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Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI INTURI RAMA RAO & SHRI DUVVURU RL REDDY
PER INTURI RAMA RAO, ACCOUNTANT MEMBER:
This is an appeal filed by the Revenue directed against the Order of the learned Commissioner of Income Tax (Appeals)-6, Chennai (hereinafter called as ‘CIT(A)’) dated 22.02.2019 for the assessment year 2014-15.
2 -: 2. The Revenue raised the following grounds of appeal: “1. The Order of the learned Commissioner of Income Tax (Appeals) is contrary to the Law and facts of the case.
1. The CIT(A) erred in directing the AO to modify the disallowance ufs.14A by disallowing 0.5% of the average value of investment, the income from which does not form part of the total income.
2. The CIT(A) erred in restricting the disallowance u/s.14A when the disallowance has to be computed as per Rule 8D(2)(i)(ii)&(iii) of the IT Rules.
3. The CIT(A) erred in directing the AC to modify the disallowance u/s.14A made under Rule 8D without considering the facts that the assessee had mixed bag of funds and huge investments were made in assets yielding exempt income.
4. The CIT(A) ought to have considered the CBDT Circular No.5/2014 wherein it is clarified that, disallowance u/s.14A r.w.r. 8D has to be made even if the taxpayer in a particular year has not earned any exempt income.
5. The CIT(A) ought to have appreciated the fact that a proposal in the case of M/s. Chettinadu Logistics Pvt Ltd has been sent to the Pr. DGIT, (L&R), New Delhi for filing of review petition before the Hon’ble Supreme Court vide C.No.450/1/PCIT(C)-1/2017-18 dated 20.12.2018 by the DGIT (Inv) Chennai.
6. The CIT(A) failed to appreciate the fact that the AD has correctly made disallowance u/s.14A of the Act, which is added back to the income of the assessee while computing the book profit u/s. 11 5JB of the Act.
7. For these and other grounds that may be adduced at the time of hearing, it is prayed that the Order of the learned Commissioner of Income Tax (Appeals) be set aside and that of the Assessing Officer be restored.”
The brief facts of the case are as under:
The respondent-assessee namely M/s. Ennore Tank Terminals Pvt. Ltd., is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of providing services and facilities such as berthing of vessels, pipeline connectivity,
3 -: storage and handling of liquids and liquefied gases. The return of income for the AY 2014-15 was filed on 21.11.2014 declaring as ‘Nil” income after set off brought forward losses of Rs. 17,67,02,595/-. Against the said return of income, the assessment was completed by the Dy. CIT, Corporate Circle-2(1), Chennai (hereinafter called “AO”) vide order dated 17.12.2016 passed u/s. 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) at total income of Rs. 22,36,05,402/- after making certain disallowances, which includes disallowance of Rs. 3,35,56,340/- u/s. 14A of the Act with which we are concerned with herein.
Being aggrieved by the above addition, an appeal was preferred before ld. CIT(A) challenging the disallowance u/s. 14A of the Act on the ground that no disallowance of interest u/s. 14A of the Act can be made, as the investments are made out of own funds and further contested that the amount of disallowance cannot exceed the exempt income of Rs. 1,00,20,297/- placing reliance on the decision of Hon'ble Supreme Court in the case of PCIT vs. State Bank of Patiala [2018] 99 taxmann.com 286 (SC). The ld. CIT(A) considering the fact that the own funds are more than the investments made by the respondent-assessee, he held that no disallowance of interest can be made following the principle that where the interest free funds are available with the assessee are sufficient to meet its investment, it should be presumed that investments are made
4 -: out of the interest free funds available and not out of the borrowed funds.
Accordingly, the ld. CIT(A) directed the deletion of addition made on account of interest under the limbs (i) or (ii) of r. 8D of the Income Tax Rules, 1962 (herein after called “the Rules”) of Rs. 3,14,63,230/-.
Further, the ld. CIT(A) also directed the AO to restrict the amount of disallowance of s. 14A of the Act to the extent of exempt income following the decision of Hon’ble Jurisdictional High Court in the case of PCIT Vs. State Bank of Patiala, which is affirmed by the Hon'ble Supreme Court by dismissal of SLP. Being aggrieved by the decision of ld. CIT(A), the respondent-assessee is in appeal before us in the present appeal challenging the correctness of the decision of ld. CIT(A).
It is contended that the ld. CIT(A) ought not to have deleted the addition under the limb (i) & (ii) of r. 8D of the Rules. In view of the fact that in the case of mixed funds, no disallowance of interest be made. It is further contended that the ld. CIT(A) ought not to have directed the AO to restrict the amount of disallowance u/r. 8D(2)(i)(ii) & (iii) of the Rules to the extent of exempt income following the decision of the Hon’ble High Court of Madras in the case of Chettinadu Logistics Pvt. Ltd., which is confirmed by the Hon'ble Supreme Court by dismissal of SLP as the Revenue is challenging the decision before the Hon'ble Supreme Court in review petition which is pending disposal. It is further contended that 5 -: the ld. CIT(A) ought not to have deleted the amount of disallowance u/s. 14A of the Act from book profits for the purpose of computing the tax liability u/s. 115JB of the Act. On the other hand, the ld. AR placed reliance on the orders of ld. CIT(A) and further submitted that the only amount of disallowance u/s. 14A of the Act under the limb (iii) of r. 8D of the Rules can be made, which is less than the exempt income.
We heard the rival submissions and perused the material on record. The solitary issue in the present case relates to the disallowance u/s. 14A of the Act. Admittedly, the respondent-assessee company earned exempt income of Rs. 1,00,20,290/- therefore, the provisions of s.
14A of the Act triggers and the amount of disallowance has to be computed as prescribed u/r. 8D of the Rules. As regards to the amount of disallowance under the limb (i) & (ii) of r. 8D of the Rules now it is settled position of law that where the investments are made out of the mixed funds available with the assessee i.e., own funds and borrowed funds presumption should be drawn that interest free funds are utilized for the purpose of making the investments in the light of law laid down by the Hon'ble Supreme Court in the case of CIT Vs. Reliance Industries Ltd. 410 ITR 666 (SC) and the several High Courts decisions. The ld. CIT(A) considering the financial statements of the respondent-assessee company held that free own funds i.e., in the form of share capital is Rs.
6 -: 55,25,00,000/- is sufficient to make investments of Rs. 47,69,21,168/- and accordingly, following the principles enunciated by Hon'ble Supreme Court supra, held that no disallowance under the limb (i) & (ii) r. 8D of the Rules can be made. The decision of the ld. CIT(A) is based on the proper appreciation of the material on record and in consonance with the law laid down by the Hon'ble Supreme Court in the case of Reliance Industries Ltd., supra, and therefore, we do not find any fallacy in the reasoning of the ld. CIT(A). Accordingly, grounds of appeal Nos.2, 3 & 4 stand dismissed.
Ground of appeal No.5 challenges the decision of ld. CIT(A) to restrict the amount of disallowance to the extent of exempt income. We find from the record that the amount of disallowance computed under the limb (iii) of r. 8D of the Rules is lower than the amount of exempt income.
The finding of the ld. CIT(A) that the amount of disallowance cannot exceed the exempt income is inconsonance with the ratio laid down by the Hon'ble Supreme Court in the case of CIT vs. Chettinad Logistics Pvt. Ltd. 80 taxmann.com 221 (SC). However, in the light of the fact that the amount of disallowance computed is lower than the exempt income, we direct the AO to adopt amount availed by computing the disallowance under the limb (iii) of r. 8D of the Rules by considering only the value of the investments which yielded exempt income alone in the light of the 7 -: decision of the Special Bench of the Tribunal in the case of ACIT Vs. Vireet Investments Pvt. Ltd. 2017-TIOL-923-ITAT-Del-SB.
Even the finding of the ld. CIT(A) that the amount of disallowance u/s. 14A of the Act should not be added back to the book profits for the purpose of computing tax liability is in accordance with decision of the Special Bench of Tribunal in the case of Vireet Investments Pvt. Ltd., supra. Therefore, we do not find any merit in the appeal filed by the Revenue.
In the result, appeal filed by the Revenue is dismissed.
Order pronounced on the 20th day of November, 2019 in Chennai.