the provisions of section 14A read with rule 8D of Income Tax Rule.
12.3 Coming to disallowances of the administrative expenses. In this regard we note certain facts as detailed below: & 9/AHD/2019-2020 A.Y. 2016-17 8 Gross income of the assessee from taxable sources Rs. 598.05 crores Gross income of the assessee from exempted sources Rs. 10.51 crores Gross Total income of the assessee from both source Rs. 608.57 crores 12.4 Form the above we find that the percentage of exempted income in relation to the gross total income of the assessee stands at 1.73 % approx.
12.5 We further note that against the gross income of Rs. 608.57 crores, the assessee incurred administrative expenses being employee benefit expenses of Rs. 23.87 crores and other expenses of Rs. 71.56 crores only. On further analyzing the schedule of other expenses we find that all the expenses under the head “other expenses” cannot be attributed to exempted income. As such the details of “other expenses” which can be allocated between exempted and taxable income, as per the schedule of other expenses appearing in the financial statements, placed on pages 35 of the paper book, stand as under:
Printing, Stationary & Communication Rs. 85,44,889 Rent Rs. 76,24,807 Building Repairs Rs. 44,21,926 Bank Charges Rs. 15,62,480 Director sitting fees Rs. 10,000
Audit Fee Rs. 6,87,000 Misc. Expenses Rs. 2,56,90,671 Total Rs. 4,78,54,773 12.6 If we proceed to make the disallowance of administrative expenses under rule 8D(2) of income tax rule against the exempted income, then the total disallowance is worked out by the AO stands at Rs. 4,72,83,868/- against gross expenses attributable to both the exempted and taxable income of Rs. 11,62,56,504/- which constitute more than 40% of the such expenses. The question arises whether it is reasonable to hold that the assessee has incurred above expenditure to the tune of Rs. 4,72,83,868/-against the exempted income. The & 9/AHD/2019-2020 A.Y. 2016-17 9 answer certainly stands in negative. It is for the reason that the exempted income in relation to gross total income stands only at 1.73% whereas the proportion of the administrative expenses as calculator by the AO against the exempted income is much greater than the proportion of the income discussed above. Thus, in such facts and circumstances the disallowance cannot be made under the provisions of rule 8D(2) of the income tax rule which will provide absurd result.
12.7 Moving further, it is important to note that the assessee has made suo-moto disallowance amounting to Rs. 18,59,309/- which includes disallowances of 5% salary expenses amounting to Rs. 17,82,826/- paid to 3 employee. The basis adopted by the assessee is certainly not proper. It is for the reason that though there was no change in the investment in equity shares but there were transactions in the mutual funds. As such the assessee during the year sold unit of mutual fund for the amount aggregating to Rs. 132,24,72,393/- and made new investment in the units of mutual fund for the amount aggregating to Rs. 354,67,91,520/- only. Admittedly, for the sale, purchase of the mutual funds, there must have been called board meetings, involvement of the supporting staff and likewise certain expenses in the form of stationary, refreshment, building repairs, Misc. expenses etc. must have been incurred by the assessee. However, the assessee has nowhere made any disallowance of such expenses. Therefore, the AO rightly disagreed with the correctness of the claim made by the assessee. But the question arises, if the AO is not satisfied with the correctness of the claim made by the assessee, can he resort to the provisions of rule 8D(2) of income tax rule. The answer stands in affirmative but subject to one caveat, he has to refer the books of accounts of the assessee. But in the given case the AO has certainly pointed out the defects in the claim made by the assessee for the expenses against the exempted income, but he did not consider the accounts of the assessee and directly jumped to the provisions of rule 8D of Income Tax Rule for the purpose of the disallowance which have given absurd amount of disallowance of the administrative expenses as discussed above. Accordingly, we are not convinced with the approach of the AO to make the & 9/AHD/2019-2020 A.Y. 2016-17 10 disallowance as per the provisions of rule 8D of income tax rules in the given facts and circumstances.
12.8 Before parting, it is important to note that the administrative expenses as discussed above cannot be allowed to the assessee as deduction in entirety against the taxable income. In our considered view, some part of such expenses should be allocated to the exempted income of the assessee. As we note that there was no infirmity pointed out by the revenue with respect to the basis of the disallowance of the salary expenses of Rs. 17,82,826/- being to the tune of 5% of the salary paid to 3 employees as discussed above, we are of the view that the justice will be served to the revenue and the assessee if 5% disallowances is made of the expenses as discussed above. In view of the above and after considering the facts in totality, the appeal of the assessee is partly allowed whereas the appeal of the revenue is dismissed.
12.9 In the result the appeal of the assessee is partly allowed.
Coming to an appeal by the Revenue for A.Y. 2016- 17
The Revenue has raised following grounds of appeal:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in law and on facts in holding that only those investment out of which exempt income is earned would be considered while computing disallowance u/s 14A r.w. Rule 8D of I.T. Rule, even though, there is no such provisions for computing disallowance u/s 14A of the Act.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT{A) has erred in law and on facts in directing the A.O. to re-compute the disallowance u/s 14A of the Act after considering the average of those investments out of which exempt income is earned.
3. On the facts and in the circumstances of the case and in law, the Ld- CIT(A) has erred in law and on facts in deleting the addition of Rs.3,97,72,249/- made on account of business development expenses without appreciating the material facts brought on record by the A.O.
& 9/AHD/2019-2020 A.Y. 2016-17 11
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order of the A.O.
5. It is, therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. be restored to the above extent.
The issue raised by Revenue vide ground numbers 1 & 2 of its appeal has been adjudicated along with the assessee grounds of appeal in where the issue has been decided vide paragraph no. 12 to 12.8 of this order against the Revenue. For detail discussion, please refer the aforesaid paragraph of this order. Hence the ground of appeal of the Revenue is hereby dismissed.
15. The next issue raised by Revenue vide ground no. 3 of its appeal is that the learned CIT(A) erred in deleting the disallowances of business expenditure of Rs. 3,97,72,249/- only.
The assessee in the year under consideration claimed that it has launched various scheme in order to retain its customer base apart from “Lavjana Scheme” by way of providing gift to customers on regular basis. The assessee claimed that such expenses of Rs. 3,97,72,249/- are in the nature of business promotion which were incurred in the regular course of business. The assessee further claimed the identical business development expenses has been incurred since many years which have been claimed revenue expenditure whereas Department treated the same as capital expenditure. The dispute has been resolved by the Hon’ble ITAT in own case of the assessee for earlier A.Ys. in favour of the assessee by holding the impugned expenditure as business expenses.
However, the AO found that the order of the ITAT has not been accepted by the department and the same has been challenged before the Hon’ble Gujarat High Court which is pending for adjudication and therefore he was of the view that the & 9/AHD/2019-2020 A.Y. 2016-17 12 issue on hand has not reached to its finality. Therefore, he disallowed the sum of Rs. 3,97,72,249/- and added to the total income of the assessee.
On appeal by the assessee, the learned CIT(A) deleted the addition made by the AO by placing reliance on the order of the ITAT in the own case of the assessee for AY 2005-06 to 2009-10.
Being aggrieved by the order of the learned CIT(A), the Revenue is in appeal before us.
Both the Learned DR and AR before us vehemently supported the order of the authorities below as favourable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that the ITAT in the own case of the assessee bearing for A.Y. 2011-12 dated 27/07/2021 has decided the issue in favour of the assessee. The relevant extract of the order is reproduced as under:
22. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that the ITAT in the own case of the assessee bearing for A.Y. 2010-11 dated 10/11/2016 has decided the issue in favour of the assessee. The relevant extract of the order is reproduced as under: We now come to Revenue’s appeal ITA No.2863/Ahd/2013. Its first substantive ground challenges the CIT(A)’s order deleting business development expenditure disallowance of Rs.3,12,91,284/- as made by the Assessing Officer in assessment order by treating the same to be capital expenditure. Both the ld.Representatives are ad idem that this tribunal’s order in assessee’s own case for AYs 2005-06 to 2009-10(supra) follows yet another decision in its case pertaining to AY 2001-02 holding identical business development expenditure to be Revenue in nature. Ld.Departmental Representative fails to point out any distinction on the conclusion under challenge. The Revenue fails in its first substantive ground. 22.1 Respectfully following the same, we don’t find any reason to interfere in the order of the ld. CIT-A. Accordingly, we dismiss the ground of appeal of the Revenue.
& 9/AHD/2019-2020 A.Y. 2016-17 13 21.1 Before us, no material has been placed on record by the Revenue to demonstrate that the decision of Tribunal as discussed above has been set aside / stayed or overruled by the Higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts & circumstances of the case of the assessee and fact & circumstances in case of earlier years nor has placed any contrary binding decision in its support. Thus, respectfully following the order of this tribunal in the own case of the assessee as discussed above, we uphold the finding of the learned CIT(A). Thus, the ground of appeal raised by the Revenue is hereby dismissed.
21.2 In the result the appeal Revenue is hereby dismissed
In the combined result the appeal of the assessee partly allowed whereas the appeal of the Revenue is dismissed.
Order pronounced in the Court on 09/12/2022 at Ahmedabad.