TAMILNADU POWER FINANCE & INFRASTRUCTURE DEVELOPMENT CORPN LTD.,CHENNAI vs. ACIT CORPORATE CIRCLE 3(1), CHENNAI

The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-11, Chennai in ITA No.60/18-

The assessee, M/s.Tamilnadu Power Finance & Infrastructure Development Corporation Limited, is engaged in the business of Financial Activities & creating infrastructure facilities and is owned by Government of Tamil Nadu. The assessee is in the business for more than a decade with a primary object of mobilizing retail source in the form of public deposits and generates the same for infrastructure investment in the State of Tamilandu, in general and in particular, to the activities of Tamilnadu Electricity Board. While making the assessment for assessment year 2016-17, the A.O. found that the assessee has received a dividend of ₹.1,67,16,352/- from Neyeli Lignite Corporation and claimed the same an an exempt income. In the computation of total income, the assessee itself voluntarily disallowed ₹.17,91,038/- towards expenditure disallowable under Section.14A on earning the exempted income. While making the assessment, the A.O. re-worked the disallowance under Section.14A r.w.Rule 8D at ₹.3,17,86,479/-. However, restricted to an extent of dividend income of ₹.1,67,16,352/- applying the decision of the Apex Court in the case of Pr.C.I.T,Patiala Vs. State Bank of Patiala in (2018) 99 Taxmann.com. 286(SC) dated 08.11.2018. Aggrieved with the order of the A.O., the assessee filed an appeal before the learned CIT(A). The learned CIT(A) enhanced the disallowance from ₹.1,67,16,352/- to ₹.31,78,65,479/-. Aggrieved, the assessee filed this appeal before the Tribunal.

The Ld. A.R. submitted that while making the assessment, the A.O. has not made any disallowance under Rule 8D(i) of Income Tax Rules,1962. However, under Rules 8D(ii), he arrived disallowance at ₹.3,35,77,517/-. After deducting the disallowance voluntarily made by the ₹.17,91,038/-, assessee at he arrived the disallowance at ₹.31,78,65,479/-. Before the learned CIT(A), the assessee pleaded that the assessee voluntarily disallowed ₹.17,91,038/- as an expenditure incurred for earning tax exempt income as per Clause (2)(iii) of Rule 8D, though the assessee has not incurred any expenditure. Further, the assessee submitted that on the date of investment ₹.16,888.72 lakhs was outstanding as a general reserves and the investment was made from assessee’s own funds(from general reserve). The A.O. has not commented upon the correctness or otherwise of the assessee’s method of arriving the disallowance or its quantification. Therefore, the A.O. has not provided any reason for his computation. When he is not satisfied with the said working of the assessee and terms it as incorrect then he could proceed to re-work the disallowance under Section.14A r.w.Rule 8D based on objective criteria and cogent reasons. It was also pleaded that the interest expenditure incurred by the assessee at 15,63,90,01,000/- is directly, wholly and exclusively attributable to the income earned on financing operations and the assessee has not made any investment out of borrowed funds, to earn any tax exempted income. Therefore, the A.O. should not have considered this interest expenditure under Rule 8D(ii), which was incurred wholly and exclusively for earning income from financing operations. Further, the assessee brought to the notice of the learned CIT(A) that this Tribunal in assessee’s own house for the assessment years 2010-11 & 2011-12 in I.T.A. No. No.1813/Mds/2014 dated 19.02.2016 and dated 24.03.2016 held that the first and second limb of Rule 8D(ii) is not applicable and under the third limb, an amount equal to 0.5% of the average value of the investment, income from which does not or shall not form part of total income as appearing in the balance sheet of the assessee on the first day and the last day of the previous year, has to be considered. In accordance with such decision only, the assessee has arrived out the disallowances quantified by it. However, the learned CIT(A) without considering the assessee’s plea, enhanced the disallowances. Therefore, the Ld. AR pleaded that the assessee’s appeal may be allowed.

Per contra, Ld. D.R. supported the order of the learned CIT(A).

We have considered the rival submissions and gone through the relevant materials. It is clear from the above assessment order that the A.O. has recorded that the assessee has debited interest expenses in the books of accounts and the assessee has been following the mixed funds accounting i.e. using its own funds and borrowed funds. On that principle, the A.O. has proceeded to make the disallowance. It is also clear that the assessee has brought to the notice of the learned CIT(A) that it has incurred interest expenditure of ₹.1563,93,01,000/-, but it is directly wholly and exclusively attributable to the income earned on financing operations and it has not made any investments out of borrowed funds to earn any tax exempt income. Further, the assessee has also submitted that as on the date of investment ₹.16,888.72 lakhs was outstanding as general reserve in the assessee’s books and hence, the investment was made from own funds (general funds), therefore, disallowance under Rule 8D(ii) is not warranted. It appears from the order of the lower authorities that this issue has not been examined properly. It is clear from the order of the Tribunal in the earlier years that a finding is recorded that the assessee has not incurred any expenditure by way of interest. However, during this assessment year, the assessee itself is claiming that it has incurred an interest expenditure of ₹.15,63,93,01,000. Therefore, we are of the view that the fact and associated circumstances require examinations. Hence, we remit this issue to the file of A.O. for a fresh examination as to (i) whether the assessee’s claim that its impugned investment was made out of the own funds (general reserve) etc is a fact, and (ii) whether the assessee’s claim that the interest incurred at ₹.15,63,93,01,000/- is directly, wholly and exclusively attributable to the income earned on financing operations is a fact. If both the claims of the assessee are found correct, then assessee’s claim that no disallowance could be made under Section.14A r.w.Rue8D(ii) has to be allowed.

In the result, the appeal of the assessee is allowed for statistical purposes.