DCIT, CIR-11(1), KOLKATA, KOLKATA vs. M/A. KHAITAN INDIA LTD, KOLKATA

Date of Hearing : 13.11.2018 Date of Pronouncement : 16.11.2018 ORDER Per M.Balaganesh, AM

M/s Khaitan India Ltd. A.Yr. 2013-14 appliances. The assessee filed its return of income for the Asst Year 2013-14 on 27.9.2013 declaring total loss of Rs 5,44,78,899/-. The assessee filed a revised computation declaring loss of Rs 3,74,14,050/- during the course of assessment proceedings. The ld AO observed that in support of assessee’s claim of expenditure and on various queries raised in course of hearing, the authorized representative of the assessee submitted the details as per requisition and Xerox copies of documents. The ld AO examined the balance sheet, profit and loss account along with schedules, tax audit report and other details and documents submitted during the course of hearing. The ld AO asked the assessee as to why disallowance of expenses u/s 14A of the Act should not be made in the instant case as the assessee was having exempted income . The assessee offered a sum of Rs 8,25,160/- for disallowance u/s 14A of the Act read with Rule 8D(2)(iii) of the Income Tax Rules , 1962. The ld AO however observed that the assessee had paid interest on its borrowed funds and accordingly recomputed the disallowance to be made u/s 14A of the Act read with Rule 8D of the Rules as under:-

Disallowance under Rule 8D(2)(ii) - Rs 65,92,509/- Disallowance under Rule 8D(2)(iii) - Rs 8,25,835/- --------------------- Rs 74,18,344/-

M/s Khaitan India Ltd. A.Yr. 2013-14 submitted by the assessee that all the existing Share in Financial Year 2012-13 in various companies had been acquired in the earlier years only by way of utilizing its own fund available for the Share Capital and the Reserves. Accordingly, the assessee submitted that there could not be any disallowance of any part of the Interest paid on Loan since the Loan had been utilized for specific purposes, viz., carrying on the business of the assessee. The assessing officer did not accept the assessee’s submissions and after making reference to certain decisions of the ITAT and the High Courts, he stated that he would apply Rule 8D(2)(ii) for disallowance of Interest on the assumption that the concerned Loan had allegedly been utilized for the purpose of making Investments In Shares. The Assessing Officer took into account the average value of the Investments at Rs. 16,51,67,043/- and the average value of the total assets at Rs. 105,29,69,354/- and thereafter he applied Rule 8D(2)(ii) and he arrived at an amount of Rs. 65,92,509/- which he considered as the amount of interest allegedly disallowable u/s 14A read with Rule 8D(2)(ii). Further, he considered another disallowable amount of Rs. 8,25,835/- under Rule 8D(2)(ii). As a result the total amount considered by the Assessing Officer as disallowable, came to Rs. 74,18,344/- (Rs. 65,92,509 + 8,25,835). The assessee submits that the value of Shares as per the assessee’s Balance Sheet as at 31.03.2013 had been Rs. 16,49,90,444/- which remained constant at the beginning as well as at the end of the year. Hence, the average of the balances should have been considered by the Assessing officer at Rs. 16,49,90,444/-. The assessee submits that the investments which were existing during the Financial Year 2012-13, had been made by the assessee in the earlier year as under:

M/s Khaitan India Ltd. A.Yr. 2013-14 Copies of the Balance Sheets for the Financial Years 1992-93 to 2015-16 are enclosed for ready reference. From the above chart it may kindly be appreciated that in all the years when investments had been made in Shares the assessee had more than sufficient balance in it share capital and reserves and accordingly the entire investments had been made by way of utilization of only the fund owned by the assessee and no part of the borrowed fund, i.e. Loan was ever utilized by the assessee. Though these facts had duly been brought to the attention of the Assessing Officer, yet he did not take into account the availability of own fund in the hands of the assessee and he went on to assume that the assessee’s utilization of borrowed fund had been partly for the purpose of making Investments in Shares and he made a disallowance of Rs. 65,92,509/- out of interest paid on Loan by applying Rule 8D(2)(ii). The assessee further submitted On the basis of the above facts the appellant submits that-(i) In view of the fact that no part of the borrowed fund, i.e., Loan had been utilized by the appellant for making Investments in Shares, no portion of the Interest paid on Loan should have been disallowed by the Assessing Officer u/s 14A read with Rule 8D(2)(ii) and accordingly the appellant submits that the disallowance of Interest of Rs.65,92,509 should be held as unjustified. The assessee submits that it was required of the Assessing Officer to establish that there had been alleged nexus between the Loan and the Investments made to hold that part of loan could allegedly have been utilized for making investments. In this regard several decisions have been taken by the Courts and ITATs holding that no disallowance would be called for where an assessee had made investments out of his own funds or the own 5

M/s Khaitan India Ltd. A.Yr. 2013-14 funds available with him had been quite sufficient to make investments from which the income could be exempt and further that for making any disallowance it would be necessary to prove nexus between the loan and the making of investments. Some of the decisions are being referred to hereunder:

(a) CIT v. Winsome Textile lndustries Ltd. [2009] 319 ITR 204 (Punj & Har); (b) Yatish Trading Co. (P.) Ltd. v. Asst CIT [2011] 129 ITD 237(Mum ITAT); (c) Maruti Udyog Ltd. v. Dy, CIT [2005] 921TD 119(Delhi ITAT); (d) ITO v, Strides Arcolab Ltd. [2012] 138 ITD 323 (Mum ITAT); (e) Balarampur Chini Mills Ltd. v. Dy. CIT [2012] 20 Taxman.com 117(Kol); (t) CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom); (g) CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 (Punj & Haryana); (h) CIT v. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom).

(ii) Without prejudice to the submission made in (i) above, the assessee submits that the computation of the allegedly disallowable amount by applying Rule 8D(2)(ii) by taking into account the average value of Investments at RS.16,51,67,043 instead of the correct figure of Rs.16,49,90,444, should be held to be wrong and the correct amount may kindly be directed to be taken into account whereby the allegedly disallowable sum would arrive at RS.65,85,460 instead of Rs.65,92,509 as computed by the Assessing Officer.

(iii) Without prejudice to the submissions made at (i) and (ii) above, the appellant submits that the action of the Assessing Officer in taking into account the Interest payment of Rs.4,20,28,419 for the purpose of making a disallowance by applying Rule Rule 8D(2)(ii) had been wrong in view of his not appreciating the fact that as per the Segment Accounts the Interest had been utilized exclusively for the purposes of the assessee’s businesses under the Sugar Division and Marketing Division respectively. 6

M/s Khaitan India Ltd. A.Yr. 2013-14 Hence, the Assessing Officer may kindly be directed not to consider the Interest of Rs. 4,20,28,419 for disallowance under Rule 8D(2)(ii). Without prejudice to the submissions made at (i),(ii) and (iii) above, the assessee further submits that since the assessee had not earned any dividend during the year which could be exempt, there could not be any disallowance u/s 14A and so the action of the Assessing Officer in making any disallowance u/s 14A was wrong. Hence, the assessee submits that the entire disallowance of Rs. 74,18,344/- may kindly be deleted.

“7.1. I have considered the submission of the AR of the assessee in the backdrop of the assessment order. I have also taken note of the various judicial decisions as referred to by the AR in support of his argument. It is the contention of the AR of the assessee that since no exempt income had been earned during the year under consideration, there was no need for resorting to the provisions of section 14A r.w.Rule 8D. Having perused the accounts of the assessee and finding that no exempt dividend income had been earned by it during the year under consideration. I do not find any merit in the action of the AO in making the impugned disallowance . The matter is well settled by various judicial forums that when there is no exempt income earned by an assessee, the provisions of section 14A r.w. Rule 8D would not be applicable. The Delhi High Court in the case of Chem Invest Ltd. vs. CIT reported in 378 ITR 33 (Del) has held that where there is no exempt income no disallowance is called for u/s 14A of the Act. Respectfully following the foregoing decision, I direct the AO to delete the impugned addition. This ground is allowed accordingly.”

M/s Khaitan India Ltd. A.Yr. 2013-14 Accounts were audited and copies thereof had been submitted before the Assessing Officer. Copies of the Segment Accounts are enclosed for ready reference. The Assessing Officer asked the assessee as to why should there be no disallowance u/s 14A read with Rule8D in relation to the Exempt Agricultural Income. The assessee duly explained the whole issue. It was pointed out to the Assessing Officer that the assessee had claimed exemption for net Agricultural Income after reducing the Gross Income of the Agriculture Division by the expenditure incurred to earn such income, but the Assessing Officer did not consider properly the said fact. The Assessing Officer computed the alleged disallowable amount u/s 14A at Rs.21,13,761 under Rule 8D(2)(iii). Since the Agricultural Income had been exempt from tax u/s 10(1), the appellant in its Return reduced the net income of RS.1,77,23,438 earned from Agricultural Division while computing the taxable income. In computing the exempt Agricultural income, all the relatable expenses had been deducted from the Agricultural Income and no part of such expenditure was claimed by the assessee . In view of the fact that no part of the expense relating to the Agricultural division had been claimed by the assessee , there was no need to take into account any expense, direct or indirect, of the Agricultural Division for the purpose of computing disallowable expense u/s 14A. It was submitted before the Assessing Officer that there could not have been any requirement of any further disallowance u/s 14A in relation to any expense attributable to the assessee's Agricultural Income. However, the Assessing Officer without properly examining the Return vis-a-vis the Accounts of the appellant, held that further disallowance would allegedly be necessary u/s 14A Rule 8D in 21,13,761. The assessee submits that since no expenditure relatable to the Agricultural Income had been claimed by the assessee , the Assessing Officer's action in making a Disallowance of Rs.21,13,761 by applying Rule 8D(2)(iii) should be held as unjustified and so the disallowance of Rs.21,13,761, may kindly be deleted. The assessee further submits that for earlier two Assessment Years 2008-09 and 2009-10 also similar disallowances had been made by the Assessing Officer and in Appeals the CIT(Appeals)-4, Kolkata .vide 8

M/s Khaitan India Ltd. A.Yr. 2013-14 his two separate Appellate Orders both dated 10/07/2015 deleted the said disallowances. Copies of the above-referred two Appellate Orders both dated 10/07/2015 are enclosed for ready reference. The assessee submits that for the Assessment Year 2013-14 also, following the above- referred Appellate Orders, the disallowance of Rs.21, 13,761 may kindly be deleted. Without prejudice to the above, the assessee further submits that while computing the alleged further disallowable amount under Rule 8D(2)(iii) in relation to the Agricultural Division, the Assessing Officer assumed the Average Total Value of the Assets of the Agricultural Division at Rs.42,27,52,232 as the appellant's alleged average of value of investments from which the earned income did not form part of Total Income as appearing in the Accounts of the appellant. The appellant submits that this assumption of the Assessing Officer was not in accordance with the provisions contained in Rule 8D of the income-tax Rules, 1962. The Assessing Officer should have appreciated that the income of the Agricultural Division had been earned through Operation and not by way of any return from any alleged investment. Thus the Assessing Officer was wrong in taking into account the alleged average investment at Rs.42,27,52,232 and in making a disallowance of Rs.21,13,761. On the basis of the above facts and the Appellate decisions for the earlier years, the assessee submits that the Assessing Officer's action in disallowing RS.21,13,761 under Rule 8D(2)(iii) in relation to the assessee's Agricultural Division, had been on a wrong assumption and therefore the said disallowance, may kindly be deleted.

“8.1. I have considered the submission of the AR of the appellant in the backdrop of the assessment order. I find force in the arguments of the AR that since the Agricultural Income had been exempt from tax u/s 10(1), the appellant in its return of income reduced the net income of Rs. 1,77,23,438 earned from Agricultural Division while computing the taxable income. In computing the exempt Agricultural income, all the 9

M/s Khaitan India Ltd. A.Yr. 2013-14 relatable expenses had already been deducted from the Agricultural Income and no part of such expenditure was claimed by the appellant. In view of the fact that no part of the expense relating to the Agricultural division had been claimed by the appellant, I find no merit in the action of the Aa to consider direct or indirect expenses of the Agricultural Division for the purpose of computing disallowable expense u/s 14A. I find that the AO has not considered the issue properly and without properly examining the Return of income vis-a-vis the Accounts of the appellant, and made further disallowance u/s 14A read with Rule 80 amounting to Rs.21,13,761. I find that for AYs 2008-09 and 2009-10 similar disallowances had been made by the AO and the CIT(Appeals)-4, Kolkata vide his two separate orders both dated 10/07/2015 deleted the said disallowances. Copies of the two Appellate Orders both dated 10/07/2015 were furnished before me as well. Therefore following the Appellate decisions in the appellants own case for the earlier years, I direct the AO to delete the disallowance of Rs. 21,13,761 made under Rule 8D(2)(iii) in relation to the appellant's Agricultural Division. These grounds are allowed.”

M/s Khaitan India Ltd. A.Yr. 2013-14 11.1. Hence respectfully following the ratio laid down in the aforesaid decisions, we find no infirmity in the order of the ld CITA deleting the disallowance u/s 14A of the Act in the sum of Rs 74,18,344/-. Accordingly, the Ground No. 1 raised by the revenue is dismissed.

11.2. With regard to disallowance u/s 14A of the Act made towards agriculture division in the sum of Rs 21,13,761/- , we find that the assessee had provided segmental annual statement of accounts for each of its divisions. The assessee had claimed agricultural income of Rs 1,77,23,438/- as exempt after reducing the expenditure attributable to agriculture division from the gross receipts of agriculture division. The assessee had not claimed exemption towards agricultural income on its gross receipts. It had claimed exemption u/s 10(1) of the Act only for the net agricultural income. Hence we hold that there is no need to take into account any direct or indirect expenses of the agriculture division and apply the provisions of section 14A of the Act thereon. We hold that the ld CITA had rightly deleted the disallowance u/s 14A of the Act in the sum of Rs 21,13,761/- which does not call for any interference. Accordingly, the Ground No. 2 raised by the revenue is dismissed.

Order pronounced in the Court on 16.11.2018