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Income Tax Appellate Tribunal, KOLKATA ‘C’ BENCH, KOLKATA
Before: Sri J. Sudhakar Reddy & Sri S.S. Viswanethra Ravi]
Per J. Sudhakar Reddy, AM :- Both these appeals by the assessee are directed against the order of the ld. Assessing Officer passed u/s 143(3) r.w.s 144C of the Income Tax Act, 1961 (the ‘Act’), for the Assessment Year 2012-13, dt. 24/11/2016 and for the Assessment Year 2013-14, dt. 28/08/2017. 2. Facts in brief:- The assessee is a company and is engaged in the business of owning and operating ships, primarily bulk carriers. In the course of its business operations, the assessee entered into international transactions with its Associate Enterprise (AE), Surrendra Overseas (Panama) Inc. (SOP) and Apeejay Tea (Panama) Inc. (ATP). The international transactions for the Assessment Year 2012-13 and T.P. Adjustments, are as follows:-
Assessment Year: 2012-13 Assessment Year: 2013-14 M/s. Apeejay Shipping Limited
As can be seen from the above table, the issue for adjudication for this Assessment Year 2012-13 is the international transactions of corporate guarantee and the transaction of loan to SOP. The international transactions for the Assessment Year 2012-13 and T.P. Adjustments, are as follows:-
As can be seen from the above table, the issue for adjudication for this Assessment Year 2013-14, is the international transactions of corporate guarantee
Assessment Year: 2012-13 Assessment Year: 2013-14 M/s. Apeejay Shipping Limited and the transaction of loan to SOP as well as the transactions of provisions of corporate guarantee to ATP.
We first take up Assessment Year 2012-13
The submissions of the assessee in respect of the Transfer Pricing (TP) Adjustment in question, is as follows:-
Assessment Year: 2012-13 Assessment Year: 2013-14 M/s. Apeejay Shipping Limited Assessment Year: 2012-13 Assessment Year: 2013-14 M/s. Apeejay Shipping Limited Similar submissions arguments were made for the Assessment Year 2013-14.
The ld. Counsel for the assessee submitted that the matter may be set aside to the file of the Assessing Officer for fresh adjudication, in view of the above submissions.
4.1. The ld. D/R, though not leaving his grounds, ultimately submitted that the issue may be set aside to the file of the Assessing Officer/TPO for determining the ALP after considering the submissions of the assessee afresh. 4.1.1. In view of the rival submissions, we deem it fit and proper to set aside this issue of determination of ALP of both the loan and guarantee transactions in question to the Assessment Year: 2012-13 Assessment Year: 2013-14 M/s. Apeejay Shipping Limited file of the Assessing Officer/TPO for fresh adjudication, in accordance with law. The Assessing Officer shall consider the fresh analysis provided by the assessee and all the submissions that may be made by it, before us as well as the additional evidences/material placed before us while determining the ALP.
4.2. In the result, this ground of appeal for both the Assessment Years are allowed for statistical purposes.
5. The second issue that arises for our consideration for both the Assessment years, is the disallowance u/s 14A of the Act. The contentions of the assessee is that the Assessing Officer has not recorded reasons as to why he is not satisfied with the suo moto disallowance made by the assessee u/s. 14A of the Act. The assessee relied on certain decisions in support of these contentions.
For the Assessment Year 2013-14, at para 5 of the draft assessment order dt. 29/12/2016, the Assessing Officer stated as follows:-
“5. It is seen from the Balance Sheet filed by the assessee company alongwith its return of income that it had shown nail-current investments in equity instruments, Preferential Shares, Joint Venture & Bonds to the tune of Rs.492,30,81,000/ - as on 31.03.2014 in comparison to Rs.210,41,11,000/- as on 31.03.2013. In addition to this, the assessee company has shown current investment of Rs.5,74,000/-, Dividend Income of Rs.96,36,000/-. The A/R of the assessee company was requested to show cause as to why provision of section 14A read with Rule 8D shall not be invoked in the case. In response to the same, the A/R of the assessee company has filed a computation of disallowance made suo motu under section 14A to the tune of Rs.20,02,735/- and the same has been added back to the total income of the assessee concern by themselves.”
5.1. Thereafter, at para 5.1., of the draft assessment order the CBDT Circular No.5/2014 [F.No.225/182/2013-ITA II] dated 11.02.2014, has been extracted reads as follows:-
Assessment Year: 2012-13 Assessment Year: 2013-14 M/s. Apeejay Shipping Limited “Section 14A of the Income-tax Act, 1961 (`Act’) provides for disallowance of expenditure in relation to income not “includible” in total income.
A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A of the Act even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial-year.
3. The matter has been examined in the Board. It is pertinent to mention that section 14A of the Act was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A with retrospective effect since inception of the Act was clarified vide Circular No. 14 of 2001 as under: “Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income”. Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial-year or not.
4. The above position is further clarified by the usage of term ‘includible’ in the Heading to section 14A of the Act and also the Heading to Rule 8D of I.T.Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year’s income, for disallowance to be triggered. Also, section 14A of the Act does not use the word “income of the year” but “income under the Act”. This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration.
The above position is further substantiated by the language used in Rule 8D(2(ii) & 8D(2)(iii) of I.T.Rules which are extracted below:
Assessment Year: 2012-13 Assessment Year: 2013-14 M/s. Apeejay Shipping Limited “(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 accordance with the following formula, namely:- A*B/C Where………. B= the average of value of investment, income from which does not or shall not form part of total income as appearing in the balance sheet of the assessee, on the first and last day of the previous year : (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 ’tile last day of the previous year.” (Emphasis added) 6. Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income.”
Similarly, for the Assessment Year 2012-13, in the draft assessment order dt. 29/03/2016, at para 9, he held as follows:-
The assessee had shown non-current investments of Rs.21,041.11 Lacs as on 31.03.2013 as compared to Rs.8,813.71 Lacs as on 31.03.2012. In addition to this the assessee has also shown Current investments of Rs.1,766.98 Lacs as compared to Rs.16,805.09 Lacs as on 31.03.2012 and further disclosed dividend income of Rs.217.69 Lacs. It is seen from the computation filed by the assessee, that it had suo moto disallowed an amount of Rs.12,21,856/- and added back to its total income. There are plethora of judgements passed in various courts that emphasises the disallowability of expenditure u/s.14A read with Rule 8D in respect of investments that results in income that does not 'form part of total income and also income that shall not form part of total income.
Assessment Year: 2012-13 Assessment Year: 2013-14 M/s. Apeejay Shipping Limited 8. Thereafter he held as follows:- “It is evident from the above that it is for the assessee to explain with supporting evidences that borrowed funds were not applied in investments in shares held both as investments and stock-in-trade which would result or have resulted in earning of dividend income that would, in its turn, be exempt from tax. It is for this purpose that the provisions of Rule 8D(2)(ii) is applicable with regard to the said interest expense of Rs.41.54 lacs. This position is further clarified in CBDT Circular No.5/2014 [F.No.225/182/2013-ITA II] dated 11.02.2014.”
A perusal of both these findings demonstrate that the Assessing Officer has not recorded any reason as to why he is not satisfied with the correctness of the computation of disallowance u/s 14A of the Act, by the assessee. Once such satisfaction is not recorded, the propositions of law laid down in the case of Maxopp Investment Ltd. v.Commissioner of Income Tax, New Delhi [2018] 402 ITR 640 (SC) by the Hon’ble Supreme Court apply.
In view of the above discussion, we delete this disallowance made u/s 14A for the sole reason that the Assessing Officer failed to record any reason as to why he is not satisfied with the correctness of the suo moto disallowance made by the assessee u/s 14A of the Act. As we have upheld the contention of the assessee on this ground, we do not go into the other arguments raised by the assessee on this issue which are:-
a) No general expenditure has been incurred by the assessee to earn exempt income. b) That certain investment should have been excluded while computing disallowance under Rule 8D c) That no disallowance u/s 14A, can be invoked where the income is computed in accordance with law. d) That disallowance can be made u/s 14A, while computing book profits u/s 115JB of the Act. 11. In the result, this ground for both the assessment years are allowed.
Assessment Year: 2012-13 Assessment Year: 2013-14 M/s. Apeejay Shipping Limited 12. In the result, appeal of the assessee for both the assessment years are allowed in part.
Kolkata, the 12th day of September, 2018.