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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI AMARJIT SINGH, JM
सुनवाई क� तार�ख / : 23.01.2018 Date of Hearing घोषणा क� तार�ख / : 09.03.2018 Date of Pronouncement आदेश / O R D E R Per Shamim Yahya, A. M.: This appeal by the Revenue is directed against the order of the ld. Commissioner of Income Tax (Appeals) dated 31.12.2015 and pertains to assessment year 2010-11.
The grounds of appeal read as under:
(A.Y.2010-11) Dy. CIT vs. M/s. Bennet Coleman & Company Ltd. 1. “Whether on facts and in the circumstances of the case and in Law, the Ld.CIT(A) erred in restricting the disallowance to Rs.73,69,364/- as against Rs.32,59,61,000/- made by the Assessing Officer, without appreciating the fact that section 14A r.s. Rule 8D is squarely applicable in this case and disallowance has to be made as per the formula given in Rule 8D.”
2. “Whether on facts and in the circumstances of the case and in Law, the Ld.CIT(A) erred in allowing software expenses related to website/portal to assessee amounting to Rs.62,36,529/- as revenue expenditure.”
Apropos ground no. 1:
The brief facts of the case are that the assessee company earned dividend income of Rs.12,74,97,916/- from mutual funds and other investments and Rs.22,87,91,487/- being long term capital gains on sale / redemption of investments, both aggregating to Rs.35,62,89,403/-, that was exempt from tax. The total income (revenue) as appearing in the Profit and Loss Account of the assessee company was Rs.36,69,34,00,324/-. While filing the return of income, the assessee disallowed a sum of Rs.73,39,364/- under Sec.14A(1) of the Income Tax Act, 1961 (the Act). The assessee company, in its computation of income, in Note No. 14 had submitted that its treasury operations were centralized and located at its registered office at the Times of India Building, in Mumbai and the investments were made from this registered office only. The assessee company had incurred a sum of Rs.75,58,63,650/- as common expenses (excluding staff costs and expenses directly relatable to printing and publishing activities of the assessee) at its registered office. The salaries, wages and other employee benefits of employees belonging to the Finance Dept. had been considered in entirety in arriving at the common expenses. Based on the above, the (A.Y.2010-11) Dy. CIT vs. M/s. Bennet Coleman & Company Ltd. assessee company arrived at Rs.73,39,364/- being the common expenses in the ratio of "exempt income" to 'total income" and disallowed the same under Sec.14A(1) of the Act as expenditure attributable to earning the exempt income.
In the assessment proceedings, the Assessing Officer asked the assessee company to show cause why expenses in relation to exempt income ought not to be disallowed as per Section 14A r/w Rule 8D of the Act. After considering the submissions of the assessee company, the Assessing Officer made a further addition of Rs.32,59,61,000/- by invoking Rule 8D in the following words at page 17 in para 4.2:
"4.2 I have considered submission made by the assessee. The assessee has suggested method of computation of allocation of indirect expenses to earn exempt income, which comes to Rs.73,39,364/-. However, after insertion of Rule 8D there is no occasion for estimation of disallowance u/s 14A by any other method. I am, therefore, not satisfied with the claim made by the assessee and compute expenditure as per Rule 8D(2) because of following reasons.
Upon assessee's appeal, the ld. Commissioner of Income Tax (Appeals) deleted the addition by holding as under:
4.4 The Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT (328 ITR 81) at page 100-101, while referring to the circumstances when sub-section (2) to Section 14A of the Act r/w Rule 8D can be invoked by the A.O., observed as follows: "Under Sub-Section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of the expression "prescribed" in Section 2(33), must be prescribed by Rules made under the Act. What merits emphasis is that the jurisdiction of the assessing officer to determine the (A.Y.2010-11) Dy. CIT vs. M/s. Bennet Coleman & Company Ltd. 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 form part of the total income. Moreover, the satisfaction of the assessing officer has to be arrived at having regard to the accounts of the assessee. Hence, sub- section (2) does not ipso facto enable the assessing officer to apply the method prescribed by the rules straight away without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The assessing officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the assessee 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 a situation where the accounts of the assessee furnish an objective basis for the assessing officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it Is only in the event of the assessing officer not being so satisfied that recourse to the prescribed method is mandated by law."
4.5 The above observations of the Hon'ble Bombay High Court clearly laid down that Section 14A(2) requires the A.O., in the first instance, to determine whether the claim of disallowance made by the Appellant company under Section 14A(1) is correct, having regard to the accounts of the Appellant company. It is only when the A.O., on an objective basis, comes to a conclusion that the claim of the Appellant company, having regard to its accounts is incorrect, that Rule 8D can be invoked by the A.O.
4.6 The Appellant company had allocated the common expenses incurred by its registered office in the ratio of 'exempt income' to 'total income' as attributable to the earning of exempt income and disallowed Rs.73,39,364/- under Sec.l4A(l) of the I.T. Act, 1961, while filing its return of income. The basis for this disallowance was clearly spelt out by the Appellant company in Note No. 14 of its computation of income.
(A.Y.2010-11) Dy. CIT vs. M/s. Bennet Coleman & Company Ltd. 4.7 The above observations of the Ld. A.O. in para 4.2 of his order to invoke Rule 8D clearly establish that he has not arrived at any objective satisfaction with regard to the correctness of the claim of the Appellant company to disallow Rs.73,39,364/- before invoking Rule 8D. The only reason given by the A.O. in para 4.2 to invoke Rule 8D is his opinion that: -
''However, after insertion of Rule 8D there is no occasion for estimation of disallowance u/s 14A by any other method. I am, therefore, not satisfied with the claim made by the assessee... ......" 4.8 These observations of the A.O. indicate that the only reason for his invoking Rule 8D is his opinion that after the insertion of Rule 8D there is no occasion for estimating the disallowance under Sec.l4A by any other method. This, by no stretch of imagination, can be an objective satisfaction arrived at by the A.O. with regard to the correctness of the claim of the Appellant company to disallow Rs.73,69,364/- under Sec. 14A(1) of the Act while filing its return of income. The ratio of the jurisdictional High Court judgment clearly requires that the A.O. cannot, ipso facto, invoke Rule 8D straight away without coming to such an objective satisfaction on the correctness of the claim of the Appellant company. Not having done so, the action of the A.O. in invoking Section 14A(2) and Rule 8D is beyond jurisdiction. 4.9 In the circumstances, respectfully following the decision of the jurisdictional High Court in the case of Godrej 86 Boyce Mfg. Co. Ltd. vs. DCIT (328 ITR 81) (Bom.) I am of the opinion that invoking Rule 8D by the AO is not justified and accordingly the appeal is allowed. 5.2 I have carefully considered the facts, gone through the Assessment Order and other material available on record as well as the written submissions filed before me. 5.3 The facts submitted by the Appellant company, which facts were also before the A.O., indicate that till the year ended 31st March 2006 the Appellant company did not have any borrowings. The extract of source and application of funds from the Appellant company's audited Balance Sheets for the years ended 31st March 2006 to 31st March 2010, reveals that the Appellant company has deployed its own funds in investments, though it had borrowings in those years. In the circumstances, the facts go to show that only own funds have been deployed by the Appellant company in making investments to earn tax-free income. The Ld. A.R, has relied upon the decisions of the Hon’ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (313 ITR 340) and CIT
(A.Y.2010-11) Dy. CIT vs. M/s. Bennet Coleman & Company Ltd. vs. HDFC Bank Ltd. (366 ITR 505] to argue that no disallowance of interest expense on borrowings is warranted when own funds have only been used to make investments on which tax free income was earned.
5.4 The Hon'ble Bombay High Court in CIT vs. Reliance Utilities & Power Ltd. (313 ITR 340) (Bom.) at page 344 laid down the following principles: "If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd, v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 where a similar issued had arisen ........................................ The principle, therefore, would be that if there are funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. .,......"
5.5 The jurisdictional High Court in CIT vs. HDFC Bank Ltd. (366 ITR 505) (Bom.) held that the above ratio was equally applicable in the case of Section 14A of the I.T. Act. At page 522 of their decision, Their Lordships after reproducing the above principle laid down in the case of Reliance Utilities 85 Power Ltd., held as follows: "We find that the facts of the present case are squarely covered by the Judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the Income-tax Appellate Tribunal in the present case is that the assessee's own funds and other on-interest bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the assessee's capital, profit reserves, surplus and current account deposits were high than the investment in the tax-free securities. In view of this factual position, as per the judgment of this court in the case of Reliance Utilities and Power Ltd. (supra) it would have to be presumed that the investment made by the assessee would be out of the interest-free funds available with the assessee. We, therefore, are unable to agree with the submission of Mr. Suresh Kumar that the Tribunal had erred in dismissing the appeal of the Revenue on this ground."
(A.Y.2010-11) Dy. CIT vs. M/s. Bennet Coleman & Company Ltd. 5.6 Respectfully following the ratio of the jurisdictional High Court in the above decisions, the Appellant company having sufficient interest free funds available wherefrom it has made investments on which it has earned tax-free income, the borrowings made and the interest paid thereon by the Appellant company cannot be attributed to making investments. Hence the Ld. A.O. erred in invoking Rule 8D to attribute interest paid on borrowings and other expenses for purposes of disallowance under Sec.14A(2) of the IT Act. The addition of Rs.32,59,61,000/- made by the A.O. is, therefore, deleted.
5.7 In A.Y.2007-08 vide order no. CIT(A)-I/IT-529/09-10 dated 25.02.2011, my Ld. Predecessor upheld the method adopted by the Appellant company in apportioning the common expenses pertaining to its registered office (excluding the staff costs and the expenses directly relatable to publishing and printing activity) in the ratio of exempt income to total income as a reasonable basis to arrive at a disallowance under Sec.l4A(l) of the Act in the following words: "6.10 The appellant has advanced an alternative submission that the investments on which tax free income has been earned have all been made using the services of its treasury department that is located at its Registered Office at the Times of India Building, Mumbai. Consequently, the appellant contended that the method adopted in apportioning the common expenses pertaining to its Registered Office (excluding expenses directly related to its printing and publishing operations) in the ratio of exempt income to total income is a reasonable basis and based on the same has claimed that Rs.23,80,000 ought to be considered for disallowance u/s 14A of the Act.
6.11 But I have considered this alternative submission of the appellant and am inclined to accept the same. This submission is also in consonance with the ruling of the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. Vs. CIT [328 ITR 81] where, their Lordships while approving the theory of apportioning expenditure between taxable and non taxable income also laid down that a reasonable and fair basis ought to be followed in making the disallowance u/s 14A. It is seen that appellant had no borrowings during the year and hence there is no question of attributing any interest expenditure towards the earning of tax free income. Since the appellant has a dedicated treasury department at its Registered Office that deals also with investment of its surplus funds, there is a direct and proximate nexus between the expenses incurred which are relatable to the running of the said department and the tax free income. It is therefore, appropriate to consider the common
(A.Y.2010-11) Dy. CIT vs. M/s. Bennet Coleman & Company Ltd. expenses of the Registered Office of the appellant (excluding staff cost and the expenses directly related to the printing and publishing operations) and apportion them in the ratio of exempt income to total income. On this basis, the appellant has arrived at a disallowance of Rs.23,80,000 u/s 14A of the Act. Considering the facts and circumstances of the appellant's case and the apportionment being on a reasonable basis, the AO. is therefore directed to disallow Rs. 23,80,000 u/s 14A (1) of the LT. Act, 1961 based on this method. Thus Ground Nos.5, 6, 7, 8 and 9 (a), (b), (c) and (d) are allowed and ground No.4 is dismissed,"
5.8. Respectfully following the same , I am inclined to agree that the disallowance of Rs.73,39,364/- made by the Appellant company under Sec.l4A(l) of the Act can be attributable to the earning of exempt income by the Appellant company and therefore further disallowance made by the A.O. of Rs.32,59,61,000/- is not warranted.
6. Against this order, the assessee is in appeal before us.
We have heard both the counsel and perused the records. The ld. Counsel of the assessee submitted that the issue involved is covered in favour of the assessee by decision of this ITAT in assessee's own case for assessment year 2008-09 in & 3537/Mum/2012 vide order dated 08.01.2018. Further, the learned counsel submitted a chart showing the deployment of funds. From this he claimed that sufficient interest-free funds were available to make the incremental investment.
Hence he submitted that in accordance with the ITAT decision here in above and the finding of learned CIT-A for the current year, the addition in this case has rightly been deleted by the ld. Commissioner of Income Tax (Appeals).
Per Contra, the ld. Departmental Representative relied upon the order's of the assessing officer. In response to the fact that ITAT has decided the issue in assessee's
(A.Y.2010-11) Dy. CIT vs. M/s. Bennet Coleman & Company Ltd. own case in assessee's favour earlier, learned departmental representative submitted that the factual examination of the interest-free funds availability and the investment in tax-free funds have not been examined for the current year by the ITAT in the earlier order.
We have carefully considered the submissions and perused the records. We find that identical issue was considered by this ITAT in assessee's own case as referred here in above. We may gainfully refer to the ITAT's order in this regard as under:
We have heard the rival contentions of both the parties. We find that assessee has produced the chart showing the summary of source and application of funds which was also available before the AO and is extracted as under for the sake of better understanding of the facts: Sources 31.03.2006 31.3.2007 31.3.2008 31.3.2009 Share Capital Reserves and Surplus 2625 3119 3973 4347 Depreciation Reserve 523 669 843 1002 A 3180 3819 4848 5381 Application Investments on which 882 982 1996 2187 tax-free income received Investments in unlisted 313 374 514 807 shares of subsidiary Other Investments 173 324 613 812 B 1368 1680 3123 3806 SURPLUS (A – B) 1812 2139 1725 1575 It is clear from the records that the assessee has replied to show cause notice issued by the AO and furnished details before the lower authorities by means of above chart that the own funds over the years were sufficient to cover the investments in the shares and securities yielding exempt income. We also note that the borrowings of the assessee company have been utilised for other business requirements and not for making the investments as such. The entire interest expenditure on borrowing fund was incurred in connection with the operating revenue which has been offered to tax. Therefore, no disallowance is required to be made under section 14A of the Act. We also find merit in the (A.Y.2010-11) Dy. CIT vs. M/s. Bennet Coleman & Company Ltd. contention of the AR that no objective atisfaction has been recorded by the AO before invoking the provisions of section 14A of the Act and the assessee is supported by the decision of the Hon'ble Jurisdictional Bombay High Court in the case of "Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT [(2010) 328 ITR 81 (Bom)]" in which it has been held as under: "Sub-section (2) of section 14A does not enable the assessing officer to apply the method prescribed by Rule 8D without determining in the first instance the correctness of the claim of the assessee, having regard to the accounts of the assessee. ................... The satisfaction envisaged by sub- section (2) of Section 14A is an objective satisfaction that has to be arrived at by the assessing officer having regard to the accounts of the assessee. .................. An objective satisfaction contemplates a notice to the assessee an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the assessing officer in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee." From the above judgment it is clear that it is necessary for AO to give opportunity to assessee as to why rule 8D should not be invoked. Assessee has placed on all the relevant facts including his accounts qua the claim and it has also given the detailed working qua the suo motto disallowance Rs.1,18,11,210/- voluntarily made by the assessee for earning the exempt income in the return of income. The assessee has claimed that it had all the sufficient funds to cover investments in tax free securities which is corroborated by the financial audited report for various assessment years i.e. 2006-07 and 2007-08. Even the first appellate authority has recorded the findings that assessee's own funds were for more than the investments in shares and securities yielding tax free income. We notice that the assessee had sufficient own funds and is squarel covered by the ratio laid down by the decision of the Bombay High Court in the case of "CIT vs. Reliance Utilities and Power Ltd." (2009) 313 ITR 340 (Bom) which reads as under: "16. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the (A.Y.2010-11) Dy. CIT vs. M/s. Bennet Coleman & Company Ltd. relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.' s case [1982] 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there are funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal."
7. We, therefore, respectfully following the ratio laid down by the Hon'ble Bombay High Court inclined to set aside the order of CIT(A) on this issue and direct the AO to delete the disallowance as made u/s 14A of the Act.
10. We find there is cogency in the ld. Counsel of the assessee’s submissions that the issue in present appeal is covered in favour of the assessee by the ITAT decision in assessee’s own case earlier. It is not the case that the Hon'ble jurisdictional High Court has reversed the decision. As regards the ld. Departmental Representative’s objection that current year’s investments and source have not been examined by ITAT, we find that for the current year, the ld. Commissioner of Income Tax (Appeals) has given his findings that sufficient interest free own funds are available.
This has not been disputed by the ld. Departmental Representative. Hence, we find
(A.Y.2010-11) Dy. CIT vs. M/s. Bennet Coleman & Company Ltd. that the order of the ld. Commissioner of Income Tax (Appeals) is in accordance with the ITAT decision in assessee’s own case. Hence, we uphold the order of the ld. Commissioner of Income Tax (Appeals).
Apropos ground no. 2:
Brief facts of the case are that in Schedule ‘M’ of the P & L account, the assessee has debited an amount of Rs.1,03,57,910/- as Web Site Creation Expenses under the head “Other Administrative Expenses” which falls under the main head of ‘Administration, Selling & General expenses’. During the course of proceedings, the assessee was asked to furnish the details of these expenses. Since, the above amounts relate to development of web-site is of enduring nature, the Assessing Officer hold that expenditure of an amount of Rs.62,36,529/- is of capital nature. The said amount is accordingly disallowed.
Upon the assessee's appeal, the ld. Commissioner of Income Tax (Appeals) deleted the addition by holding as under:
7.3 I have considered the submissions carefully. A website enables dissemination of information relating to the Appellant Company and thus providing wider access to a large section of society. This, by no stretch of imagination, gives rise to acquisition of any capital asset or any enduring advantage so as to constitute capital expenditure. Respectfully following the judicial decisions relied upon by the Appellant company, the facts in the current year being the same as that in the earlier years, I consider it proper and appropriate to delete the addition of Rs.62,36,529/- in respect of website expenses made by the A.O. in the Assessment order.
Against the above order, the assessee is in appeal before us.
(A.Y.2010-11) Dy. CIT vs. M/s. Bennet Coleman & Company Ltd.
We have heard both the counsel and perused the records. We find ourselves in agreement with the ld. Commissioner of Income Tax (Appeals)’s finding that the website creation expenditure is a revenue expenditure and not a capital expenditure. The reliance by the assessee upon the decision of the ITAT Mumbai in the case of CIT vs. Mahindra Realty & Inf. Developers Ltd. duly supports the assessee’s case. Furthermore, same issue has been decided in assessee’s favour in earlier year. Hence, we uphold the order of the ld. Commissioner of Income Tax (Appeals).