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Income Tax Appellate Tribunal, ‘A’ BENCH, BENGALURU
O R D E R Per N.V. VASUDEVAN, VP: is the appeal by the assessee while ITA No.3067/Bang/2018 is the appeal by the Revenue. Both these appeals are directed against the order dated 17/8/2018 of the CIT(A)-5, Bengaluru, relating to assessment year 2009-10.
The common issue for consideration in both these appeals is with regard to disallowance made by the AO of the expenses incurred in earning income which does not form part of the total income under Chapter III of the Income-tax Act,1961 ['the Act' for & 3067/Bang/18 Page 2 of 10 short] in accordance with provisions of section 14A of the Act r.w. rule 8(D)(2)(ii) and 8D(2)(iii) of the Income Tax Rules. 1962 (‘the Rules’ for short).
The assessee is a company engaged in the business of manufacturing and trading in electronic goods. In the course of assessment proceedings u/s 143(3) of the Act, the AO noticed that the assessee had claimed exemption in respect of dividend income from shares and mutual funds u/s 10(34) of the Act of a sum of Rs.84,83,798/-. The AO also noticed that in the Profit & Loss account of the assessee, the Assessee had debited expenditure to the tune of Rs.1,65,08,941/-. He was of the view that expenditure incurred by the assessee for earning income which is claimed as exempt should be disallowed in accordance with section 14A of the Act read with rule 8D of the Rules.
The AO noticed that total investments for the year ending 31/3/2009 were Rs.60,76,47,134/- out of which an amount of Rs.51,48,12,527/- was invested in shares and mutual funds, and balance sum of Rs.7,81,17,583/- was invested in immovable properties. In the aforesaid scenario, the AO arrived at disallowance of expenses u/s 14A r.w. rule 8D at a sum of Rs.32,31,779/-. The manner in which this sum was computed by the AO is not set out in the order of assessment.
The order of the AO was confirmed by the CIT(A) against which the assessee preferred an appeal before the Tribunal in ITA & 3067/Bang/18 Page 3 of 10 No.1312/Bang/2013 and the Tribunal, by order dated 12/08/2016 remanded the issue of disallowance u/s 14A to the AO for fresh adjudication. In the proceedings pursuant to the order of the Tribunal, the AO enhanced the addition u/s 14A of the Act from Rs.32,31,779/- to Rs.1,69,71,613/- comprising of disallowance of interest under rule 8D(2)(ii) at a sum of Rs.1,41,51,125/- and under rule 8D(2)(iii) at a sum of Rs.28,20,488/-. The manner in which the aforesaid disallowance was computed by the AO was as follows: & 3067/Bang/18 Page 4 of 10 6. Aggrieved by the aforesaid order, the assessee preferred an appeal before the CIT(A). The CIT(A) upheld the order of the AO in principle. But held that expenditure that should be disallowed u/s 14A of the Act cannot exceed the exempt income and accordingly directed the AO to restrict the addition u/s 14A of the Act to the extent of exempt income earned by the assessee during the previous year.
Aggrieved by the order of the CIT(A) confirming the addition made u/s 14A of the Act to the extent of exempt income earned by the assessee, the assessee has preferred the present appeal before the Tribunal. Aggrieved by the order of the CIT(A) in not sustaining the addition made by the AO, Revenue preferred an appeal before the Tribunal.
We have heard rival submissions and perused the relevant material on record. As far as disallowance u/s 14A r.w. rule 8D(2)(ii) is concerned, plea of the assessee is that it had sufficient funds out of which it made investments in shares which are likely to yield income which is exempt in the form of dividend. To substantiate its case, the learned counsel for assessee has drawn our attention to the balance-sheet of the assessee as on 31/3/2009 to demonstrate the availability of own funds to the extent of Rs.57,47,51,114/-. Our attention was also drawn to the fact that total investment as on 31/3/2009 was Rs.51,48,12,527/- and as on 31/3/2008 the same was Rs.61,33,82,572/-. There was, thus, decrease in investments to the tune of Rs.9,85,70,045/-. Out of investments as on 31/3/2009, & 3067/Bang/18 Page 5 of 10 dividend yielding investments and non-yielding investments are the sum of Rs.23,27,03,595/- and Rs.28,21,08.,931/- respectively. The break-up of total investments of dividend yielding investments and non-dividend yielding investments are given as Annexure-1 to this order. The assessee has also furnished list of secured and unsecured creditors during the previous year which are as follows:
It is thus clear from the above details that the assessee had own funds which are interest-free to the extent of Rs.57,47,51,114/- whereas dividend yield investments as on 31/3/2009 were only Rs.23,27,03,595/-. Perusal of the chart annexed to this order would also show that investments and dividend yielding shares have come down from 31/3/2008 and investments in non-yielding instruments & 3067/Bang/18 Page 6 of 10 have remained same from 31/3/2008. It can therefore be safely presumed that the assessee had own surplus funds which were more than investments in dividend yielding shares. The law by now is well-settled that if available interest-free funds are much more than investments in dividend yielding shares, then there can be no disallowance under rule 8D(2)(ii) of the Act. In the case of CIT Vs. HDFC Bank Ltd. [2014] 49 taxmann.com 335 (Bombay) it was held where assessee's own funds and other non interest bearing funds were more than investment in tax free securities, no disallowance of part of interest payments under section 14A of the Act can be made. In light of the above factual and legal position, we are of the view that disallowance of interest under rule 8D(2)(ii) cannot be sustained and the same is directed to be deleted.
9. As far as disallowance under rule 8D(2)(iii) is concerned, the AO has disallowed a sum of Rs.28,28,488/-. The learned counsel for assessee drew our attention o page 24 of the paper book which contains the total expenditure debited in the profit & loss account of the assessee. The same is given as Annexure-2 to this order. Perusal of the same shows that total expenditure incurred by the assessee debited in the profit & loss account is only sum of Rs.28,20,488/- and the entire expenditure has been disallowed by the AO.
10. We have considered the expenditure debited in the profit & loss account and we find that only bank charges of Rs.35,676/-, remuneration to auditors of Rs.8500/-, salary and wages of & 3067/Bang/18 Page 7 of 10 Rs.2,46,000, travelling and conveyance of Rs.60,000/-, vehicle maintenance of Rs.1,81,816- are expenses which are general in nature and all other expenses are attributable to the activities other than activity of investment in shares which are likely to yield exempt income. Therefore, only the aforesaid expenses can be considered for disallowance under rule 8D(2)(iii). We may also mention here that the mandate of section 14A of the Act is that the expenditure incurred in relation to income which does not, form part of total income has to be determined having regard to the account of the assessee. Therefore, nexus between expenses sought to be disallowed and earning of dividend income has to be seen before applying the provisions of rule 8D of the IT Rules. In that view of the matter, we direct that disallowance of expenses should be restricted to the items as set out above.
As far as appeal of the revenue is concerned, there is no merit in the appeal because the law, by now is well settled that disallowance u/s 14A of the Act cannot exceed exempt income earned by the assessee.
In the result, the appeal by the assessee is partly allowed. The appeal by the revenue is dismissed.
Order pronounced in the open court on 17th July, 2019.