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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI R.C. SHARMA, AM & SHRI RAVISH SOOD, JM
आदेश / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER:
The present appeal filed by the revenue is directed against the order passed by the CIT(A)-22, Mumbai, dated 08.04.2015, which in itself arises from the order passed by the A.O under Sec.143(3)(ii) of the Income tax Act, 1961 (for short ‘Act’), dated 31.01.2014. The revenue assailing the order passed by the CIT(A) had raised before us the following grounds of appeal:-
P a g e | ACIT Vs. M/S L & T Infrastructure Finance Co. Ltd. “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not considering interest expenses while calculating disallowance u/s 14A r.w. Rule 8D although the assessee has not maintained separate account for the investment related to exempt income. 2. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal.
3. The appellant prays that the order of CIT(A) on the above ground be set- aside and that of the assessing officer be restored”
2. Briefly stated, the facts of the case are that the assessee which is a non banking finance company carrying on the business of providing financial products and services to its customers engaged in development of infrastructure in power, roads, telecommunication, oil and gas and ports sector in India had e-filed its return of income for A.Y. 2011-12 on 28.09.2011, declaring total income of Rs.231,33,25,226/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. The case of the assessee was thereafter taken up for scrutiny assessment under Sec. 143(2).
3. During the course of the assessment proceedings the A.O observed that dividend income of Rs. 4,08,55,890/- was claimed by the assessee company as exempt. The A.O noticed that the assessee had in its return of income disallowed a sum of Rs. 81,25,709/- under Sec. 14A of the Act. However, the A.O being of the view that the disallowance worked out by the assessee was not as per the Rule 8D of the Income Tax Rules, 1962, therefore, called upon the assessee to explain as to why the disallowance under Sec. 14A r.w. Rule 8D may not be reworked in the backdrop of the claim of exempt income raised by it. The assessee in its reply submitted that no expenses were incurred for earning of the exempt income. It was further submitted by the assessee that no borrowed funds were utilized to make
P a g e | ACIT Vs. M/S L & T Infrastructure Finance Co. Ltd. investments in the exempt income yielding investments. It was submitted by the assessee that though the provisions of Sec. 14A were not applicable to its case, however, a suo motto disallowance of Rs. 81,25,709/- was offered by the assessee under Sec. 14A r.w. Rule 8D(2)(iii) in its return of income for the year under consideration.
The A.O not persuaded to be in agreement with the claim of the assessee that no expenses were incurred for earning of the exempt dividend income, observed that as making of investments and earning of exempt income required efforts, therefore, part of the administrative and other expenses incurred by the assessee could safely be related to the earning of exempt dividend income by the assessee. The A.O on the basis of his aforesaid conviction recomputed the disallowance under Sec. 14A r.w. Rule 8D at Rs. 13,08,51,210/- as under :-
“(i) The amount of expenditure directly relating to income which Nil does form part of total income (ii) In a case, where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in Hence, A x B= 380,16,70,329 x 187,49,99,414 C 5867,92,21,705 12,14,76,213 Where, A = amount of expenditure by way of interest other than the amount of interest included in clause (i) 380,16,70,329 B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee on the first day and the last day of the previous year, i.e. 187,49,99,414
P a g e | ACIT Vs. M/S L & T Infrastructure Finance Co. Ltd. C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year i.e. 5867,92,21,705 (iii) An amount equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and last day of the previous year.
Hench, 0.5% of Rs. 187,49,99,414/- = Rs. 93,74,997/- in the result, the total disallowance u/s 14A works out as under : Disallowance u/s. 14A = Rs. Nil + Rs. 12,14,76,213/- + Rs. 93,74,997/- = Rs. 13,08,51,210/-.”
The A.O after taking cognizance of the fact that the assessee had by itself disallowed a sum of Rs. 81,25,709/-, therefore, made an addition/disallowance of Rs. 12,27,25,501/- [i.e. Rs. 13,08,51,210/- (-) Rs. 81,25,709/-] in the hands of the assessee. The A.O further while computing the MAT liability of the assessee as per Sec. 115JB(f) added the said amount to the ‘book profit’ of the assessee.
5. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) observed that the A.O while re-computing the disallowance under Sec. 14A had made a disallowance of Rs. 12,14,76,213/- under Rule 8D(2)(ii) for the interest expenditure and Rs. 93,74,997/- i.e. 0.5% of the average investment for administrative purposes under Rule 8D(2)(iii). The assessee submitted before the CIT(A) that the A.O had erred in dislodging the disallowance of Rs. 81,25,709/- which was offered by the assessee under Sec. 14A in its return of income for the year under consideration. The assessee assailed the addition/disallowance of interest expenditure of Rs.
P a g e | ACIT Vs. M/S L & T Infrastructure Finance Co. Ltd. 12,27,25,501/- made by the A.O under Sec. 14A, on two grounds, viz. (i) the A.O had erroneously treated the interest expenditure amounting to Rs. 3,80,16,70,329/- as not being directly attributable to any particular income or receipt; and (ii) that as the own funds of Rs. 1,012 crores available with the assessee in the form of share capital and reserve and surplus substantially explained the source of the investments of Rs. 350 crores made by the assessee during the year under consideration, therefore, no disallowance in respect of the interest expenditure was called for in the hands of the assessee. The assessee in order to drive home his contention that the A.O had wrongly invoked Rule 8D(2)(ii) for making a disallowance of the interest expenditure of Rs. 12,14,76,213/-, submitted that the disallowance under the said statutory rule could only be invoked where the interest expenditure incurred by the assessee was not directly attributable to any particular income or receipt. It was submitted by the assessee that as the interest expenditure of Rs. 3,80,16,70,329/- was incurred on the borrowed funds which were advanced by the assessee in the course of its business to its customers as infrastructure loans, against which the interest income received by the assessee was reported as business income and offered to tax, therefore, there was a direct nexus of the interest paid on the loan funds and the interest received on the infrastructure loans. The assessee in order to fortify its aforesaid claim, submitted that the borrowed funds of the assessee on which the interest expenditure had been incurred comprised of (i) term loans; and (ii) NCD borrowings, as under :
Sr. No. Particulars Amount (In crores) 1. Term Loan from banks Rs. 3331.67 2. Bank O/D Rs. 75.64
P a g e | ACIT Vs. M/S L & T Infrastructure Finance Co. Ltd. 3. Commercial Papers Rs. 500 4. Secured NCD’s Rs. 2136.22 5. Term Loan from others Rs. 150 The assessee submitted that as per the RBI Circular, dated 01.07.2009, the term loans could not be given by the banks to the company for investment activities, therefore, the question of utilizing the term loans for making of investments by the assessee in the exempt income yielding investments in shares was clearly ruled out. It was further submitted by the assessee that as the funds which were raised through issue of Non Convertible Debentures (for short NCD’s) were utilized for providing infrastructure loans only, therefore, no inference as regards utilizing of any part of the said funds for making of investment in exempt income yielding shares could also be inferred. The assessee in order to fortify its claim that no part of the interest expenditure was liable to be disallowed under Rule 8D(2)(ii), submitted that following the same methodology the assessee had not offered any disallowance in respect of interest expenditure under Sec. 14A r.w. Rule 8D(2)(ii) in its case for A.Y. 2009-10, which was accepted by the CIT(A) vide its order dated 09.11.2012.
That as regards the disallowance made by the A.O under Sec. 14A r.w. Rule 8D(2)(iii), it was submitted by the assessee that it had while working out the disallowance @ 0.5% of the average investment for administrative purposes at Rs. 81,25,709/-, only considered the investments which were capable of generating exempt income. It was submitted by the assessee that the A.O had erred in considering Compulsorily Convertible Debentures (for short ‘CCD’) of Tikona Digital Networks Pvt. Ltd. of Rs. 49,97,15,040/- as on 31.03.2011, while computing the average value of investments. It was submitted by P a g e | ACIT Vs. M/S L & T Infrastructure Finance Co. Ltd. the assessee that the A.O overlooked the fact that the investment in the aforesaid CCD’s fetched interest income chargeable to tax or taxable long term capital gain, which thus took the said investments beyond the sweep of the investments which were to be included while computing the disallowance under Sec. 14A r.w. Rule 8D(2)(iii). The assessee further submitted that the A.O while computing the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) had wrongly reduced the current liability and provisions for the purpose of arriving at the total value of the assets. It was the claim of the assessee that as the total assets as per Rule 8D was to be construed as the total assets as appearing in the balance sheet and the methodology contemplated therein did not envisage reduction of the current liabilities from the value of the total assets, therefore, the methodology adopted by the A.O for working out the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) also suffered from the aforesaid fallacy.
The CIT(A) after deliberating on the contention raised by the assessee before him in the backdrop of the facts of the case, observed that as the own funds of the assessee by way of share capital and reserve and surplus during the year were to the extent of Rs. 1,012 crores, while for the investments made by the assessee in the exempt income yielding investments were only to the tune of Rs. 350 crores, therefore, the own funds of the assessee were more than the aforesaid exempt income yielding investments. The CIT(A) observed that as the assessee had sufficient self owned funds i.e. share capital and reserve & surplus, therefore, no disallowance under Sec. 14A r.w. Rule 8D(2)(ii) was called for in its hands. The CIT(A) supported his aforesaid view by relying on the judgments of the Hon’ble High Court of Bombay in the case of CIT Vs. Reliance Utilities and Power Ltd (2009) 313 ITR 340 (Bom) and CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom).
P a g e | ACIT Vs. M/S L & T Infrastructure Finance Co. Ltd. The CIT(A) on the basis of his aforesaid observations deleted the disallowance of interest expenditure of Rs. 12,14,76,213/- made by the A.O.
That as regards the disallowance of administrative expenses i.e. @ 0.5 % of average investment made by the A.O under Sec. 14A r.w. Rule 8D(2)(iii), the CIT(A) taking cognizance of the fact that the interest income received from the investments made by the assessee in the Compulsorily Convertible Debentures of Tikona Digital Networks Pvt. Ltd. of Rs. 49,97,15,040/- as on 31.03.2011 was taxable, therefore, the same were liable to be excluded for working out the disallowance under Sec. 14A r.w. Rule 8D(2)(iii). The CIT(A) on the basis of his aforesaid observations directed the A.O to rework the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) @ 0.5% of average investment after excluding the Compulsorily Convertible Debentures of Tikona Digital Networks Pvt. Ltd. of Rs. 49,97,15,040/-.
The revenue being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. We find that despite the fact that the assessee respondent was put to notice as regards the hearing of the appeal, however, neither any appearance had been put forth on its behalf, nor any application seeking an adjournment has been filed. We thus being left with no other alternative, proceed with as per Rule 25 of the Appellate Tribunal Rules, 1963 and dispose of the appeal after hearing the revenue appellant and perusing the orders of the lower authorities. We find that as the assessee during the year under consideration, viz. A.Y. 2011-12 had substantial own funds by way of share capital and reserve & surplus of Rs. 1,012 crores, which sufficiently explained the source of the investments made by the assessee in the exempt dividend income yielding shares of Rs. 350
P a g e | ACIT Vs. M/S L & T Infrastructure Finance Co. Ltd. crores, therefore, keeping in view the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. HDFC Bank Ltd. (2014) (366 ITR 505) (Bom), wherein the Hon’ble High Court had held as under :
“4. We do not agree. In the case at hand, as recorded by the ITAT, undisputedly the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax free securities. The ITAT therefore held that there was no basis for deeming that the Assessee had used the borrowed funds for investment in tax free securities. On this factual aspect, the ITAT did not find any merit in the contention raised by the Revenue and therefore, accordingly answered the question in favour of the Assessee. On going through the order of the CIT (Appeals) dated 28th March 2005 as well as the impugned order, we do not find that the CIT (Appeals) or the ITAT erred in holding in favour of the Assessee. In this regard, the submission of Mr Mistry, the learned Senior Counsel appearing on behalf of the Assessee, that this issue is squarely covered by a judgment of this Court in the case of Commissioner of Income Tax v/s Reliance Utilities and Power Ltd., reported in (2009) 313 ITR 340 (Bom) is well founded. The facts of that case were that the Assessee viz. M/s Reliance Utilities and Power Ltd. had invested certain amounts in Reliance Gas Ltd. and Reliance Strategic Investments Ltd. It was the case of the Assessee that they themselves were in the business of generation of power and they had earned regular business income therefrom. The investments made by the Assessee in M/s Reliance Gas Ltd. And M/s Reliance Strategic Investments Ltd. were done out of their own funds and were in the regular course of business and therefore no part of the interest could be disallowed. It was also pointed out that the Assessee had borrowed Rs.43.62 crores by way of issue of debentures and the said amount was utilised as capital expenditure and inter-corporate deposit. It was the Assessee's submission that no part of the interest bearing funds (viz. Issue of debentures) had gone into making investments in the said two companies. It was pointed out that the income from the operations of the Assessee was Rs.313.53 crores and with the availability of other interest free funds with the Assessee the amount available for investments out of its own funds were to the tune of Rs.398.19 crores. In view thereof, it was submitted that from the analysis of the balance-sheet, the Assessee had enough interest free funds at its disposal for making the investments. The CIT (Appeals) on examining the said material, agreed with the contention of the Assessee and accordingly deleted the addition made by the Assessing Officer and directed him to allow the same under the provisions of the Income Tax Act, 1961. The Revenue being aggrieved by the order preferred an Appeal before the ITAT who upheld the order of the CIT (Appeals) and dismissed the Appeal of the Revenue. From the order of the ITAT, the Revenue approached this Court by way of an Appeal. After examining the entire factual matrix of the matter and the law on the subject, this Court held as under :- “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 P a g e | ACIT Vs. M/S L & T Infrastructure Finance Co. Ltd. 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 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 were 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 funds generated or available with the company if the interest-free funds were sufficient to meet the investment. 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.”
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 ITAT in the present case is that the Assessee's own funds and other non-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 higher 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. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected.” , the CIT(A) had rightly concluded that no disallowance of the interest expenditure was called for in the hands of the assessee under Sec. 14A r.w. Rule 8D(2)(ii). We thus finding no infirmity in the order of the CIT(A), who had on the basis of his aforesaid observations deleted the P a g e | ACIT Vs. M/S L & T Infrastructure Finance Co. Ltd. disallowance of interest expenditure of Rs. 12,14,76,213/-, therefore, uphold his order to the said extent.
That adverting to the issue as regards the disallowance of the administrative expenses made by the A.O under Sec. 14A r.w. Rule 8D(2)(iii), i.e. @ 05.% of average investment, we find that the assessee had offered a disallowance of Rs. 81,25,709/- as per Rule 8D(2)(iii) @ 0.5% of the average investments of Rs. 162,51,41,906/-. The aforesaid computation of the disallowance by the assessee was dislodged by the A.O, who re-worked the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) after including the investments made by the assessee in Compulsorily Convertible Debentures of Tikona Digital Networks Pvt. Ltd. of Rs. 49,97,15,040/-. We find that the CIT(A) taking cognizance of the fact that the interest received on the aforesaid Compulsorily Convertible Debentures of Tikona Digital Networks Pvt. Ltd. were taxable, therefore, observed that while computing the disallowance as per Rule 8D(2)(iii), the average investments were to be worked out after excluding the said CCD’s. We have given a thoughtful consideration to the issue and are of the considered view that as per 8D(2)(iii) the average value of investments that have to be considered for working out the disallowance are those, the income from which does not or shall not form part of the total income. We are of the considered view that the CIT(A) rightly observing that as the interest received on the Compulsorily Convertible Debentures of Tikona Digital Networks Pvt. Ltd. was taxable, therefore, the same could not be permitted to form part of the average value of investments contemplated in the formula laid down in Rule 8D(2)(iii). We thus finding no infirmity in the directions of the CIT(A) that the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) was to be worked out after excluding the Compulsorily
P a g e | ACIT Vs. M/S L & T Infrastructure Finance Co. Ltd. Convertible Debentures of Tikona Digital Networks Pvt. Ltd. of Rs. 49,97,15,040/-, therefore, uphold his order to the said extent.
We thus in the backdrop of our aforesaid observations uphold the order of the CIT(A) and dismiss the appeal of the revenue.
Order pronounced in the open court on 14.02.2018
Sd/- Sd/- (R.C. Sharma) (Ravish Sood) ACCOUNTANT MEMBER JUDICIAL MEMBER भुंफई Mumbai; ददनांक 14.02.2018 Ps. Rohit Kumar आदेश की प्रनिलऱपि अग्रेपषि/Copy of the Order forwarded to : अऩीराथी / The Appellant 1. प्रत्मथी / The Respondent. 2. आमकय आमुक्त(अऩीर) / The CIT(A)- 3. 4. आमकय आमुक्त / CIT 5. ववबागीम प्रतततनधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai गार्ड पाईर / Guard file. 6. सत्मावऩत प्रतत //True Copy// आदेशधिुसधर/ BY ORDER, उि/सहधयक िंजीकधर (Dy./Asstt. Registrar) आयकर अिीऱीय अधर्करण, भुंफई / ITAT, Mumbai
P a g e | ACIT Vs. M/S L & T Infrastructure Finance Co. Ltd.