M/S. TOURISM FINANCE CORPORATION OF INDIA LTD.,NEW DELHI vs. DCIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘G’: NEW DELHI BEFORE, SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER AND SHRI YOGESH KUMAR U.S., JUDICIAL MEMBER ITA No.6130/Del/2013 (ASSESSMENT YEAR 2008-09) Tourism Finance Dy.CIT Corporation of India Circle-16(1) Ltd. Vs. New Delhi 13th Floor, IFCI Tower 61, Nehru Place New Delhi-110019 PAN-AAACT0706D (Appellant) (Respondent)

Assessee by Sh. S.K. Agarwal, CA Respondent by Sh. Anuj Garg, Sr. DR Date of Hearing 01/05/2024 Date of Pronouncement 10/05/2024

ORDER PER S.RIFAUR RAHMAN, AM: 1. This appeal has been filed by the Assessee against the order

of Learned Commissioner of Income Tax (Appeals)-19, New Delhi

[“Ld. CIT(A)”, for short], dated 31/03/2013 for Assessment Year

2008-09.

2 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

“1) That the order of the learned CIT (Appeals) is bad in law and wrong on facts. 2) That on the facts and in the circumstances of the case, the learned CIT(A) has erred in confirming the addition of Rs.1,03,88,618/- which related to dividend income wrongly offered to tax as debenture interest in earlier year. 3) Without prejudice to the afore-mentioned in ground No. 2, the learned CIT(A) has erred 3) in not giving any direction to the Assessing Officer to examine the claim and allow the same in earlier year to which it relates. 4) That on the facts and in the circumstances of the case, the learned CIT(A) has erred in upholding the disallowance of Rs. 1,42,29,000/- being amount of debenture loan written off without appreciating the fact that subscription to debentures is also one of the modes of providing long term finance by the appellant company. 5) That on the facts and in the circumstances of the case, the learned CIT(A) has erred in upholding the disallowance of the claim of deduction of Rs. 1,13,68,502/- u/s 36(1)(viia) by erroneously treating the reversal of provision for bad and doubtful debts made in earlier year as part of provision made during the year. 6) That on the facts and in the circumstances of the case, the learned CIT(A) has erred in confirming the disallowance of Rs. 6,77,25,599/- u/s 14A in respect of dividend income of Rs. 1,56,58,624/- inspite of the fact that the Assessing Officer did not establish a clear nexus between interest bearing funds alleged to be invested for generating tax free dividend income. As a matter of fact, the appellant has invested its reserves and surplus funds in investments which has been ignored by the CIT(A) 7) That the appellant craves leave to reserve to itself the right to add, alter, amend or vary any ground(s) at or before the time of hearing.”

wise.

26/09/2008 declaring an income of Rs.23,85,42,065/- which was

3 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

processed u/s 143(1) of the Income Tax Act. 1961 (‘the Act’ for

short). Subsequently, the case was selected for scrutiny and

notices u/s 143(2) and 142(1) were issued and served on the

assessee. In response, AR of the assessee attended and submitted

the relevant information as called for.

wrongly offered to tax as Debenture interest. The relevant facts

are, during the assessment proceedings, the Assessing Officer

observed that the audited balance sheet for the year ending

31/03/2008 reveals that income from operation was shown at

Rs.58,21,92,202/-, which includes interest and other charges on

loan of Rs.43,73,39,892/- as per Schedule-J to the Balance Sheet.

The assessee was asked to submit further details on interest on

other charges and the same was filed by the assessee vide letter

dated 03/12/2010, the same are reproduced by the Assessing

Officer in his order. For the sake of clarity, it is reproduced below:

[ Interest and other charges on loans during the year 2007-08 Interest on Rupee Term Loan (long-term) 42,96,73,815/- Interest on Debentures (long-term) 70,88,695/- Less: Dividend on Preference Shares of

4 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

Shri Shakti Resorts & Hotels Ltd. Wrongly treated as debentures interest in earlier year and offered for tax 1,03,88,618 - 32,99, 923 Bad debts recovered 1,09,66,000 ---------------- 43,73,39,892 =========== 6. From the above submissions, the Assessing Officer observed

that the assessee has deducted the dividend of Rs.1,03,88,618/-

on preference shares of Sh. Shakti Resorts & Hotels Ltd. was

wrongly treated as debenture interest in earlier year and the same

was wrongly offered to tax. Therefore, the above said amount of

Rs.1,03,88,618/- was reduced from debenture interest income of

Rs.70,88,695/- earned during the year under consideration and,

thereafter, negative interest of Rs.32,99,923/- was included in

Interest Schedule. The Assessing Officer observed that the above

adjustment made by the assessee is against the interest income of

the current year, such adjustment are not allowable under the

provisions of IT Act. He observed that the assessee has option to

move rectification application u/s 154 of the Act to request for

rectification of above mistake in the year in Asst. Year 2007-08.

With the above observation, the Assessing Officer proceeded to

5 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

make the addition as dividend on preference shares of Sh. Shakti

Resorts & Hotels Ltd. for the above said amount of

Rs.1,03,88,618/-.

CIT(A)-19, New Delhi and filed detailed submissions in this regard.

After considering the submissions of the assessee, the Ld. CIT(A)

dismissed the grounds raised by the assessee with the observation

that the AO has correctly pointed out that the error of earlier year

cannot be corrected or rectified by reducing the current year

income and, thereby reducing the tax liability of the year under

consideration.

basic facts that assessee has received dividend from preference

shares and the same was wrongly declared as Debenture interest

income in the earlier assessment year and he submitted that the

same was rectified by the assessee during the current assessment

year. He submitted that when the assessee realized that it has

made patent error in declaring the above said dividend income as

6 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

interest income in the earlier year and the time for filing the

rectification application u/s 154 was already over, therefore,

assessee has preferred to make the adjustment in the current

assessment year. He prayed that the apparent mistake may be

allowed to the assessee.

submissions and submitted that the mistake of earlier year cannot

be rectified in the current assessment year disturbing the taxable

income of the current assessment year. He submitted that

assessee failed to revise the return of income in assessment year

2007-08. He brought to our notice page-3 of the assessment order

and submitted that the Assessing Officer has rightly disallowed

the same.

record, we observed that the assessee has received dividend from

preference shares in Asst. Year 2007-08 and by mistake the same

was declared as debenture interest and offered to tax in that Asst.

Year 2007-08. It is fact on record that assessee has received

dividend income which is exempt from tax, however, the assessee

7 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

declared as debenture interest and paid the relevant tax, we

observed that this fact was came to the knowledge of the assessee

while finalizing the Balance Sheet for the current assessment year

2008-09. At the time of rectifying the above mistake in the balance

sheet, the assessee has not preferred to file a rectification

application before AO to revise the return of income for the Asst.

Year 2007-08. It is also a fact on record that assessee has rectified

the above mistake without declaring the same in the financial

statement. This patent mistake made by the assessee was

observed by the lower authorities. In our view, the total taxable

income cannot be disturbed for the current assessment year

without there being any apparent mistake for the income declared

for the present assessment year and for any other reason the same

cannot be disturbed, even for the mistake committed in earlier

assessment year. We are not aware of the status of the stage of

proceedings for Asst. Year 2007-08, therefore, we are inclined to

sustain the addition made by the Assessing Officer, and,

accordingly, grounds raised by the assessee are dismissed.

8 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

loan written off. The relevant facts are, during the assessment

proceedings, the AO observed from the letter dated 29/10/2010

submitted by the assessee, assessee has claimed bad debt written

off during the current assessment year. The assessee has claimed

the debenture loan given to Guruvayur Hotels & Resorts as non

recoverable and claimed the same as bad debts to the extent of

Rs.1,42,29,000/-. The Assessing Officer observed from the

Schedule-F of the Balance Shee/ Annual Report submitted by the

assessee and observed that the total investments of

Rs.1,36,49,31,278/- as on 31/03/2008 which includes an

amount of Rs.1,42,29,000/- relating to investment made in the

debentures of M/s Guruvayur Hotels (P) Ltd.. These are 0%

optionally convertible secured debentures. The assessee has

invested in these debentures with the option to convert these

debentures in equity shares of the company in future whenever

option is exercised by the assessee. He further observed that this

is quasi equity investments, on conversion, equity shares would be

allotted to the assessee. Since, assessee has written off these

9 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

investments from the books, this cannot be allowed as allowable

deduction as the conditions of Section 36(2) are not complied with

for claim of bad debts. He further observed that the above said

amount has never been credited to Profit and Loss account as no

income against the same has been offered in the past. The

investment in debentures made by the assessee during its normal

course of investment activity and write off of these investments

does not make it to be claimed as allowable deduction. According

to him write off investments is capital loss which cannot be

allowed as revenue loss. He relied on few case laws which is

mentioned at page-5 of the assessment order. Accordingly, he

proceeded to make the disallowance of above said bad debts

written off by the assessee.

CIT(A) and filed the detailed submissions in this regard. After

considering the detailed submissions of the assessee and by

relying on the decision of First Appellate Authority in Asst. Year

2006-07 wherein the Ld. CIT(A) relying on the decision of ITAT

dated 30/04/2009 in assesse’s own case in various years has

10 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

decided the issue u/s 36(1)(viii) of the Act as interest on

debentures. The same issue was considered and held that the

interest on above said debentures are allowable u/s 36(1)(viii) of

the Act. Accordingly, the same was remitted back to the AO,

however, the ITAT held that the assessee is also claiming

deduction under this section on receipts on account of dividends

and profit on sale of investment. As per the above discussion, it

was held that these two receipts are also not in the nature of

income from long term finance and hence this cannot be

considered for allowing deduction under section 36(1)(viii).

terms finance given under Explanation (h) to Section 36(1)(viii)

does not qualify for the debentures. Further, he observed that

assessee has filed a copy of the debentures subscriptions

agreement. Clause 2.8, 2.10 and 2.11 of the agreement were

reproduced in his order at page 8 of the order. As per the above

clause of the agreement, the Ld., CIT(A) observed that the

debentures holders can redeem the above debentures in full or in

part at any time at the discretion of the debenture holders. The

11 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

debenture holders had an option to get the listing of the

debentures, in one or more recognized stock exchange(s) as may

be stipulated by them and make such other arrangements to give

effect to listing of these debentures. Further, debentures holders

had an option to convert into equity. With the above observation,

the Ld. CIT(A) observed that the right to redeem the debentures at

any time means, it is not falling under the category of ‘long term

finance’ in terms of Explanation (h) to section 36(1)(viii) and the

assessee has not shown how the assessment order is erroneous on

this issue. With the above observation, he dismissed the grounds

raised by the assessee.

164 of the PB which is the decision of ITAT for Asst. Years 1995-

96 & 1997-98 in ITA No.2610 & 2612/Del/2002, Asst. Year 2000-

01 & 2001-02 in ITA No. 5213 & 4439/Del/2003 and for Asst.

Year 2002-03 in ITA No.2574/Del/2006, order dated 19/11/2010.

He brought to our notice para 22 of the order in which it was

specifically held that the income from the debentures are also in

12 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

the nature of interest of the loan because debentures is nothing

but long term loan given by the assessee.

submissions and he brought to our notice page 164 of the PB

wherein the ITAT has remitted the issue to the AO to determine

whether the debentures issued by the assessee are long term or

short term based on the period of repayment of these debentures.

He further brought to our notice page-9 of the Ld. CIT(A) order and

relied on the same. He submitted that the debentures issued by

the assessee are not falling under Clause (h) of Explanation-2 to

section 36(1)(viii) of the Act.

record, we observed from the record that the assessee has issued

convertible debentures to M/s Guruvayur Hotels & Resorts (P) Ltd.

as part of its nature of business to grant loans as a secured

debentures, to be on the safe of side, the assessee purchased the

debentures from M/s Guruvayur Hotels & Resorts with various

conditions including conversion into shares or redeemed

prematurely at the option. We observed from the record, the issue

13 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

of debentures was a debatable issue before the ITAT from Asst.

Year 1997-98, therefore, looking at the issue which was

adjudicated by the Co-ordinate Bench in 1997-98 on treating the

interest income, with interest expenditure as long term or short

term. Considering the fact on the issue of holding period of the

debentures, we observed that the issue was remitted back to the

file of Ld. AO to determine the period of holding in the earlier Asst.

Years. In the current Asst. Year, the assessee has treated the

above said debentures/loan as irrecoverable and claimed as bad

debts. From the above observation, the period of holding

commenced from Asst. Year 1997-98, therefore, it certainly falls

within the long term finance in terms of Explanation (h) to section

36(1)(viii), therefore, it qualifies to be a long term finance and the

assessee has given the loan in the form of subscribing to

debentures issued by M/s Guruvayur Hotels & Resorts (P.) Ltd..

Therefore, in our considered view the claim of debenture loan as

bad debts is proper as per the information on record submitted

before us. Accordingly, the ground raised by the assessee is

allowed.

14 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

proceedings, the Assessing Officer observed from computation of

deduction u/s 36(1)(viii) of the Act and observed that assessee has

claimed the deduction of Rs.3,95,75,000/-. On perusal of the

record, he observed that the assessee has not correctly bifurcated

its income into long term finance and other income. After

considering the submissions of the assessee, the Assessing Officer

reworked the deduction u/s 36(1)(viii), he observed that the

deduction u/s 36(1)(viia) also to be amended. Accordingly, he

observed that the deduction u/s 36(1)(viia)(c) of the Act shall be

allowed in respect of any provision for bad and doubtful debts

made by a Public Financial Institution or a State Financial

Corporation or a State Industrial Investment Corporation, an

amount not exceeding 5% of the total income to claim the

deduction under this section in order to claim the deduction, the

assessee has to make provision for bad and doubtful debts during

the previous year. The assessee has claimed Rs.1,13,68,502/- (5%

of taxable income after deduction u/s 36(1)(vii) i.e. 5% of

Rs.22,73,70,041/-) towards deduction under this section. He

15 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

observed that after re-computation of total income and deduction

u/s 36(1)(viii), the revised the amount of deduction u/s 36(1)(viia)

to the extent of Rs.1,63,41,092/- as worked out by him as under:

5% of Rs.32,68,21,849/- (35,92,88,258 - 3,24,66,409) =

Rs.1,63,41,092/-.

the assessee, provision for bad and doubtful debts made during

the previous year is Rs.73,00,000/- but no such amount is evident

from the profit and loss account. Rather, it is submitted by the

assessee in the statement of provision for bad and doubtful debts

filed during the course of assessment proceedings that provision

for bad and doubtful debts made in the earlier year have been

written back during the year of Rs.7,50,00,000/-. Therefore,

instead of creating provisions, the assessee has reversed the

excess provision created in earlier years. Hence, the basic

condition to make provision for bad and doubtful debts to claim

deduction u/s 36(1)(viia) is not complied with by the assessee.

Accordingly, he rejected the claim of the assessee and disallowed

16 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

the claim made by the assessee u/s 36(1)(viia) of the Act for

Rs.1,13,68,502/-.

CIT(A) and filed detailed submission, for the sake of repetition, the

same is reproduced below:

“The appellant being a public financial institution, is entitled to a deduction of 5% of its income towards provision for bad and doubtful debts.

The appellant has been creating provision in its accounts, offering the same for tax by way of addition to income and claiming 5% of the income as provision for bad and doubtful debts as permitted under the section. The details of such provision created and offered for tax since the assessment year 1997-98 is attached herewith. Out of the provisions created as above the appellant had written back Rs. 7,50,00,000/- treating the same as no longer required and reduced the same from the income since it had already been offered for tax in earlier years and this has been accepted by the learned Assessing Officer after going through the details and records of the appellant.

During the year under consideration, the appellant company has made a provision for bad and doubtful debts of Rs. 73,00,000/- (wrongly claimed in the return at Rs. 1,13,68,502/- and has submitted the details thereof which is admitted by the learned Assessing Officer.

The learned Assessing Officer has not allowed any deduction to the appellant by confusing and mixing the two separate issues of creation of provision for the current year i.e. AY 2008-09 and write back of the provision relating to previous year which has already been offered for tax. This has in fact resulted in double disallowance since the provision written back had already been offered for tax and the provision for the current year has been disallowed by linking the two.

It is submitted that the act of making a provision for the current year is separate and different than the act of writing back the provision for earlier years and both have to be treated separately which the learned Assessing Officer has failed to do. The question of effective provision does not arise since both relate to separate years.

17 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

In view of the above, it is submitted that the provision made during the year for Rs.73,00,000/- (and not Rs.1,13,68,502/-) may kindly be allowed”

CIT(A) dismissed the ground raised by the assessee with the below

observation:

“6.5 The submissions of the appellant and the facts have been carefully considered in the asstt. order, the AO. has pointed out that during the year provision for bad and doubtful debits made in earlier years of Rs.7.5 Crore has been reversed. The appellant has stated that provision for Rs. 73 lakh has been made during the year. Even if this is accepted there is a not reversal of Rs.6.77 Crore or a negative amount under this head. Effectively, no provision has been made during the year. The fact that the earlier provision reversed this year has been offered to tax is a separate matter and this does not mean that a provision in terms of section 36(1)(viia)(c) has been created. In view of the above, the decision of the A.O. is justified and is upheld. The Ground is dismissed.” 23. Aggrieved with the above order, the assessee is in appeal

before us.

relevant facts of this ground and brought to our notice page 106 of

the PB which is statements of assessable income wherein the

assessee has claimed deduction of Rs.1,13,68,502/- calculated @

5% of Rs.22,73,70,041/-. He submitted that during assessment

proceedings, the Assessing Officer observed that the assessee has

18 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

maintained bad and doubtful debts account and assessee has also

written back during the year of Rs.7.5 Crore and also created the

provision for bad debts. The bad and doubtful debts created

during the current year for Rs.73 lakh. The Assessing Officer

considered the written back doubtful debts of Rs.7.5 Crores and

after adjustment of current years provision, he observed that the

provisions of doubtful debts became negative to the extent of

Rs.6.77 Crore. Accordingly, AO denied the deduction claimed by

the assessee u/s 36(1)(viia) by observing that the provision of

doubtful debts becomes negative. He submitted that the method

adopted by the Assessing Officer is not proper, he submitted that

the creation of provision for doubtful debts is continuous process

and the reversal was made towards write back of recovery of loan

relating to previous years. What is relevant is the creation of

provision for the current assessment year which has to be

considered for allowing the deduction u/s 36(1)(viia) of the Act. In

this regard the Ld. AR relied on the decision of ITAT, Cochin

Bench in the case of Kannur District Co-operative Bank Ltd. vs.

ACIT, [2012] 20 taxman.com 667, the same is placed at 309 of PB

19 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

wherein it was held that the provision for bad and doubtful debts

newly created during the year under consideration should not be

netted against the amount written back are reversed, held in

favour of the assessee. Further, it was held that in case of

provision created for a particular debts needs enhancement, only

enhanced amount should be treated as new provision for the

purpose of section 36(1)(viia), held in favour of the assessee. By

relying on the above decision, he prayed that the facts in the case

of the assessee are also similar.

the assessee and he heavily relied on the findings of the Lower

Authorities. He also relied on the same case law relied on by the

assessee in the case of Kannur District Co-operative Bench Ltd.

(supra) and he pointed out that in the case of provision of created

for a particular debts needs enhancement, only enhanced amount

should be treated as new provision for the purpose of section

36(viia), in case, the assessee’s plea is accepted, he submitted that

this issue may be remitted back to AO for proper verification.

20 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

record, we observed that assessee created provision for doubtful

debts every year as per the guidelines of the RBI, it is continuous

process of creation of provision and claim of deduction. The

deduction u/s 36(1)(viia) is available only to the extent of creation

of provision. In the present case, the assessee has created the

provision for the current assessment year to the extent of Rs.73

lacs and at the same time, the Assessing Officer observed that

assessee has also written back of Rs. 7.5 Crores during the

current year which is reversal of provision for doubtful debts

created in the earlier years. In the net effect, the provisions for

doubtful debts becomes negative at the end of the current year to

the extent of Rs.6.77 lakhs.

“Section 36(1)(viia)…. (a)…… (b)……. (c) a public financial institution or a State financial corporation or a public industrial investment corporation, an amount not exceeding five per cent of the total income computed before making any deduction under this clause and Chapter VI-A):] Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment

21 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year;]

36(1)(viia), starts with “in respect of any provision for bad and

doubtful debts made by” it denotes in order to claim the deduction

under this section the assessee has to create provision for bad and

doubtful debts then only the assessee can claim deduction to the

extent of permitted under this Act. In the given case, the assessee

falling under section 36(1)(viia) (c) of the Act and assessee is

allowed to claim deduction at 5% of the total income after

adjusting any deduction under this Clause and Chapter-VIA. In

the given case, we observed that the assessee in fact, created the

provision for the current assessment year to the extent of Rs.73

lakh and based on the provisions, the assessee is allowed to claim

the deduction as per the calculation given by the Assessing Officer

himself at page-11 of the order i.e., 5% of Rs.32,68,21,841/- i.e.

Rs.1,63,41,092/- are to be allowed to the extent of creation of

22 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

provision by the assessee during the year. In this regard, the

assessee has created the provision of Rs.73 Lakhs, therefore, the

assessee is eligible to claim the deduction under this section to the

extent of Rs.73 Lakhs.

authorities that assessee has created provision for Rs.73 Lakhs

during the year, however, it was not properly explained before

authorities. What is relevant is creation of provision for the

current assessment year as per the guidelines of the RBI.

Accordingly, we direct the assessee to submit the details of

provision created as per the guidelines of RBI before the AO and

claim deduction as per Rules. We also observed that in the

decision of Kannur Co-operative Bench (supra), the Co-ordinate

Bench held that the write back of earlier year should not be netted

off from the provisions of current assessment year. Therefore, the

write back of earlier assessment years cannot be adjusted for

giving the benefit under this section. Accordingly, with the above

observation, this issue is remitted back to the file of the Ld. AO to

23 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

verify the provisions created by the assessee during the current

assessment year and allow to the extent of provision created by

the assessee for the current assessment year as deduction u/s

36(1)(viia) of the Act. Accordingly, this ground raised by the

assessee is allowed for statistical purposes.

assessment proceedings, the Assessing Officer observed that the

assessee has earned dividend of Rs.1,56,58,624/-. When the

assessee was asked to explain why the expenses relating to

earning of the dividend income as per Rule 8D should not be

disallowed. In response, the assessee submitted as under:

"As regards disallowance u/s 14A read with rule 8D, it is submitted that the corporation has not incurred any direct expenditure for earning the income from dividend. The interest expenditure of Rs.31.75 crore is solely towards interest on borrowing raised by the corporation for its lending purposes, the income from which is offered for tax as income from operations. Therefore, rule 8D(2) is not applicable since there is no interest expenditure." As regards the inclusion of average of investment made during the year for consideration for making the disallowance u/s 14A, it is submitted that the investments were bought and sold during the year only. The income in respect of the same has been offered as short term capital gain and offered for tax. Since no exemption has been claimed for such income, section 14A read with rule 8D does not apply."

24 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

rejected the same and observed that the reply of the assessee on

the issue under consideration does not fulfill the requirements laid

down u/s 14A of the Act r.w. Rule 8D of the IT Rules. The

Assessing Officer by relying on the decision of Hon’ble Bombay

High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT in

ITA No.626 & WP 2010 and has reproduced his interpretation of

Rule 8D and above said decision which are as under: • The provisions of section 14A and Rule 8D are constitutionally valid. • The basic object of Section 14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income. • The insertion of Section 14A was curative and declaratory of the intent of the Parliament. The basic principle of taxation is that only net income, namely, gross income minus expenditure that is taxable. Once the test of proximate cause, based on the relationship of the expenditure with tax exempt income is established, a disallowance would have to be effected under Section 14A. • What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. The satisfaction of the Assessing Officer must be arrived at on an objective basis, It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. • In the event the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion.

25 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

• The effect of Section 14A is to widen the theory of the apportionment of expenditure. • Sub sections (2) and (3) of Section 14A are intended to enforce and implement the provisions of Sub section(1). • Even in the absence of sub-section (2) of Section 14A, the Assessing Officer would have to apportion the expenditure after following a reasonable method consistent with what the circumstances of the case would warrant and having regard to all relevant facts and circumstances to disallow the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. • The expenditure incurred u/s 14A would include direct and indirect but relationship with exempted income must be proximate. • Where the expenditure incurred cannot be related to either taxable income or exempted income, the provisions of section 14A would be attracted and therefore, AO would be justified in making disallowance in accordance with provisions of sub sections (2) & (3) r/w Rule 8D if the assessment year is 2007-08 or any subsequent year. • If there is material to establish that there is direct nexus between the expenditure incurred and the income not forming part of total income then disallowance would be justified even where there is no receipt of exempted income u/s 10 in the year under consideration in view of the decision of special bench in the case of Cheminvest Ltd. vs Income Tax Officer 124 TTJ 577 (Del) (SB). 32. After observing above, the Assessing Officer observed that he

is not satisfied with the method of computation for disallowance

submitted by the assessee and also recorded his satisfaction for

disallowance u/s 14A of the Act. He proceeded to disallow interest

and administrative expenses by applying Rule 8D and determined

the disallowance under Rule 8D(2)(ii) to the extent of

Rs.4,51,13,315/- and under Rule 8D(2)(iii) at Rs.4,61,900/- and

further disallowed the administrative expenses of

26 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

Rs.1,84,50.384/-, in total, he has disallowed Rs.6,77,25,599/-

u/s 14A of the Act.

before the Ld. CIT(A) and Ld. CIT(A) after considering the

submissions of the assessee dismissed the grounds raised by the

assessee by relying on the First Appellate Order for Asst. Year

2009-10 with the observation that the findings of the First

Appellate order for Asst. Year 2009-10 are adopted mutatis

mutandis in this case.

before us.

findings of the Assessing Officer in his order and submitted that

the assessee has earned Rs.1,56,58,624/- whereas the Assessing

Officer by applying on Rule 8D disallowed the amount of

Rs.6,72,25,599/- by rejecting the Explanation as well as detailed

working submitted by the assessee. He submitted that the issue

under consideration is squarely covered in assessee’s own case in

Asst. Year 2010-11 to Asst. Year 2015-16. The assessee has filed a

27 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

separate supplementary paper book consisting of ITAT Order. He

relied on the above decisions and prayed that the similar direction

may be given in the current assessment year as well.

under consideration is covered in favour of the assessee.

record, we observed that the Assessing Officer has disallowed

interest expenditure as well as administrative expenses u/s 14A

by prominently allocated the relevant expenditure based on the

Rule 8D. Before us, the Ld. AR of the assessee submitted that the

interest expenditure disallowed by the Assessing Officer as not

called for, considering the fact that the assessee has sufficient

interest free funds in the business to make the investments in

various securities which are exempt from tax. It is brought to our

notice that similar issue was considered by the Co-ordinate Bench

in assessee’s own case from Asst. Year 2010-11 to Asst. Year

2015-16. The relevant decisions are filed in the supplementary

paper book by the assessee. For Asst. Year 2009-10, in ITA

28 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

No.3651/Del/2014, the Co-ordinate Bench has considered the

issue and decided as under:

“7. After considering the rival submissions and on perusal of the relevant finding given in the impugned order as well as material referred to before us, we find that in so far as disallowance of interest expenditure is concerned, the same cannot be made for the reason that, firstly, assessee has given very detailed working before the authorities below for the utilisation of loans which have been shown wholly for the purpose of business; secondly, assessee has huge interest free funds available with it which far exceeded the investment made in shares; and without there being any defect in the working given by the assessee regarding utilisation of loan for the business purpose, it cannot be presumed that any interest bearing funds have been diverted for investment purpose which were capable of earning of exempt income. Moreover, it is a well settled law that if assessee has surplus and interest free funds sufficient to meet its investment then it is presumed that investments are made from interest free funds available with the assessee and not from the borrowed funds. This principle was upheld by the Hon'ble Supreme Court in its latest judgment and order dated 23rd March, 2019 in the case of CIT vs. Reliance Industries Ltd. in Civil Appeal No.10 to 13 of 2019. Thus, disallowance of interest is directed to be deleted. 8. In so far as disallowance under rule 8D(2)(3) is concerned, before us the Ld. Counsel has given the following working:-

COMPUTATION OF DISALLOWANCE OF 0.50% OF AVERAGE INVESTMENTS UNDER RULE 8D READ WITH SECTION 14A

29 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

allow the grounds raised by the assessee and direct the Assessing

Officer to follow the method of disallowance adopted in above said

decision of the Co-ordinate Bench. Accordingly, we direct the

Assessing officer to follow the same by applying 0.5% of the

30 ITA No.6130/Del/2013 Tourism Finance Corporation of India Ltd. vs. DCIT

average value of investments made by the assessee. Accordingly,

ground raised by the assessee allowed.

allowed.

Order pronounced in open Court on 10th May, 2024.

Sd/- Sd/- (YOGESH KUMAR U.S.) (S.RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 10/05/2024 Pk/sps Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT

ASSISTANT REGISTRAR ITAT, NEW DELHI