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Income Tax Appellate Tribunal, BENGALURU BENCH C, BENGALURU
Before: SHRI. INTURI RAMA RAO
PER LALIT KUMAR, JUDICIAL MEMBER:
These are appeals of the assessee against separate orders of the CIT (A), Bengaluru -2, Bengaluru, dt.10.08.2016, for the assessment years 2007-08 to 2010-11, raising the following grounds which are common to all the assessment years :
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The assessee is a company engaged in tea / coffee business and owns estates in the State of Karnataka. For the assessment year 2007- 08 the business income of the assessee was worked out as per Rule 7B and 8 of the IT Rules. The assessee declared the short-term capital gains of Rs.78,412/- from sale of shares and long term capital loss on coffee futures exchange of Rs.7,200. The assessee has also declared loss of Rs.60,48,245/- under the head ‘long-term capital loss’ on sale of timber. After adjusting the long-term capital loss on sale of timber, the net capital loss of the assessee was Rs.59,77,032/-. It was found during the reassessment proceedings that the assessee has wrongly reported the income from capital gains. The assessee has adopted wrong method of indexation on sale of timber. Accordingly the case was reopened for A. Ys. 2009-10 and 2010-11. The AO has concluded the proceedings of reassessment and as made various additions as under : AY 2007-08 AY 2008-09 AY 2009-10 AY 2010-11 Rs. Rs. Rs. Rs. Disallowance 3,12,835 4,84,380 1,52,402 1,22,144 u/s.14A Short-term 78,412 Nil Nil Nil capital gains Long-term 6,89,128 14,33,648 9,47,671 5,55,870 capital gains
Since the facts are common for all the assessment years, the facts for the assessment year 2007-08 is taken up by us for adjudication. For the AY 2007-08, it is the case of the assessee that during the previous year relevant to the assessment year the assessee
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had uprooted trees for a sale consideration of Rs.22,97,093/- and offered long-term capital gains for taxation. However while computing the long-term capital gains the assessee has claimed 70% of the sale consideration as cost, as on 01.04.1981 and applied indexation and has arrived at a loss of Rs.60,48,245/-. The AO had not agreed to the method of computation followed by the assessee. However the AO had agreed to the method of computation of cost at 70% of the sale proceeds and indexation as on 01.04.1981 was disallowed and for the AY 2007-08, taxable capital gains income was arrived at Rs.6,89,128/- as against the loss computed by the assessee.
Feeling aggrieved by the order of the AO, assessee filed appeals by the CIT (A). However, no relief was granted by the CIT (A) and therefore the assessee is in appeal before us in respect of all the four assessment years.
Before us, the Ld. AR has submitted that the issue of computation at 70% of the sale proceeds has been allowed by the ITAT, Bengaluru and later on by the Hon’ble jurisdictional High Court. However, it was contended that in the matter of Balanoor Plantations and Industries Ltd v. DCIT [ITA Nos.475 to 478/Bang/2003, dt.22.03.2004] and Bhadra Estate & Industries Ltd, [ITA Nos.270, 271, 355 & 356/Bang/2003, dt.16.12.2003, Bangalore Tribunal has determined the fair market value as on 01.04.1981 and has adopted Rs.35/- per sq. ft on the basis of the certificate issued by the Deputy Conservator of Forests. The Ld. AR further relied upon
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the Hon’ble jurisdictional High Court’s judgment in the matter of Tata Coffee Ltd, v. JCIT, in ITA Nos.57 & 1092 of 2006 and 296 of 2007, dt.24.09.2012, for the purpose of canvassing his argument that the FMV of the timber should be taken as on 01.04.1981.
On the other hand, the Ld. DR has submitted that the shade trees that are grown in the estate of the assessee had grows without any efforts of the assessee and the issue whether the shade trees fall within the definition of capital assets under the IT Act, is under shadow of doubt and only on account of the following judgments of the Tribunal and Hon’ble jurisdictional High Court, the benefit of 70% of the sale proceeds were considered as cost and the remaining 30% was considered to be the long-term capital gains .
We have heard the rival submissions and perused the record. In our considered opinion the issue of long-term capital gains pursuant to sale of timber is no more res integra and is settled by the following decisions : i) CIT v. Sangameshwara Coffee Estates and Industries P. Ltd, vide order dt.30.09.1986 in ITA No.193/Bang/2012 (AY 2008-09 – Bang Trib) ii) ITA No.1925/Mds/1972-73, dt.13.03.1975 in assessee’s own case; and iii) ITA.824/Bang/2012 in M/s. Sangameshwara Coffee Estate, dt.28.02.2013 In all the above decisions, a consistent view was taken to the effect that 30% of sale proceeds shall be taken as long-term capital gains in respect of sale of shade trees as against the proposal of the AO to treat
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the same as business income. Further the argument of the Ld. AR that the Tribunal should adopt Rs 35 sq.ft on the basis of the certificate issued by the Deputy Conservator of Forests, as FMV as on 01.04.1981 is devoid of any merit. The order of the Tribunal referred before us was in peculiar facts and circumstances of the case and was not a binding decision as the said order was passed on the consent given by the Ld. DR. In any case, for the purpose of claiming the benefit of FMV as on 01.04.1981, it was incumbent upon the assessee to allege during the assessment proceedings that these trees which were now sold by the assessee were in existence prior to 01.04.1981. No such material / evidence was brought on record by the assessee in the present proceedings before the Tribunal or before the lower authorities. Therefore this objection of the assessee and the application for accepting the additional evidence remitting the matter back to the file of the AO for seeking report from the DCF is without any merit and is therefore liable to be dismissed. Accordingly, the assessee is not liable to any relief on this count. Therefore the ground nos 1-5 are dismissed.
The other ground no.6 raised before us is with respect to disallowance u/s.14A r.w. Rule 8D, made by the AO and confirmed by the CIT (A). In this regard the AO had made disallowance on two counts namely, under Rule 8D(ii) and under Rule 8D(iii). It was the case of the AO that the assessee has utilised the borrowed funds for the purpose of earning tax-free income. Before the AO, the assessee was unable to substantiate why Rule 8D is not applicable. It was the
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case of the AO that there was no nexus between the loan taken and the investment made. Further the AO held that as per schedule VIII, the assessee has made investment in quoted and unquoted shares, mutual funds etc., hence the case of the assessee fell within the four corners of Section 14A r.w. Rule 8D.
On the other hand, the Ld. AR has submitted that the assessee has utilised the reserves and surplus for the purpose of making the investment and there was a common kitty of profit earned during the year and there was no evidence available with the AO to establish the direct nexus between the funds invested and the borrowed fund.
The Ld. DR relied upon the following judgments :
• Maxopp. Investments Ltd v. CIT [TS-668-HC-2011 (HC)] • Cheminvest Ltd v. ITO [121 ITD 318] • Pradeep Kar v. ACIT [(Kar) 319 ITR 416]
We have heard the rival submissions and perused the record. As per the balance sheet as on 31.03.2007, the secured loans for the previous year was Rs.1,22,71,656/-, and the investment sown in the previous year was Rs.1,14,52,283/-, whereas the investment shown in the current year is Rs.1,31,78,770/-. Thus it is clear that the initial investment at the beginning of the relevant financial year was Rs.1,14,22,283/- and at the closing of the financial year was only Rs.1,31,78,770/-. Thus the difference of Rs.17,56,487/-, was made during the financial year relevant to AY 2007-08. Similarly, the table
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showing the share capital, reserve and surplus, secured loans, unsecured loans, current liability, investment in shares and mutual funds and disallowance made under section 14A r.w. Rule 8D, is given below :
AY 2007-08 AY 2008-09 AY 2009-10 AY 2010-11 Share capital 29,75,290 29,75,290 29,75,290 29,75,290 Reserve and 5,14,87,589 5,73,29,398 6,66,76,749 8,28,24,073 surplus Secured loans 1,22,71,656 88,66,973 58,32,880 Unsecured 21,12,296 13,48,247 12,26,671 13,59,789 loans Current 1,39,94,220 1,54,29,329 1,72,26,269 2,90,80,114 liability Investment in 2.24.52,283 1,24,50,052 1,28,54,879 1,47,15,169 shares and mutual funds 3,12,835 (Rule 484,390 1,52,402 1,22,144 Disallowance 8D(ii) -2,51,258 (Rule 8D(ii) (Rule 8D(ii) - (Rule 8D(ii) u/s.14A r.w. Rule 8D(iii) – -4,20,308 89,139 -53,219 Rule 8D 61,578) Rule 8D(iii) Rule 8D(iii) – Rule 8D(iii) – 64,072) 63,252) – 68,925)
From a perusal of the above, it is crystal clear that the assessee was having sufficient reserve and surplus fund and profits in all the years which were more than the investments made during the year. The share capital in all these four years along with surplus reserve were sufficient for the assessee to make the investment in the listed and
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unlisted shares. Therefore in our view, the addition made by the AO by invoking Rule 8D(ii) was without any basis as the assessee was having surplus and reserve fund, which was sufficient to make the investment in the sister concern. Our above said inference is supported by the following judgment :
Microlabs Ltd.* [2017] 79 taxmann.com 365 (Karnataka)
“5. For the second question, the observations made by the Tribunal in the impugned order reads as under: "32. Ground No.2 raised by the assessee reads as follows:- "2. The learned Commissioner of Income Tax (Appeals) has erred in sustaining the additions made by the assessing officer u/s. 14A read with rule 8D on the ground that the appellant has not produced the evidentiary support in relation to dispersal of loan and utilization of loan. Whereas the appellant has produced the evidence that the amount invested was out of positive bank balance and no borrowings were utilized for the purpose of investment." 33. The assessee earned dividend income of Rs.38,75,857. It quantified a sum of Rs.3,22,426 as expenditure incurred in earning tax free income dividend income which does not form part of the total income and which is to be disallowed u/s. 14A of the Act. 34. The break-up of the sum of Rs.3,22,426 is not specifically given, but is stated to be relating to management fee, legal & professional charges, security transaction charges and NSDL charges. It is thus clear that the assessee by implication had claimed that there was no expenditure incurred by way of interest, either directly or indirectly, which is attributable to the borrowed funds which were used for the purpose of investment which yielded tax free income. 35. The AO observed that Schedule G to the Financial Statements of the assessee had shown investment to the tune of Rs.28,45,29,937 in shares mutual funds of various companies. He was of the view that such investments cannot be made routinely. No prudent businessman would make any investment without applying the resources wisely. Obviously this entails expenditure, direct as well as indirect. He thereafter proceeded to make disallowance u/s. 14A of the Act, which is given as annexure to the assessment order and enclosed as ANNEXURE-II to this order. 36. Aggrieved by the assessment order, the assessee preferred appeal before the CIT(Appeals).
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Before CIT(A), the assessee submitted that interest bearing loans were borrowed for specific purposes and not for investment purposes and in support of the above contention, the Assessee filed copies of balance sheets as on 31.03.2003 upto 31.03.2009 to show that the various loans availed from banks were all taken for specific purposes and could not have been utilized for making any investments out of which exempt income was earned. These loans include short term loans from IDBI Bank, Exim Bank, Barclays Bank and Standard Chartered Bank in respect of which it was explained that the loans could not have been used for making any long term investment. Copies of some communications from banks regarding sanction of the loans were also filed before me to substantiate the nature of the loan. In respect of IDBI loan, it was submitted that the same had been returned back before the year end, thus bringing the balance to Nil. 38. On consideration of the above submissions and on perusal of the relevant documents, the CIT(A) was of the view that the claim of the Assessee was not evidenced from the documents submitted in view of the loans and other sources of funds being mixed up in the common pool of funds. The CIT(A) further held that the burden of proof in this matter clearly continues to rest with the Assessee and that it was not enough to merely show that surplus funds were available or that bank loans had been availed for specific purposes including short term reasons. A one-to-one correlation must also be established to prove that the loans were absolutely utilized for the purpose for which they were claimed. The CIT(A) also held that there was no utilization certificate from the bank filed before the AO nor was such evidence furnished before the CIT(A). The CIT(A) also held that the documents submitted from the bank during the course of appeal only refer to the disbursal of the loan and even these specify certain conditions required to be met. The date-wise actual disbursal and utilization is not proved from the ledger copies as submitted. The CIT(A) also referred to the decision of Mumbai ITAT in the case of Hercules Hoists Ltd. (ITA No.7944, 7946, 2255 & 7943/mum/2011), wherein it was held that with the introduction of Rule 8D the burden of proof on the assessee has become "more stringent, so that rather than showing existence of sufficient capital, the matter would be required to be examined from the stand point of utilization of the borrowed interest bearing funds." In the absence of categorical utilization certificate from the bank, the CIT(A) was of the view that there was no evidentiary support of the assessee's claim. Hence, the disallowance u/s.14A of the Act as made by the AO was upheld by the CIT(A). 39. Aggrieved by the order of CIT(A), the assessee has raised ground No.2. 40. We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee's paper book and the same is enclosed as ANNEXURE-III to this order. It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income.
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The Hon'ble Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd., ITA No.330 of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of 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 can be made. 42. In the light of above said decisions, we are of the view that disallowance of interest expenses in the present case of Rs.49,42,473 made under Rule 8D(2)(ii) of the I.T. Rules should be deleted. We order accordingly." The aforesaid shows that the Tribunal has followed a decision of the Bombay High Court in the case of CIT v. HDFC Bank Ltd. [2014] 366 ITR 505/226 Taxman 132 (Mag.)/49 taxmann.com 335 . When the issue is already covered by a decision of the High Court of Bombay with which we concur, we do not find any substantial question of law would arise for consideration as canvassed.”
Therefore the additions made by the AO by invoking Rule 8D (ii) is without any merit and therefore, we have no hesitation to delete the additions for all the assessment years impugned before us. As a result thereof, the assessee gets relief of Rs.2,51,252/-, Rs.4,20,308/-, Rs.89,139/- and Rs.53,219/- for the AYs. 2007-08 to 2010-11 respectively.
Now we proceed to deal with the disallowance u/s.14A r.w. Rule 8D(iii), made by the AO. In this regard it was the case of the AO that the assessee has made the investment in quoted and unquoted shares and mutual funds. It is clear that the assessee was actively making the investment and frequently trading in the shares. This is clear from a perusal of the list of quoted and unquoted shares in the
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balance-sheet. It is the case of the AO that without the efforts of managerial staff and directors of the company, it is not possible to manage the investment portfolio of the assessee and hence the assessee must have incurred some expenses towards the said investment for earning the tax-free income.
The Ld. AR before us has refuted the case of the AO and has submitted that no expenditure was incurred as the investment portfolio is taken care off on an automatic basis.
On the other hand, the Ld. DR supported the orders of the lower authorities.
We have heard the rival contentions and perused the record. The reasoning given by the Ld. AR for not incurring any expenditure the interest-free income is bereft of any plausible explanation. In our view, the active involvement of the managerial staff and directors of the company is required to manage such a huge investment portfolio. The officers of the assessee are bound to constantly manage the affairs pertaining to investment otherwise the investments made for the purposes of earning the exempt income or short-term / long-term capital gains will be of no consequence. Therefore in our view, the AO was right in invoking the provision of Rule 8D(iii) and arrive at the approximate expenditure under various heads like management of investment, remuneration of the managerial staff etc., Therefore, this ground of the assessee is bound to be dismissed and the order passed by the lower authorities in this regard are upheld. Thus the addition
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made by the AO to the tune of Rs.61,578/-, Rs.64,072/-, Rs.63,252/- and Rs.68,928/-, for the AYs 2007-08 to 2010-11 respectively are upheld.
In the result, all the four appeals of the assessee are partly allowed .
Order pronounced in the open court on 17th day of November, 2017.
Sd/- Sd/-
(INTURI RAMA RAO) (LALIT KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER Bengaluru Dated : 17th November, 2017 MCN* Copy to: 1. The assessee 2. The Assessing Officer 3. The Commissioner of Income-tax 4. Commissioner of Income-tax(A) 5. DR 6. GF, ITAT, Bangalore By Order SENIOR PRIVATE SECRETARY