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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI INTURI RAMA RAO
O R D E R - Per N.V. Vasudevan, Vice President This is an appeal filed by the assessee against the order dated 1.9.2017 of the CIT(A)-6, Bangalore relating to asst. year 2011-12.
2. The assessee is a company engaged in the business of trading in Aviation Turbine Fuel (ATF). It supplies ATF to domestic as well as international airlines. The assessee came into existence pursuant to joint venture between Mangalore Refinery and Petro Chemical Ltd., (MERPL) and Shell MRPL. In the course of asst. proceedings for asst. year 2011-12, the AO noticed that the assessee had earned dividend income of Rs.2,07,61,748/- (dividend on mutual funds) which was exempt under Chapter III of the Income-tax Act 1961 (‘the Act’). In view of the provisions of sec. 14A of the Act, the AO called upon the assessee to show cause as to why disallowance of expenses incurred to earn tax free income should not be disallowed and added to the total income of the assessee. The assessee submitted that it had not incurred any expenditure to earn tax free income. The assessee submitted that investment in mutual funds which yielded tax free dividend income were made out of assesse’s own funds and, therefore, no disallowance of interest expenditure debited in the profit and loss account can be made as per Rule 8D(2)(ii) of the Income-tax Rules 1962 (Rules). The assessee also submitted that there was no expenditure incurred directly or indirectly to earn the aforesaid exempt income and, therefore, no disallowance of other expenses should be made in terms of Rule 8D(2)(iii) of the Rules. The AO, however disallowed a sum of Rs.2,07,62,657/- u/s 14A for the reason that the assessee failed to show as to how investments were made out of non interest bearing funds. The AO also held that other expenses have to be disallowed in view of the mandate u/s 14A r.w. Rule 8D of the Rules. The AO computed disallowance u/s 14A as follows:-
3. Aggrieved by the aforesaid order of the AO, assessee preferred appeal before the CIT(A). There were 2 submissions made by the assessee before the CIT(A), the first submission was dated 15/3/2016 and the second submission was dated 23/8/2017. These submissions are placed at pages 88 to 99 of the assessee’s paper book. The appeal before the CIT(A) was fixed for hearing on earlier occasion on 24/8/2017. The submission dated 23/8/2017 filed by the assessee were taken cognizance by the CIT(A) as is evident from the dates of hearing set out in the first page of the CIT(A)’s order. In the aforesaid submission, the assessee has pointed out that the details of utilization of borrowed funds on which interest was paid and claimed as expenditure in computing income, were being filed with supporting documents, as was required by the CIT(A) in the personal hearing on 26/7/2017. In the aforesaid submission, the assessee contended as follows:-
“In additions to our paper book filed on March 15, 2015 we hereby submit the documents! Information to substantiate that the amount of working capital loan obtained by the Appellant during FY 2010-11 was used for the purpose of making payment towards its business expenses; and no amount of the loan was used for investing in UTI Mutual Funds. During the year, the Appellant has received working capital loans from Corporation and Kotak Mahindra bank (ING Vysya). Please find attached (as Annexure 1) details of the receipt of working capital loan and utilization towards business operating expenses during FY 2010-11. As a supporting documents, we have enclosed the extract of Corporation bank statements and Kotak Mahindra Bank (ING Vysya) as Annexure 2A and Annexure 2113 respectively. Hence, It cannot be said that loan fund was used for making investments. Given the above, it cannot be said that this loan was used for earning any exempt income (i.e., dividend income from investment in UTI Mutual Funds) and therefore, any interest paid on such loan cannot be disallowed under section 14A. Considering the above facts, the company submits that the Investments were made in UTI Mutual funds are made by utilising its own funds and not from working capital loan and hence disallowance of interest under section 14A is not tenable.”
The assessee also enclosed detailed workings and supporting documents along with submission dated 23/8/2017 and those are placed at pages 100 to 129 of the assessee’s paper book.
The CIT(A) however confirmed the order of the AO by observing that the assessee did not provide any details called for by the AO. Following were relevant observation of the CIT(A)’s order:
“In this context, it is noted that the appellant had not provided details as called for by the AO. The appellant merely shrugged off the matter by claiming that section 14A was not applicable. Therefore the AO's action of invoking Rule 8D and disallowing investments u/s 14A is found to be in order. Reliance is placed on the order of Hon’ble ITAT Mumbai in the case of Asha Lalit Kanodia Vs. Addl. CIT Range-12(2), Mumbai 2016 71 Taxmann.com 84 (Mumbai) Trib. dated 17th February 2016. In the cited case, the Hon'ble ITAT Mumbai held that where assessee claimed that no expenses were incurred to earn exempt dividend income , onus was on assessee to substantiate her claim with her accounts and on failure to do so, disallowance is to be made u/s 14A read with rule 8D. The ground fails. Disallowance is upheld,"
Aggrieved by the order of the CIT(A), the assesee has preferred an appeal before the Tribunal. The grievance of the assessee is projected in the following grounds of appeal:-
Grounds of Appeal The grounds hereinafter taken by the Appellant are without prejudice to one another. A. Disallowance of under section 14A of the Act - Rs. 2,07,62,657 A.1 Non-applicability of section 14A 1. The Learned AG and Hon'ble CIT(A) has erred in law and facts by disallowing an amount of Rs. 20,762,657 under section 14A of the Act, read with Rule 8D of the Income-tax Rules, 1962 ("the Rules").
The Learned AG and Hon'ble CIT(A) has erred in not relying on the judicial precedents wherein it was held that no disallowance is warranted under section 14A of the Act, if there is no actual expenditure incurred.
The Learned AG and Hon'ble CIT(A) ought to have appreciated that the interest cost on borrowed funds are not utilized for investment from which exempt income is earned.
4. The Hon'ble CIT(A) ought to have considered the details and supporting documents submitted during the appellate proceedings.
5. Notwithstanding and without prejudice the above grounds the Hon'ble CIT(A) has erred in confirming the amount of disallowance made by the Learned AG, and ought to have relied on the principles emerged from various judicial precedents, that disallowance under section 14A of the Act would be restricted to an amount of exempt income earned during the year under consideration. A.2 Wrong computation of disallowance under section 14A 1. Notwithstanding and without prejudice to the above, the learned AG has wrongly disallowed an amount of Rs. 20,762,657 instead of Rs. 9,861,700 while computing disallowance under section 14A. 2. The learned AG has erred in considering the average of the total assets as Rs. 32,96,00,000 instead of Rs. 86,07,70,000 while applying the formula prescribed under Rule 8D. B. Non-grant of set off of brought forward losses 1. The learned AO and Hon'ble CIT(A) has erred in not granting set-off of brought forward losses of AY 2009-10 amounting to Rs. 1,816,502 claimed by the appellant in the return of income. C. Levy of Interest under section 234B and 234C of the Act 1. The Ld. AO has erred in levying interest under section 234B at Rs. 2,803,510 instead of Rs. 1,109,472. 2. The interest under section 234B is consequential in nature. 3. The Ld. AO has erred in levying interest under section 234C of the Act at Rs.727,845 without appreciating the law that, interest under section 234C is levied only on returned income and not on assessed income.”
Revised Grounds of Appeal
The grounds hereinafter taken by the Appellant are without prejudice to one another. 1 Disallowance of under section 14A of the Income-tax Act, 1961 ("Act") - Rs. 2,07,62,657 1.1 Non-applicability of section 14A 1.1.1 The Learned AO and Hon'ble CIT(A) has erred in law and facts by disallowing an amount of Rs. 20,762,657 under section 14A of the Act, read with Rule 8D of the Income-tax Rules, 1962 ("the Rules"). 1.1.2 The Learned AO and Hon'ble CIT(A) has erred in not relying on the judicial precedents wherein it was held that no disallowance is warranted under section 14A of the Act, if there is no actual expenditure incurred. 1.1.3 The Learned AO and Hon'ble CIT(A) ought to have appreciated that the interest cost on borrowed funds are not utilized for investment from which exempt income is earned. 1.1.4 The Hon'ble CIT(A) ought to have considered the details and supporting documents submitted during the appellate proceedings. 1.1.5 Notwithstanding and without prejudice the above grounds the Hon'ble CIT(A) has erred in confirming the amount of disallowance made by the Learned AO, and ought to have relied on the principles emerged from various judicial precedents, that disallowance under section 14A of the Act would be restricted to an amount of exempt income earned during the year under consideration. 1.2 Wrong computation of disallowance under section 14A 1.2.1 Notwithstanding and without prejudice to the above, the learned AO has wrongly disallowed an amount of Rs. 20,762,657 instead of Rs. 9,861,700 while computing disallowance under section 14A.
1.2.2 The learned AO has erred in considering the average of the total assets as Rs. 329,600,000 instead of Rs. 860,770,000 while applying the formula prescribed under 2. Non-grant of set off of brought forward losses 2.1 The learned AO and Hon'ble CIT(A) has erred in not granting set-off of brought forward losses of AY 2009-10 amounting to Rs. 1,816,502 claimed by the appellant in the return of income. 3 Levy of Interest under section 234B and 234C of the Act 3.1 The Ld. AO has erred in levying interest under section 234B at Rs. 2,803,510 instead of Rs. 1,109,472. 3.2 The interest under section 234B is consequential in nature. 3.3 The Ld. AO has erred in levying interest under section 234C of the Act at Rs.727,845 without appreciating the law that, interest under section 234C is levied only on returned income and not on assessed income.”
We may mention that as far as ground No.2 raised by the assessee is concerned, it would be appropriate to direct the AO to verify the claim of the assessee for set off of brought forward losses and allow set off in accordance with law. In this regard, we also observe that assessee has in the grounds of appeal raised before the CIT(A) had raised a specific ground regarding the action of the AO in not allowing set off of brought forward losses but the same has not been adjudicated by the CIT(A).
8. As far as ground No.3 is concerned, the facts are similar, in as much as despite specific ground raised by the Assessee regarding wrong computation of interest u/s.234B and 234C of the Act, the same was not adjudicated by the CIT(A). It would be just appropriate for CIT(A) if the AO is directed to charge interest u/s 234B and 234C in accordance with law after due verification of facts and on proper application on the relevant statutory provision.
9. The main ground which needs to be adjudicated is ground No.1 raised by the assessee. As far as ground No. 1 of the assessee is concerned, it is clear that the CIT(A) has not taken note of the written submission filed by the assessee dated 23/8/2017 along with annexure. The ld counsel for the assessee by taking us through the relevant annexure to the written submission dated 23/8/2017 wanted to demonstrate that the borrowed funds on which interest was paid by the assessee was used only for the purpose of business and not to make investment which yielded the tax free income. The ld. DR pointed out that the documents which are annexure to written statement dated 23/8/2017 were not filed before the AO and the assessee therefore ought to have filed along with application for admission of additional evidence in terms of Rule 46A of the Rules. Since the Assessee has not made such application before CIT(A), the same should not be taken cognizance. We are of the view that since the CIT(A) has not made any reference to the written submission dated 23/8/2017, the argument of the ld DR cannot be accepted. Had the CIT(A) made a reference to the written submission dated 23/8/2017 and supporting documents filed along with those submissions and refused to admit those documents as additional evidence, then the plea of the learned DR would be of some substance.
As we have already observed in the written submission dated 23/8/2017, the assessee has specifically referred to the fact that the CIT(A) in the earlier hearing had directed the assessee to file the documents which were being filed along with the written submission. In terms of Rule 46A(4), the CIT(A) has power to call upon the assessee to produce certain documents with a view to enable him to dispose off the appeal or for any other substantial cause. Since the submissions have not taken cognizance of CIT(A), we are of the view that it would be just an appropriate to set aside the order of the CIT(A) and remand the issue of disallowance u/s 14A of the Act for fresh consideration by the CIT(A) after affording opportunity of being heard to the assessee on the admissibility of additional evidence filed by the assessee before the CIT(A) in accordance with law and thereafter adjudicate on the issue of disallowance u/s.14A of the Act. The grounds of appeal are treated as allowed for statistical purposes.
In the result, the appeal of the assessee is treated as allowed for statistical purposes.
Pronounced in the open court on this 16th day of November, 2018.