Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C” Bench, Mumbai
Before: Shri M. Balaganesh & Shri Ravish Sood
PER RAVISH SOOD, JM
The present appeal filed by the assessee is directed against the order passed by the A.O under Sec. 143(3) r.w.sec. 144C(13) of the Income Tax Act, 1961 (for short „Act‟), dated 30.10.2018. The assessee has assailed the impugned order on the following grounds of appeal before us: “GROUND NO. I: DISALLOWANCE U/S 14A OF THE ACT AMOUNTING TO RS. 1,07,21,891/-:
1. On the facts and circumstances of the case and in law, the Ld. AO, pursuant to the directions of the DRP in disallowing a sum of Rs. 1,07,21,891/- u/s 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 ("the Rules").
2. He failed to appreciate and ought to have held that i. The assessing officer is duty bound to assess correct income irrespective of the income returned by the assessee; ii. Disallowance u/s 14A of the Act be cannot exceed income claimed exempt during the year;
2 M/s PHL Fininvest Pvt. Ltd. Vs. ACIT, Range-7(3)(2) iii. Only expenditure incurred „in relation to' earning exempt income can be disallowed u/s 14A of the Act; iv. Rule 8D is not automatic; v. Disallowance computed as per Rule 8D(2)(iii) cannot exceed the amount of expenses actually debited to the statement of profit and loss.
3. The Appellant prays that the total disallowance u/s 14A of the Act, including the suo- moto disallowance made by the Appellant, be restricted to the exempt income earned during the year.
4. Without prejudice, the Appellant prays that disallowance made u/s 14A r.w.r 8D of the Rules be deleted or appropriately reduced. The Appellant craves leave to add, amend, alter and/or delete any/all of the above ground of appeal
. GROUND NO. II: ADDITION OF DISALLOWANCE U/S 14A OF THE ACT WHILE COMPUTING BOOK PROFITS U/S 115JB OF THE ACT:
1. On the facts and circumstances of the case and in law, the AO, pursuant to the directions of the Hon‟ble DRP, erred in adding a further sum of Rs.93,20,329/- on account of disallowance u/s 14A of the Act while computing the book profits u/s 115JB of the Act, over and above the addition already made by the Appellant in respect of the suo-moto disallowance made by it u/s 14A of the Act; thereby leading to double addition.
2. The Appellant prays that the double addition to the extent of Rs.93,20,329/- made while computing the book profits u/s 115JB of the Act be deleted.
3. The Appellant further prays that the addition made by the Appellant itself while computing book profits u/s 115JB in its return of income be appropriately reduced consequent to the outcome of Ground No. I above.”
2. Briefly stated, the assessee company which is engaged in the business of finance and investment activities had e-filed its return of income for A.Y. 2014-15 on 29.11.2014, declaring its total income at Rs.55,94,450/-. Subsequently, the revised return of income was filed by the assessee company on 25.02.2016, declaring the same income but with an additional claim for TDS credit. The case of the assessee was thereafter selected for scrutiny assessment under Sec. 143(2) of the Act.
During the course of the assessment proceedings it was observed by the A.O that the assessee during the year under consideration was in receipt of exempt dividend income of Rs.39,61,180/-. It was noticed by the A.O that the assessee had offered a suo motto disallowance of interest expenditure under Sec. 14A r.w. Rule 8D(2)(i) of Rs.93,20,329/-. Observing, that the assessee had not attributed any part of the indirect expenditure for earning of the exempt dividend income, the A.O called upon it to explain as to why the disallowance to the said extent may not be made in its hands. In reply, the assessee submitted before the A.O that no further disallowance under Sec. 14A was called for in its hands for the reason viz. (i)
3 M/s PHL Fininvest Pvt. Ltd. Vs. ACIT, Range-7(3)(2) that, it had already made a suo moto disallowance in respect of interest expenses as per the direct nexus method under Sec. 14A of Rs.93,20,329/-; and (ii) that, as the investments made were of a strategic nature, therefore, no disallowance under Sec. 14A r.w. Rule 8D was called for as regards the same. However, the A.O did not find favour with the aforesaid claim of the assessee and declined to accept the same. Observing, that the disallowance under Sec. 14A was to be worked out in the hands of the assessee as per the methodology contemplated in Rule 8D, the A.O worked out the same at Rs.74,66,50,171/-, as under :
Sr. No. Particulars Amount (Rs.) 1. The amount of expenditure directly relating to income which does not 93,20,329 form part of total income-Rule 8D(2)(i) (as claimed by assessee) 2. Expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt an amount computed in accordance with the following formula, namely: A x B 1,44,55,01,135X28,03,12,308 74,52,48,609 C 54,37,00,122 A= the amount of expenditure by way of interest other than amount of interest included in clause (i) incurred during the previous year (after excluding the interest on car loan and processing fee) =Rs.1,44,55,01,135/- B= the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. Opening = Rs.48,02,66,746/- Closing = Rs.8,03,57,870/- Average of investment = Rs.28,03,12,308/- C= the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year – Rule 8D(2)(ii) Opening = Rs.65,71,80,222/- Closing = Rs.43,02,20,022/- Average of assets = Rs.54,37,00,122/- 3. i. Average value of investment 14,01,562 Opening balance of investments + Closing balance of investments /2 ii. Disallowance An amount equal to one half per cent of the average of the value of investment income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. iii. 0.5% of Rs.28,03,12,308/- Total disallowance 74,66,50,171 On the basis of his aforesaid deliberations, the A.O after inter alia proposing an additional disallowance under Sec. 14A of Rs.73,73,29,842/- [Rs.74,66,50,171/- (-) Rs.93,20,329/-],
4 M/s PHL Fininvest Pvt. Ltd. Vs. ACIT, Range-7(3)(2) therein vide his draft assessment order passed under Sec. 143(3) r.w.Sec.144C, dated 29.12.2017 sought to assess the income of the assessee company under the normal provisions at Rs.89,61,06,740/-. Also, the A.O after making an adjustment for the disallowance worked out under Sec.14A r.w. Rule 8D reworked the „book profit‟ under Sec.115JB at Rs.74,58,19,643/-.
Aggrieved, the assessee filed objections with the Dispute Resolution Panel-2, Mumbai (DRP). Observing, that as the disallowance of the interest expenditure pertaining to exempt income yielding investments was specifically identified, therefore, the DRP was of the view that no separate disallowance of the interest expenditure was called for under Rule 8D(2)(ii). At the same time, the DRP upheld the disallowance under Sec.14A r.w Rule 8D(2)(iii) that was made by the A.O at an amount of Rs.14,01,652/-. Accordingly, on the basis of his aforesaid observations the DRP restricted the additional disallowance under Sec.14A to Rs.14,01,512/-, as under:
Sr. No. Particulars Amount (Rs.) 1. The amount of expenditure directly relating to income 93,20,329 which does not form part of total income as ascertained by the assessee – Rule 8D(2)(i) 2. Expenditure by way of interest during the previous Nil year which is not directly attributable to any particular income or receipt an amount computed in accordance with the following formula, namely: 3. i. Average value of investment 14,01,562 Opening balance of investment + Closing balance of investments/2 ii. Disallowance An amount equal to one half per cent of the average of the value of investment income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. iii. 0.5% of Rs.28,03,12,308/- Total disallowance 1,07,21,891 4. Less: Amount disallowed by the assessee 93,20,329 Disallowance 14,01,512 The A.O after receiving the order of the DRP under Sec.144C(5), dated 25.09.2018 passed the final assessment order under Sec.143(3) r.w.Sec. 144C(13), dated 30.10.2018. On the basis of the directions of the DRP the A.O inter alia worked out the disallowance under Sec. 14A r.w. Rule 8D at Rs.1,07,21,891/-.
5 M/s PHL Fininvest Pvt. Ltd. Vs. ACIT, Range-7(3)(2)
The assessee being aggrieved with the order passed by the A.O under Sec. 143(3) r.w. Sec.144C(13), dated 30.10.2018 has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee took us through the facts of the case. It was submitted by the ld. A.R that the assessee during the year under consideration was in receipt of exempt dividend income of Rs.39,61,180/-. In the backdrop of the aforesaid facts, it was submitted by the ld. A.R that the assessee had already offered a suo motto disallowance under Sec. 14A of Rs.93,20,329/- i.e in excess of the amount of the exempt income. As regards the disallowance that was offered by the assessee under Sec. 14A r.w. Rule 8D(2)(i), it was submitted by the ld. A.R that as the assessee had sufficient self-owned funds to justify the investments in the exempt income yielding assets, therefore, no disallowance of any part of the interest expenditure was called for in its hands. In support of his aforesaid contention the ld. A.R had relied on the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. HDFC Bank Ltd. [366 ITR 505] (Bom). Further, the ld. A.R in order to buttress his claim that where the assessee had sufficient interest free and interest bearing funds available, then the presumption would be that investment in the exempt income yielding assets was made out of the interest free funds available with the assessee. In support of his aforesaid contention the assessee had drawn support from the judgement of the Hon‟ble High Court of Bombay in PCIT (Central) Vs. Ashok Apparels (P) Ltd. (2019) 196 taxman.com 63 (Bom). Also, reliance was placed on the orders of the coordinate benches of the Tribunal in the case of M/s HDFC Bank Ltd. Vs. ACIT-2(3), Mumbai [ITA No. 5480 & 5481/Mum/2014, dated 24.08.2016]. As regards the disallowance of the indirect expenses, it was submitted by the ld. A.R that the same in toto aggregated to an amount of Rs.1,97,789/-. In order to drive home his aforesaid claim the ld. A.R had drawn our attention to the „Profit and loss account‟ for the year under consideration. In fact, it was submitted by the ld. A.R that the aforesaid indirect expenses of Rs.1,97,789/- included audit fees/charges aggregating to Rs.58,989/- which had no nexus with the earning of the exempt dividend income. As such, it was the claim of the ld. A.R that the total „indirect expenses‟ incurred by the assessee company during the year aggregated to an amount of Rs.1,40,000/-. On the basis of the aforesaid facts, it was submitted by the ld. A.R that the disallowance in respect of the indirect expenses incurred for earning of the exempt dividend income could by no means exceed the amount of Rs.1,40,000/-. In order to support his aforesaid contention the ld. A.R had relied on the judgment of the Hon‟ble High Court of Gujarat
6 M/s PHL Fininvest Pvt. Ltd. Vs. ACIT, Range-7(3)(2) in the case of PCIT Vs. Adani Agro (P) Ltd, 253 taxman 507. Also, support was drawn from the orders of the coordinate benches of the ITAT, Mumbai viz. (i) ACIT Vs. Jay Shree Petro Chemicals Pvt. ltd. [ (Mum); and (ii) ACIT vs. Iqbal M. Chagla (ITA No. 877/Mum/2013] (Mum). In sum and substance, it was the claim of the ld. A.R that on account of availability of sufficient own funds no disallowance of any part of the interest expenditure was called for in the hands of the assessee.
Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities.
We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. Admittedly, the assessee during the year under consideration was in receipt of exempt dividend income of Rs.39,61,180/-. As against the aforesaid exempt income the assessee had offered a suo moto disallowance under Sec. 14A in respect of direct interest expenses amounting to Rs.93,20,329/-. As is discernible from the records, the A.O pursuant to the directions of the DRP had reworked the disallowance under Sec.14A r.w. Rule 8D at Rs.1,07,21,891/-, which comprised of viz. (i) U/rule 8D (2)(i): Rs. 93,20,329/-; and (ii) U/rule 8D(2)(iii): Rs.14,01,562/-.
As can be gathered on the basis of the contentions advanced by the ld. A.R before us, we find, that the latter had tried to impress upon us that as the assessee company had sufficient self owned funds for making investments in the exempt income yielding assets, therefore, no disallowance of any part of the interest expenditure was called for in its hands. Admittedly, the assessee had for the very first time assailed the disallowance under Sec.14A of any part of the interest expenditure, for the reason, that it had sufficient self owned funds that justified the investments made in the exempt income yielding assets. Although the assessee had raised the aforesaid fresh claim before us, however, as the same is based on the facts already available on record, therefore, the same merits to be admitted on our part. Our aforesaid view is fortified by the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. Pruthvi Brokers Shareholders Pvt. Ltd. (2012) 349 ITR 336 (Bom). Insofar the aforesaid contention of the ld. A.R is concerned, we are principally in agreement with the same. As observed by the Hon‟ble High Court of Bombay in CIT Vs. HDFC Bank (2014) 366 ITR 505
7 M/s PHL Fininvest Pvt. Ltd. Vs. ACIT, Range-7(3)(2)
(Bom), where the assesse‟s capital, profit reserves, surplus and current account deposits are higher than the investments in tax free securities, it would have to be presumed that the investment made by the assessee was out of the interest free funds available with it and no disallowance on the said count would be warranted under Sec. 14A of the Act. The aforesaid view taken by the Hon‟ble High Court had thereafter been reiterated in HDFC Bank Ltd. Vs. Dy.CIT (2016) 383 ITR 529 (Bom). At this stage, we may herein observe that the Hon‟ble High Court while concluding as hereinabove had observed that where funds are available both interest free and interest bearing, then there would be a presumption that the investment had been made out of the interest free funds available with the assessee. Rather, the Hon‟ble High Court of Bombay in PCIT (Central) Vs. Ashok Apparels (P) Ltd. (2019) 264 taxman 50 (Bom) had observed that where the revenue had failed to establish that interest free funds were utilised for making investments in exempt income yielding assets, no disallowance under Sec. 14A could be made. As such, we are in agreement with the contentions advanced by the ld. A.R that no disallowance in respect of any part of the interest expenditure would be called for under Sec. 14A, if in case, the assessee is able to establish that it had sufficient interest free funds for making such investments. However, the aforesaid claim of the assessee cannot be accepted on the very face of it and would require verification. Accordingly, in all fairness we herein restore the matter to the file of the A.O who shall verify as to whether the aforesaid claim of the assessee that it had sufficient self owned funds which would justify the investments made in the exempt income yielding assets is in order, or not. In case, the assesses capital, profit reserves, surplus and current year deposits are found higher than the investments made in the tax free securities, therein it shall be presumed that the investments to the said effect were made by the assessee out of the interest free funds available with it and no disallowance under Sec.14A to the said extent would be warranted in its hands.
We shall now advert to the contention of the ld. A.R that as the total indirect expenses incurred by the assessee aggregated to Rs.1,40,000/- (excluding audit/fees/charges of Rs.58,989/-), therefore, the disallowance insofar the administration expenses attributable to earning of the exempt dividend income could not have exceeded the said amount. As observed by us hereinabove the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) in respect of the administrative expenses as had been worked out by the A.O as per the machinery provision amounted to Rs.14,01,562/-. It is the claim of the ld. A.R, that as the total administrative
8 M/s PHL Fininvest Pvt. Ltd. Vs. ACIT, Range-7(3)(2) expenses actually incurred by the assessee aggregated to an amount of Rs.1,40,000/- (supra), therefore, the disallowance on the said count could not have exceeded the said amount. We have given a thoughtful consideration to the aforesaid claim of the ld. A.R and are persuaded to subscribe to the same. Under no circumstances can the A.O attribute administrative expenses for earning of tax free income in excess of the total administrative expenditure incurred by the assessee. Our aforesaid view is fortified by the judgment of the High Court of Gujarat in PCIT Vs. Adani Agro (P) P. Ltd. (2018) 253 taxman 507 (Guj). At this stage, we may herein observe that it is not the case of the revenue before us that the amount of administrative expenses incurred by the assessee is in itself in dispute. Accordingly, we are of the considered view that in the backdrop of the aforesaid material fact, the A.O ought to have attributed part of the administrative expenses actually incurred by the assessee towards earning of the exempt dividend income by it. In our considered view, the matter requires to be restored to the file of the A.O, with a direction that the disallowance of administrative expenses out of Rs. 1,40,000/- attributable to earning of the exempt dividend income be worked out on a pro rata basis in the backdrop of the income of the assessee from other operations.
We shall now advert to the claim of the ld. A.R that the A.O had erred in making an addition of the disallowance worked out under Sec. 14A while computing the „book profit‟ of the assessee under Sec.115JB of the Act. It is the claim of the ld. A.R that the A.O was in error in adding a further sum of disallowance under Sec. 14A i.e an amount over and above the addition that was already made by the assessee, for the purpose of computing the „book profit‟ under Sec.115JB of the Act. It is the claim of the ld. A.R that the aforesaid addition made by the A.O had in fact resulted to a double addition. We have perused the computation of total income filed by the assessee and find that it had while working its „book profit‟ under Sec. 115JB had already added the suo moto disallowance of Rs.93,20,329/- that was offered by it under Sec. 14A of the Act. As such, we are in agreement with the claim of the ld. A.R that the separate addition of disallowance under Sec. 14A r.w. Rule 8D by the A.O in the assessment order passed under Sec. 143(3) r.w.s. 144C(13), dated 30.10.2018 had resulted to a double addition in the hands of the assessee. Be that as it may, we are of the considered view that the computation of „book profit‟ as per clause (f) of Explanation 1 to Sec. 115JB(2) is to be made without resorting to the computation format contemplated under Sec. 14A r.w. Rule 8D. Our