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Income Tax Appellate Tribunal, “B”, BENCH KOLKATA
Before: SHRI S. S. GODARA, JM &DR. A.L.SAINI, AM
Per Dr. A. L. Saini: The captioned appeal filed by the Assessee, pertaining to Assessment Year 2011-12, is directed against an order passed by the Ld. Commissioner of Income Tax (Appeals)-4, Kolkata in Appeal No.1842/CIT(A)-4/Range-12/Kol/14-15, dated 02.11.2016, which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’), dated 13.02.2015.
The grievances raised by the Assessee are as follows:
“1 For that the order passed by the Commissioner of Income Tax (Appeals) u/s 250 of the Income Tax Act, 1961 (“the Act”) confirming the disallowance under section 14A of Rs.2,24,62,001/- of the Act, is disputed, arbitrary and bad in law. 2. a) For that the Assessing Officer erred in determining and holding that for earning the exempted income of Rs.12,64,180/- the assessee has incurred expenses of Rs.2,24,62,001/- .
India Glycols Limited Assessment Year: 2011-12 b) For that the Assessing Officer failed to appreciate the fact that interest expenses paid during the year is related to borrowings which are only for the purpose of business carried on by the assessee and are in no way related to the exempt dividend income. c) For that the Assessing Officer as well as the Commissioner of Income Tax (Appeals) failed to appreciate the fact that the investments were made by the assessee long back and were fully out of its own funds and not borrowed funds. d) For that the calculation of disallowance under Rule 8D(2)(ii) of the Income tax Rules, 1962 (“the Rules”) at proportionate value of investments in relation to total assets is illegal, without jurisdiction and authority of law. e) For that the disallowance as made under Rule 8D(2)(ii) and (iii) of the Rules is beyond the disallowance permitted u/s 14A of the Act and no such disallowance could be made on a notional basis which is not with reference to any expenditure incurred whether directly or indirectly. f) For that the disallowance made by Assessing Officer u/s 14A of the Act is against the principles of natural justice and interpretation of law, arbitrary and excessive.
3. For that Assessing Officer further erred in addition of Rs.2,24,62,001/- u/s 14A while computing book profit in the order of assessment and the same should be deleted.
For that the Assessee craves leave to amend, add, delete any of the grounds mentioned above at any time before the final hearing of the appeal.”
The brief facts qua the issue are thatduring the relevant previous year 2010- 11, the assessee company had earned dividend income of Rs.12,64,180/- which was exempted u/s 10(34) of the Act. The assessee company has a common business set up and all the business and investment activities are carried out from the same administrative set up. Further, there is a common pool of fund for regular business activity as well as for investment and other activities of the company. The ld AO noted that under the scheme of taxation, it is the net income which has to be taxed and not the gross receipts. Similarly, it is the net income which is exempt and not the gross receipts. Accordingly, in case of dividend, it is the net income on account of dividend which is exempt. The assessee has not made any disallowance relatable to dividend income which does not form part of total income. Therefore, the assessee was asked to furnish the details of expenses incurred for earning exempt income u/s 14A r.w.r. 8D of the I.T. Rules.
4. In response, assessee has submitted working of disallowance u/s 14A r.w.r. 8D of the I.T. Rules. The assessee has also submitted that in the return filed by them, they had not made any deduction u/s 14A of the Income Tax Act, as the investments held Page | 2
India Glycols Limited Assessment Year: 2011-12 by the Company were mostly made several years back and were acquired from company’s own fund.
The ld AO noted that sub-section(3) of section14A of the Act,covers a situation where the assessee claims that no expenditure has been incurred in relation to earning of exempt income and directs that provisions of sub-section (2) shall apply. As per Rule 8D, the aggregate of following three categories of expenses shall be the amount of expenses disallowable u/s 14A of the Act:
(i) expenditure directly relating to exempt income [8D(2)(i)].
(ii) expenditure by way of interest which is not directly attributable to particular income [8D(2)(ii)].
(iii) an amount equal to 0.50% of average value of investment [8D (2) (iii)] Having regard to the amounts of the assessee company, the ld AO was not satisfied with the correctness of the claim of the assessee that no expenditure has been incurred by it in relation to earning of Dividend income therefore, provisions of section 14A(2) r.w.r. 8D of the I.T Ruleswas invoked. Reliance in this respect was placed by the ld AO, on the decision of Hon’ble ITAT, Kolkata in the case of Champion Commercial Co. Lt,. in wherein the Hon’ble ITAT, Kolkata had relied on the observation of Hon’ble High Court of Bombay, in the case of Dhanuka & sons vs. CIT (339 ITR 319) which is as follows:
In the case before us, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired…………………..
In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the Page | 3
India Glycols Limited Assessment Year: 2011-12 income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment.” Therefore, in a situation where the Assessing Authority is not satisfied with the correctness of the claim regarding disallowance of expenses in relation to earning of exempt income, the quantum of disallowance has to be necessarily worked out as per Rule 8D which provides mechanism for the computation of quantum of disallowance u/s 14A. In view of the above, claim of the assessee that no disallowance u/s 14A of the Act can be made,was not accepted by the ld AO. Therefore, the disallowance u/s 14A r.w.r 8D was worked as follows:
Disallowance u/s 14A r.w.r. 8D Rs. Rs. 8D(2)(ii) Total interest paid 972,965,000 Less: Finance charges 156,651,000 (A) Interest (A) 816,314,000 Working of average investment relatable to exempt income As on 31.03.2010 As on 31.03.2011 Investment 411,911,069 572,016,093 (B) Average Investment (B) 491,963,581 Total assets As on 31.03.2010 As on 31.03.2011 17,904,784,585 22,250,507,830 (C) Average value of total assets 20,077,646,208 8D(2)(ii) Interest relatable to exempt income A*B/C 20,002,183 8D(2)(iii) ½% of Total Average investment B*1/2% 2,459,818 Total disallowance u/s 14A 22,462,001 Therefore, as per the working mentioned above, the ld AO made the disallowance U/s 14A r.w.r 8D of the I.T. Rules, to the tune of Rs.2,24,62,001/-.
Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) but without any success. The ld CIT(A) noted that the assessee had earned exempt dividend income but made no interest disallowance relatable to earning the same. The assessee had common business set up and all its business and investment activities were carried out from the same administrative set-up. The assessee was not able to controvert the findings of the ld AO, therefore, the disallowance made by the Assessing Officer was confirmed by the ld CIT(A).
Aggrieved by the order of ld CIT(A), the assessee is in further appeal before us. Page | 4
India Glycols Limited Assessment Year: 2011-12 8. The ld Counsel for the assessee begins by pointing out that the Assessing Officer ignored the details and documents submitted and submissions made by the assessee during the assessment proceedings. The ld AO relied solely on the decision of Hon'ble ITAT, in the case ofChampionCommercial Co. Ltd. in ITA No. 644/Kol/2012, wherein ITAT, relied on theobservation of Hon'ble High Court of Bombay in case of Dhanuka & Sons vs. CIT (339ITR 319) which clearly distinguishable on the circumstances and the facts and is not relevant to the assessee under consideration. The ld Counsel submitted before us the year-wise details of owned funds i.e. Share Capital and Reserves & Surplus andinvestment made each year from Assessment Year 1995-96 to Assessment Year 2011- 12, whichare as under:
Assessment Year Share Capital Reserves & Own Fund Investments Surplus 1995-96 2,788 4,859 7,648 50 1996-97 2,788 6,079 8,865 166 1997-98 2,788 7,327 10,115 125 1998-99 2,788 8,726 11,514 609 1999-00 2,788 9,499 12,287 647 2000-01 2,788 10,789 13,578 1,134 2001-02 2,788 11,845 14,633 1,258 2002-03 2,788 9,513 12,301 1,146 2003-04 2,788 9,615 12,403 1,146 2004-05 2,788 14,550 17,338 1,198 2005-06 2,788 21,494 24,282 777 2006-07 2,788 25,939 28,727 241 2007-08 2,788 28,912 31,701 264 2008-09 2,788 45,480 48,268 1,294 2009-10 2,788 35,090 37,879 1,301 2010-11 2,788 36,600 39,389 4,119 2011-12 2,788 38,678 41,467 5,720 The above details were produced before the Assessing Officer during the course of assessment proceeding and also the same were submitted before the Learned Page | 5
India Glycols Limited Assessment Year: 2011-12 Commissioner of Income Tax (Appeals) in course of appellate proceedings. Therefore, from the above details it is clear that the assessee made investments from time to time, each year the interest free owned funds of the assessee were many times more than the investment, thus, the investments were purchased from the interest free owned funds of the assessee and no interest expenditure was incurred for maintaining the portfolio on these investments or for holding the same. These investments are long term investment and are out of owned funds of the assessee.
The ld Counsel relied on the judgment of the jurisdictional High Court in the case of M/s. BalarampurChini Mills Ltd. Vs. DCITITA No. 504/K/2011 for AY 2008-09 dated 29.07.2011, wherein it was held as under:
8. Here in the present case, there is no linkage or nexus between the funds borrowed by assessee and the impugned investments, hence no interest expenditure can be disallowed by mechanically applying the Provisions of Rule 8D of the Rules. The assessee has explained that the share capital and reserves, that is its own funds, were utilised for the purpose of investment in shares for earning dividend income and this has not been negated by lower authorities i.e. neither CIT(A) nor Assessing Officer. The assessee has explained each and every investment with sources of funds and its utilization as well as opening application of funds and closing application of funds as noted above. It is an admitted position in law that expenditure can be disallowed U/s.14A of the Act if and only if it is incurred in relation to income which does not form part of total income.
The ld Counsel submitted that the assessee credited a sum of Rs. 12,64,180/- as dividend income in the profit and loss account and claimed the same as an exempt income in its computation of taxable income. In the course of assessment proceedings, the assessee explained that no expenditure was incurred by it for earning of such income. Therefore, no part of the expenditure debited in the profit and loss account which was incurred exclusively for the purpose of the business of the assessee, relates to earning of exempt income, but the Assessing Officer disallowed Rs. 2,24,62,001/- u/s 14A of the Act. The details of dividend income earned by the assessee during the relevant assessment year is as follows:
India Glycols Limited Assessment Year: 2011-12 Investment Name Dividend Received (Rs.) Axis Bank Limited 4,08,000 ICICI Bank Limited 30,000 IDBI Bank Limited 6,34,620 UTI Bonds (Mutual Fund) 1,91,560 Total 12,64,180/- In Rule 8D(2) (ii) the words used are " the average value of investment, income from which does not form or shall not form part of the total income as appearing in the Balance Sheet as on the first day and on the last day of the Previous Year." Thus, it is not the average of total investment at the beginning of the year and at the end of the year which is to be considered but it is the average of total value of investments in shares and securities which give rise to income and does not form part of total income or exempt income which has to be considered while calculating disallowance under Rule 8D(2) of the Rules.
The ld Counsel, relied on the judgement of Delhi High Court in the case of Cheminvest Limited vs. Commissioner of Income Tax (ITA No.749/2014) wherein it was held that "the expression "does not form part of the total income" in Section 14A of the Act, envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year."
The ld Counsel also relied on the judgment of Hon'ble Income Tax Appellate Tribunal, Kolkata in the case of REI Agro Ltd., Kolkata Vs DCIT, Central Circle-XXVII, Kol (ITA Nos. 1331/Kol/2011 and 1423/Kol/2011), wherein it was held that not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income.
India Glycols Limited Assessment Year: 2011-12 9. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.
10. We have given a careful consideration to the rival submissions perused the material available on record, we note that as far as disallowance of interest expenses under Rule 8D(2)(ii) of the Rules is concerned, it is clear from the Balance Sheet of the assessee for the financial year 2010-11 that the assessee had non-interest bearing funds sufficient to cover the investments made in shares and securities. In the financial year 2010-11, the assessee company has share capital to the tune of Rs.2,788 lakhs and Reserve and Surplus to the tune of Rs. 36,600 lakhs, thus total own funds comes to the tune of Rs.39,389 lakhs, which is more than the total investments of Rs.4,119 lakhs. It has been held by the Hon’ble Bombay High Court in the case of CIT vs Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) and CIT vs HDFC Bank Ltd (2014) 49 taxmann.com 335 (Bom) that where interest free funds and overdraft and loans taken are available with an assessee, then a presumption would arise that the investments would be out of the interest free funds generated or available with the assessee, if the interest free funds were sufficient to meet the investments. The aforesaid view has been followed by the Hon’ble Calcutta High Court in the case of Principal CIT vs Rasoi Ltd. In ITAT No.109 of 2016 in GA No.633 of 2016 judgment dated 15.02.2017. In view of the aforesaid legal position and the view of the fact that the assessee had enough own funds which was more than the investments which yielded tax free income there can be no disallowance of interest expenses in terms of Rule 8D(2)(ii) of the Rule.
As far as Rule 8D(2)(iii) of the Rules is concerned it has been held by the Hon’ble ITAT Kolkata Bench in the case of DCIT vs. REI Agro Ltd. In dated 14.05.2013 that it is only the investment which yielded tax free income that should be considered for working out the average value of investment while applying the Rule 8D(2)(iii) of the Rules. This order of the Page | 8
India Glycols Limited Assessment Year: 2011-12 tribunal has been confirmed by the decision of Hon’ble Calcutta High Court in G.A. No.3022 of 2013 Judgement dated 23.12.2013. In view of the aforesaid legal position we are of the view that the order of the CIT(A) on this issue cannot be sustained. In the light of the judicial pronouncements, we are of the view that the plea of the assessee to exclude investments which had not yielded any exempt dividend income during the previous year while working out the average value of investments for the purpose of applying Rule 8D(2)(iii) of the Rules, should be accepted. We note that under Rule 8D(2)(iii) what is disallowable is ½% of the average of total value of investments in shares and securities which have yielded exempt dividend income. We note that ld Counsel submitted before the Bench, the details of only those investments which have yielded exempt dividend income, and which can be taken for the purpose of calculation of disallowance under Rule 8D(2)(iii) of the Rules, and the details of which are as under:- Investment Name Financial Year 2010-11 (Rs.) Financial Year 2009-10 (Rs) Axis Bank Limited 7,14,000 7,14,000 ICICI Bank Limited 1,97,000 1,97,000 IDBI Bank Limited 1,05,00,152 1,05,00,152 UTI Bonds (Mutual 76,13,816 75,09,000 Fund) Total 1,90,24,968 1,82,06,152 We direct the assessing officer to examine the above noted details and compute the disallowance under Rule 8D (2) (iii), by taking into accountonly those investments which have yielded exempt dividend income.
We note that ground No.3 raised by the assessee relates to addition of Rs.2,24,62,001/- u/s 14A, while computing book profit under section 115JB of the Act. We note that the provisions relating to adjustments by way of increase and decrease to the net profit shown by the assessee in Profit & Loss Account, are very explicit in section 115JB of the Act. The items which are to be added to the net profit have been listed out in Explanation 1 to that section. The learned AO should adhere to that list and cannot travel beyond these items. Since there is no mention Page | 9
India Glycols Limited Assessment Year: 2011-12 of Section 14A in the said Explanation 1 to Section 115JB of the Act, the same cannot be added to re-determine the quantum of "Book Profit". The provisions of section 115JB relating to computation of book profit are amply clear and unambiguous. These provisions do not leave any room for adjustment by the assessing officer other than those mentioned in Explanation 1 to section 115JB to the net profit reflected in the accounts of any assessee and adjustment by way of disallowance u/s 14A is not included in the said explanation. Therefore, we delete the addition of Rs.Rs.2,24,62,001/- We delete the addition, to the tune of Rs.2,00,02,183/- made by ld AO under Rule 8D (2) (ii), as the assessee had enough own funds which was more than the investments which yielded tax free income, as explained above. We also delete the addition of Rs. Rs.2,24,62,001/-, made by Ld AO while computing book profit under section 115JB of the Act. The disallowance under Rule 8D (2) (iii) is allowed for statistical purposes as per the discussion made (supra).
In the result, the appeal filed by the assessee is partly allowed.
Order is pronounced in the open court on 24.08.2018.