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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI ARUN KUMAR GARODIA & SHRI LALIET KUMAR
&980/Bang/2018 Assessment Years :2013-14 & 2014-15 M/s. Manipal Integrated Services Pvt. Ltd., The Assistant No. 24/1, 15th Floor, J W Commissioner of Marroitt, vs. Income Tax, Vittal Mallya Road, Circle – 4 (1) (2), Bangalore – 560 001. Bangalore. PAN: AADCM8103A APPELLANT RESPONDENT Appellant by : Shri S.K. Tulsiyan, Advocate Respondent by : Smt. Kabila H, JCIT (DR) Date of hearing : 27.03.2019 Date of Pronouncement : 05.04.2019 O R D E R Per Shri A.K. Garodia, Accountant Member Both these appeals are filed by the assessee and these are directed against two separate orders of ld. CIT(A)-4, Bangalore both dated 29.12.2017 for Assessment Years 2013-14 and 2014-15. Both these appeals were heard together and are being disposed of by way of this common order for the sake of convenience.
The grounds raised by the assessee for Assessment Year 2013-14 in are as under. “1) That the order passed by the Ld. C.I.T.(A) to the extent it is prejudicial to the interests of the appellant is arbitrary, erroneous, without proper reasons, invalid and bad in law. 2a) That the Ld. C.I.T.(A) on the facts and circumstances of the case erred in law in having upheld the disallowance of Rs.1,05,65,349/- made u/s. I 4A r.w.r. 8D of the Rules in spite of the fact that alleged satisfaction was derived purely on suspicion that the assessee must have incurred administrative and other expenses without establishing any direct nexus between expenditure incurred and earning of dividend income and, therefore, no real satisfaction was recorded on the basis of the accounts as required by law. (b) That the Ld. C.I.T.(A) erred in having endorsed the alleged ITA Nos. 979 & 980/Bang/2018 Page 2 of 7 satisfaction of the A.O. to attract provisions of s. I 4A r.w.r. 8D(2)(ii) of the Rules that the entire loan amount was invested in mutual funds and hence interest of Rs.92,71,233/- on such loan represented direct expenditure to earn exempt income in spite of the fact that the loan was received and utilized for the project at Jaipur and investments in shares/MF were out of own funds/internal resources. (c) That the Ld. C.I.T.(A) further erred in upholding the disallowance of Rs.12,94,1 16/- u/s. 14A r.w.r. 8D(2)(iii) of the Rules being 0.5% of average value of investment of Rs.51,76,46,752/-which was against the decision of Hon. ITAT, Kolkata in REI Agro Ltd. vs. DCIT (244 ITD 141), duly affirmed by the Hon. Calcutta High Court vide its order dated 19.04.2014 in ITAT No.220 of 2013 holding that the disallowance u/s. 14A should be restricted only to the investment which yielded dividend income. 3) That the Ld. C.I.T.(A) erred in having upheld the disallowance of Rs.5,50,000/- incurred on ROC fees for increase in authorized share capital holding the same as capital in nature, whereas as per settled law by virtue of several judicial pronouncements such fees were held deductible as revenue expenditure. 4) That the Ld. C.I.T.(A) erred in having upheld the disallowance of legal fees Rs.10,00,000/- on the alleged ground that the said expenditure was in relation to the purchase of the property in spite of the fact that the said expenditure was incurred for running of the business and hence allowable as revenue expenditure. 5) That, therefore, as the order of Ld. C.I.T.(A) on the above issues suffers from illegality and is devoid of any merit, the same should be quashed and your appellant be given such relief(s) as prayed for. 6) That the appellant craves leave to amend, alter, modify, substitute, add to, abridge and/ or rescind any or all of the above grounds.”
Similarly, the grounds raised by the assessee for Assessment Year 2014-15 in are as under. “1) That the order passed by the Ld. C.I.T.(A) to the extent it is prejudicial to the interests of the appellant is arbitrary, erroneous, without proper reasons, invalid and bad in law. 2a) That the Ld. C.I.T.(A) on the facts and circumstances of the case erred in law in having upheld the disallowance of Rs.1,40,10,214/- made u/s. 14A r.w.r. 8D of the Rules in spite of the fact that alleged satisfaction was derived purely on suspicion that the assessee must have incurred administrative and other expenses without establishing any direct nexus between expenditure incurred and earning of dividend income and, therefore, no real satisfaction was recorded on the basis of the accounts as required by law.
(b) That the Ld. C.I.T.(A) erred in having endorsed the alleged satisfaction of the A.O. to attract provisions of s.14A r.w.r. 8D(2)(ii) of the Rules that part of the loan amount was invested in mutual funds and hence proportionate interest of Rs.1,21,36,406/- on such loan represented direct expenditure to earn exempt income in spite of the fact that the loan was received and utilized towards the construction of assets and investments in shares/MF were out of own funds/internal resources. (c) That the Ld. C.I.T.(A) further erred in upholding the disallowance of Rs.18,73,808/- u/s. 14A r.w.r. 8D(2)(iii) of the Rules being 0.5% of average value of investment of Rs.37,47,61,713/-which was against the decision of Hon. ITAT, Kolkata in REI Agro Ltd. vs. DCIT (244 ITD 141), duly affirmed by the Hon. Calcutta High Court vide its order dated 19.04.2014 in ITAT No.220 of 2013 holding that the disallowance u/s. 14A should be restricted only to the investment which yielded dividend income. 3) That, therefore, as the order of Ld. C.I.T.(A) on the above issues suffers from illegality and is devoid of any merit, the same should be quashed and your appellant be given such relief(s) as prayed for. 4) That the appellant craves leave to amend, alter, modify, substitute, add to, abridge and/ or rescind any or all of the above grounds.”
At the very outset, it was submitted by ld. Counsel of the assessee that assessee does not want to press its appeal for Assessment Year 2014-15 in ITA No. 980/Bang/2018. Accordingly, this appeal of the assessee is dismissed as not pressed.
Regarding the appeal of the assessee for Assessment Year 2013-14 in , he submitted that ground nos. 1, 5 and 6 are general and ground nos. 3 and 4 are not pressed. Accordingly these grounds are rejected as not pressed.
In respect of ground no. 2, he submitted that out of total disallowance made by the AO u/s. 14A of Rs. 1,05,65,349/-, disallowance of Rs. 92,71,233/- is on account of disallowance of direct interest expenses pertaining to tax exempt investments and Rs. 12,94,116/- is on account of disallowance out of administrative expenses @ 0.5% of average amount of tax exempt investments. He submitted that the disallowance made by the AO of Rs. 92,71,233/- out of interest expenditure should be deleted because the assessee is having sufficient interest free own funds of Rs. 31,46,00,987/- & 980/Bang/2018 Page 4 of 7 as share capital and reserves and surplus as can be seen in the balance sheet for the year ending 31.03.2013 appearing on page no. 6 of the paper book. Thereafter he submitted that in addition to this, the amount of long term borrowings of Rs. 79,99,90,000/- includes an amount of Rs. 49,99,90,000/- in respect of Compulsorily Convertible Debentures (CCDs) issued in the present year and the same is interest free. In this regard, he submitted that in the P&L account appearing on page no. 7 of the paper book, an amount of Rs. 8,20,01,121/- has been debited as finance costs, the details of which are available in Schedule 23 available on page no. 22 of the paper book and from the same, it can be seen that the interest payment is on account of interest on term loans Rs. 1,38,82,126/-, loan processing charges of Rs. 6,80,23,363/- and bank charges Rs. 95,632/- total Rs. 8,20,01,121/-. Hence, this is admitted position that no interest is paid on Compulsory Convertible Debentures. He placed reliance on the judgment of Hon'ble Karnataka High Court rendered in the case of CIT and Another Vs. Microlabs Ltd. as reported in [2016] 383 ITR 490 (Kar) and submitted that this was held by Hon'ble Karnataka High Court in this case that when investments are made out of a common pool of funds and non-interest bearing funds were more than the investments in tax-free securities, no disallowance of interest expenditure u/s. 14A of the IT Act, 1961 can be made. He also pointed out that the investments is only of Rs. 51,76,46,752/- and hence, total interest free funds available with the assessee is more than the investments in tax free securities.
As against this, the ld. DR of revenue supported the orders of authorities below. In particular, our attention was drawn to Para 4.3 of the assessment order and it was submitted by her that this is the finding of the AO that the entire amount of term loan of Rs. 30 Crores was used for making investments in mutual funds. She submitted that under these facts, disallowance made by the AO out of interest expenditure should also be confirmed.
Regarding the disallowance of Rs. 12,94,116/- u/s. 14A r.w.r. 8D(iii) of IT Rules being 0.5% of average investment value, the ld. AR of assessee & 980/Bang/2018 Page 5 of 7 submitted that this disallowance may be confirmed. The ld. DR of revenue supported the assessment order.
We have considered the rival submissions. We find that as per Para 4 of the assessment order, it is stated by the AO that assessee has made investment of Rs. 51,76,46,752/- as per the balance sheet for the year ending 31.03.2013. In order to examine the applicability of this judgment of Hon'ble Karnataka High Court cited by ld. AR of assessee having been rendered in the case of CIT and Another Vs. Microlabs Ltd. (Supra), we examine the amount of interest free funds available with the assessee and compare it with investment in tax free securities. We find that assessee was having interest free own funds of Rs. 31,46,00,987/- in the form of share capital and reserves and surplus. In addition to that, the assessee is also having fund of Rs. 49,99,90,000/- in the form of CCDs on which no interest is being paid by the assessee. If we add up these two amounts, it is seen that total interest free funds available with the assessee is of Rs. 81,45,90,987/- as against the investment in tax free securities of Rs. 51,76,46,752/-. Hence interest free funds available with the assessee is more than investment in tax free securities. In the light of these facts, now we examine the applicability of the judgment of Hon'ble Karnataka High Court rendered in the case of CIT and Another Vs. Microlabs Ltd. (supra). In this case, it was held by Hon'ble Karnataka High Court that when investments are made out of a common pool of funds and non-interest bearing funds were more than the investments in tax-free securities, no disallowance of interest expenditure u/s. 14A of the IT Act, 1961 can be made. No contrary judgment was cited by the learned DR of the revenue and therefore, we are duty bound to follow and apply this judgment cited by the learned AR of the assessee. We find that this judgment is squarely applicable in the present case and respectfully following the same, we hold that in the facts of the present case, it is to be presumed that the investment was out of interest free funds available with the assessee and therefore, no disallowance u/s 14A r.w.r. 8D (ii) can be made out of interest expenditure.
This view of us finds support from a judgment of Hon’ble apex court rendered in the case of CIT vs. Reliance industries limited in Civil Appeal & 980/Bang/2018 Page 6 of 7 No. 10 to 13 of 2019 dated 02.01.2019, copy kept on record. In this case, it was noted by Hon’ble apex court that this is a finding of the tribunal that the interest free funds available to the assessee were sufficient to meet its investment and hence it could be presumed that the investment were made from the interest free funds available with the assessee. It was held by Hon’ble apex court that this is pure question of fact and since Hon’ble High Court in that case has decided the issue in favour of the assessee on the basis of finding of fact recorded by the tribunal, no interference is called for in the judgment of High court on this issue. Hence, it is seen that this judgment of Hon’ble apex court rendered in the case of CIT vs. Reliance industries limited (Supra) is on the same line as the judgment of Hon'ble Karnataka High Court rendered in the case of CIT and Another Vs. Microlabs Ltd. (supra).
Therefore, respectfully following this judgment of Hon'ble Karnataka High Court, we decide this issue in favour of the assessee and accordingly the disallowance of Rs. 92,71,233/- u/s. 14A r.w.r. 8D(2)(ii) of IT Rules, 1962 is deleted and accordingly ground no. 2(b) is allowed. Regarding the second disallowance of Rs. 12,94,116/- u/s. 14A r.w.r. 8D(2)(iii) of IT Rules, 1962 being 0.5% of average investment, we hold that there is no infirmity in the order of CIT (A) in that regard because learned AR of the assessee has also fairly conceded in that regard. This disallowance of Rs. 12,94,116/- u/s. 14A r.w.r. 8D(2)(iii) of IT Rules, 1962 being 0.5% of average investment is upheld and accordingly, ground no. 2(c) is rejected.
In the result, the appeal of the assessee for Assessment Year 2013-14 is partly allowed.
In the combined result, the appeal of the assessee for Assessment Year 2013-14 is partly allowed and appeal for A. Y. 2014-15 is dismissed. Order pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (LALIET KUMAR) (ARUN KUMAR GARODIA) Judicial Member Accountant Member Bangalore, Dated, the 05th April, 2019. /MS/