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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
These Cross appeals are arising out of the order of Commissioner of Income Tax (Appeals)-56, Mumbai [in short CIT(A)], in appeal No. CIT(A)-56/DCIT3(1)(2)/2016-17/127-E vide dated 27.12.2016. The Assessment was framed by the Dy. Commissioner of Income Tax, Circle- 3(1)(2), Mumbai (in short ‘DCIT/ AO’) for the A.Y. 2011-12 vide order dated 20.03.2015 under section 143(3) r.w.s 144(C)(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
2. The first issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of expenses of interest being difference in the rate of interest paid on borrowings and interest charged on short term lending to subsidiary companies. For this Revenue has raised the following ground : - ““(i) On facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs. 5,85,45,509/-made on account of difference in the rate of interest paid on borrowing and the interest charged on Short Term lending to only subsidiary companies without appreciating the fact that the assessee was free to explain the business prudence for such transactions during the course of assessment proceeding."
3. At the outset, the learned Counsel for the assessee took us through the facts of the case from assessment order that the assessee in the preceding years has received loan from Lehman Brothers which has been utilized for giving loans to its subsidiaries and associated companies. According to AO, the rate of interest charged is lower than the interest paid to layman brothers and hence, according to him, the differential interest charged as expense is to be disallowed and added to the returned income of the assessee. The learned counsel for the assessee stated that the AO has relied on the decision of earlier year i.e. AY 2010-11 and for this he observed in Para 5.2 as under: - “'5.2 The aforesaid submissions made by the assessee have been carefully appreciated. However, the same are not found to be acceptable. The issue remains same as in the previous year. Since the facts & circumstances of the case are identical for this year also and there is no material change in the issue involved as compared to the preceding years, the issue is decided on the same lines as was done in A.Y.2010-11. The assessee has on the one hand borrowed loan at a higher rate while it has advanced loan to subsidiary and associate companies at a discounted rate thereby suffering loss under this head. There is no justification for the loss incurred. There is no business prudence in giving loan at a lower rate while taking loan at a higher rate of interest. Therefore, the interest paid to the extent of the differential rate between the borrowings made from Lehman Brothers and the interest charged on the short term lending to wholly owned subsidiary companies is required to be disallowed. Therefore, the loss arising on account of difference between the rate of interest paid to MIs. Lehman Brothers and rate of interest charged from subsidiary companies being the difference in the rate of interest between the borrowings made and interest charged on lendings to the subsidiaries is hereby disallowed. The net disallowance will be Rs.12,25,61,662 x 6.10/12.77 - Rs.58545509 /-.”
4. According to him, the CIT(A) has also relied on the earlier years order for AY 2010-11. The learned Counsel for the assessee now before us filed the copies of Tribunals order in earlier years in 7654/Mum/2011 for AYs 2007-08 and 2008-09, in ITA No.1763/Mum/2013 for AY 2009-10, in ITA No. 6608/Mum/2011 AY 2008-09 vide order dated 14.03.2008, the Tribunal has deleted the disallowance vide Para 10 as under : - “10. We have considered rival contentions and carefully gone through the orders of the authorities below and found from record that assessee advanced loan to wholly owned subsidiaries at interest rate of 9%. AO found that assessee had received funds @13.5% by issuing fully convertible debentures. AO disallowed interest attributable to difference in rate of interest. CIT(A) deleted the same after observing that fund was given to wholly owned subsidiaries which are carrying on same business activities relating to finance and capital market, therefore, following the judicial pronouncements in case of SA Builders (SC), the interest expenditure cannot be disallowed. Furthermore, the judicial pronouncements by Hon'ble Supreme Court in case of Hero Cycles and other decisions of Mumbai Tribunal as stated above supports that no disallowance of interest can be made merely because advance was given at a lower rate of interest or without charging any interest to the wholly owned subsidiaries. In the instant case before us, advance was given to the wholly owned subsidiaries at an interest rate of 9%. Following the proposition of law laid down in the above judicial pronouncements, we do not find any infirmity in the order of ClT(A) for deleting the disallowance of interest so made by the AO..”
The learned Counsel for the assessee also narrated the fact that in this year interest charged from subsidiary is at the rate of 6% as against 9% in earlier years and also received funds from Lehman Brothers at the rate of 12 % as against at the rate of 13.5% in earlier year. When the above order was confronted to the learned CIT DR, Shri R Manjunatha Swamy, he only relied on the assessment order.
After hearing both the sides and going through the orders of the lower authorities also the Tribunal order in earlier years, we respectively following the same, confirm the order of CIT(A) deleting the disallowance of interest. Accordingly, this issue of Revenue’s appeal is dismissed.
The next issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of expenses relatable to exempt income by invoking the provisions of section 14A of the Act read with Rule 8D(2)(ii) of the Rules i.e. disallowance of interest expenses. For this Revenue has raised the following ground No. 2: -
2. On facts and circumstances of the case and in law the Ld CIT(A) erred in deleting the addition of Rs. 19,29,14,802/- made u/s. 14A r. w. Rule 8D(2)(ii), without appreciating the facts that there is no evidence furnished by the assessee to prove that the borrowed funds on which interest is paid by it, are directly attributed to earning of taxable income only."
At the outset, the learned Counsel for the assessee stated that the CIT(A) after considering the availability of funds deleted the addition vide Para 6.3 as under: - “6.3 I have considered the facts of the case, submissions of the appellant and the contentions of the AO. Sub section(1) of section MA of the Act prescribes that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Subsection (2) prescribes that if the assessing officer, having regard to the correctness of the claim of the assessee is not satisfied, he shall determine the amount of expenditure incurred in relation to such income in accordance to the method as maybe prescribed. Sub-section (3) prescribes that the provision of subsection (2) shall also apply to relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income does not form part of the total income. With effect from the assessment year 2008-09, Rule 8D has been introduced, which lays down the method of computation of the expenditure in regard to exempt income for the purpose of disallowance under section 14A. one reads sub-section (3) along with sub-section (2), it simply means that in a case where the AO is not satisfied with the claim of the assessee in respect of the exempt income he shall determine the amount of the expenditure incurred in relation to such income in accordance with the method as prescribed in view of the provisions of sub-section (2). Therefore, since from assessment year 2008- 09, Rule 8D is applicable, the AO shall be free to compute the disallowable expenditure in respect to the exempt income in all such cases, where he is not so satisfied, in an objective manner. It is seen that the appellant has a large portfolio; the average tax free investment held by the Appellant is Rs. 1,147.94 Crores. Against this investment in tax free securities, the appellant has only made a disallowance of Rs.5,72,183/- which obviously is inadequate.
Although the appellant has given a number of arguments based on the facts of its case, still, in- spite of that due to detailed reasons given by AO in the assessment order on pages 6 to 20, it cannot be accepted that the suo moto disallowance offered by the appellant at Rs.5,72,183/- was adequate. Hence, the AO was justified in computing the disallowance tinder Rule 8D r.w.s. 14A of the Act.
The latest decision available on this issue is the judgment of Hon'ble high court in the case of Godrej and Boyce Manufacturing company Ltd [328 ITR 81] wherein the Hon'ble court has held that the dividend income and income from mutual funds etc., are not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of income incurred by the assessee in relation to such income. It has also been held that the provision of Rule 8D of the I.T. Rules 1962 shall apply with effect from assessment year 2008-09. In view of this decision therefore, it is evident that the AO was correct in computing the disallowance as per Rule 8D in respect of the appellant's exempt Income.
The appellant has made a without prejudice claim that for the purpose of calculating disallowance u/s 14A r.w. Rule 8D of the I.T. Rules, investments have been made out of owned funds and interest expenditure has not been incurred in relation to exempt income and relied on the Bombay High Court decision in the case of HDFC Bank. The appellant has also made a without prejudice claim that for the purpose of calculating disallowance u/s 14A r.w. Rule 8D, the net interest expenditure should be considered. During the year under consideration the appellant paid interest of Rs. 14,28,22,407/- and had earned the interest income aggregating to Rs. 1,68,00,60,991/-. Hence, it is contented that the proportionate working of interest towards the earning of exempt income under Rule 8D (2)(ii) of the LT Rules ought to be on the net interest expense (i.e. interest paid less interest earned) which is interest income of Rs. 1,53,72,38,584/-. For this proposition, the appellant has relied upon the ITAT decision in the case of I) Morgan Stanley India Securities Private Limited ii) Trade Apartment Limited iii) Four Dimensions Securities (India) Limited and iv) Karnavati Petrochem Private Limited (all supra).
I have considered the above without prejudice contention of the appellant and agree with the same. Since, the jurisdictional High Court in the case of HDFC Bank held that where owned funds are sufficient to cover the investments, no disallowance of interest is warranted. Also the jurisdictional ITAT in the cases of Morgan Stanley India Securities Private Limited and Four Dimensions Securities (India) Limited (both Supra), has held that for the purposes of disallowances under Rule 80(2)(ii), the net interest expenditure should be considered, the same has to be followed. Since in the present case there is net interest income of Rs. 1,53,72,38,584/-. Therefore, no disallowance as per Rule 8D(ii) is warranted. The disallowance of interest expenditure of Rs. 19,29,14,802/- is directed to be deleted. The balance disallowance made by the AC at RS. 5,68,25,023/- (i.e. additional disallowance of Rs. 5,73,97,206/- after excluding the suo moto disallowance made by the appellant is upheld.
Thus this ground of appeal is partly allowed.”
The learned Counsel for the assessee stated that even the Tribunal deleted the similar addition in for the AY 2008-09 vide order dated 14.03.2018 by observing in Para 18,19,20 as under: - “18. We have considered rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us in the context of factual matrix of the case. From the record we found that own funds of the assessee i.e., share capital and reserves at the end of the year is Rs.13,49,75,79,368/- however, against this own fund assessee made investment of Rs.10,59,23,39,574/-. Thus, there was extra own funds of Rs.2,90,52,39,794/-. With regard to the interest expenditure, we found that interest expenses during the year was Rs.77,23,08,554/- where as interest income was Rs.93,48,14,787/-. Thus, there was net income of Rs.16,25,06,233/- on account of interest. A clear finding has been recorded by CIT(A) both with respect to availability of own funds in excess of investment and assessee having interest income more than the interest expenditure. Since the interest income was more than the interest expenditure, no disallowance is warranted under Rule 8D (2)(ii). We direct accordingly.
Since the assessee’s own funds were more than the investment, in view of the decision of Jurisdictional High Court in case of HDFC Bank Ltd., and Reliance Utilities and Power Limited, no disallowance of interest is warranted under Rule 8D2(ii) of the IT Act. Accordingly, there is no infirmity in the order of CIT(A) for deleting the disallowance of interest u/s.14A.
Ground No.3 of Revenue’s appeal are same as discussed by us in the Assessment Year 2007-08, following the reasoning given hereinabove, we do not find any infirmity in the order of CIT(A) for deleting disallowance of difference of interest u/s.36(1)(iii). We direct accordingly.”
When this was confronted to the learned CIT DR, he relied on the assessment order. After hearing both the sides, and going through the facts and circumstances of the case and the decision of Tribunals in assessee’s own case for AY 2008-09, we find that the facts are exactly identical and respectfully following the same, we confirm the order of CIT(A) deleting the addition.
The next issue, which is common in both the appeal of Revenue and the CO of the assessee, is as regards to the order of CIT(A) restricting the disallowance of exempt income under section 14A of the Act read with Rule 8D(2) while computing the income under section 115JB of the Act in term of the book profit. For this Revenue has raised the following ground No.3 and assessee has raised the following ground NO. 2 : - “Revenue’s ground (iii) On the facts and circumstances of the case and in law the Ld CIT(A) erred in deleting the addition of Rs. 19,29,14,8021- made u/s. 14A r. w. Rule 8D('2)(ii) r. w. s 115JB, without appreciating the facts that there is no evidence furnished by the assessee to prove that the borrowed funds on which interest is paid by it, are directly attributable to earning of taxable income only.
Assessee’s Ground
The CIT(A) ought to have directed the AO to delete the addition of disallowance u/s 14A of the Act r.w. Rule 8D of the Rules to the book profit computed as per section 11 5JB of the Act.”
At the outset, the learned Counsel for the assessee stated that this issue is covered in favour of assessee and against Revenue by the decision of Special Bench of this Tribunal in the case of ACIT vs. Vireet Investments (P.) Ltd. [2017] 58 ITR (AT) 313 (Delhi - Trib.) (SB) wherein the Tribunal has clearly held that no disallowance under section 14A of the Act r.w.r 8D of the Rules can be made while computing book profit under section 115JB of the Act. The learned Sr. DR could not controvert the above proposition. Accordingly, we are of the view that this issue is covered by the special bench decision of this Tribunal in the case of Vireet Investments (P.) Ltd. (supra). Respectfully following the same, we delete the disallowance and allow this issue of assessee’s appeal. This issue of Revenue’s appeal is dismissed and that CO of the assessee is allowed.
One more issue in this Cross Objection of the assessee is as regards to the order of CIT(A) in directing the AO to consider only those investments on which assessee has actually earned exempt income for the purpose of disallowance under section 14A of the Act read with Rule 8D(2)(iii) of the Rules. For this assessee has raised the following ground No.3:-
3. The CIT(A) ought have directed the AO to consider only those investment on which Appellant has actually earned the exempt income for the purposes of disallowance u/s 14A of the Act r.w. Rule 8D (2)(iii) of the Rules.
The learned Counsel for the assessee before us stated that in the immediately preceding year, the Tribunal in for AY 2010-11, has considered this issue and directed the AO vide Para 22 as under:-
22. We have considered rival contentions and found that after excluding the investments on which no exempt income was received, the disallowance works out to be Rs.49,63,387/-, however, assessee himself has offered disallowance at Rs.51,46,120/-. Keeping in view the judicial pronouncements referred above, we restore the matter back to the file of AO and direct the AO to recompute the disallowance under Rule 8D(2)(iii) after excluding the investment on which no exempt income has been earned as well as investment in subsidiary companies. We direct accordingly.
Before us, now the learned Counsel for the assessee filed computation of disallowance of exempt income relating to parties giving exempt income and that comes to 0.5% on average value of investment under Rule 8D(2)(iii) of the Rules at Rs. 13,35,500/-. After going through the Tribunals order, we are in agreement with the findings of the Tribunal of earlier year and are of the view that the AO has to recomputed the disallowance under Rule 8D(2)(iii) after excluding the investment on which no exempt income has been earned by the assessee. The assessee will file computation before AO and AO after verification will decide the claim. This issue of the assessee’s appeal is set aside and allowed for the statistical purposes.
In the result, the appeal of Revenue is dismissed and CO of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 24-08-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 24-08-2018 kao kI ga[- .