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Income Tax Appellate Tribunal, DELHI BENCH: ‘F’ NEW DELHI
Before: SHRI S. V. MEHROTRA & SMT SUCHITRA KAMBLE
This appeal is filed by the Assessee against the order dated 23/07/2014 passed by CIT(A)-XVI, New Delhi for Assessment Year 2010-11.
The grounds of appeal are as under:-
1. That having regard to the facts and the circumstances of the case, the ld-XVI has erred in partly confirming the addition made by Ld. Assessing Officer amounting to Rs.1,06,87,059/- by making disallowance u/s 14A as expenses incurred in relation to earning the tax free income during the year after considering Rule 8D of the I.T. Rules.
The Honorable CIT(A)-XVI has not construed the provisions of Section 14A of I.T Act and Rule 8D of I.T. Rules in the spirit of the enactment and by taking a narrow view of the statute, has denied justice to the appellant.
That in any view of the matter and in any case addition of Rs.1,06,87,059/- by making disallowance u/s 14A as expenses incurred in relation to earning the tax free income during the year is bad in law and against the facts and circumstances of the case.
The assessee is engaged in the business of activities in shares and securities during the year under consideration and driving income under the head Business Income and Capital Gain. In addition, the Assessee also earned dividend from these shares and securities. For the assessment year 2010-2011, the Assessee has filed the return showing loss of Rs. 212.09 Lacs but the A.O. has completed its assessment u/s 143(3) on a taxable amount of Rs. 150.31 Lacs after making certain adjustments. The A.O. has made an addition of Rs. 362.40 Lacs by making disallowances u/s 14A as expenses incurred in relation to earning the tax free income during the year calculated as per Rule 8D.
Being aggrieved by the Assessment Order, assessee filed appeal before the CIT(A). The CIT(A) held that while calculating disallowances as per Rule 8D, the AO considered “Interest Expenses” of Rs. 545.15 Lacs, however Interest Income of Rs. 242.96 Lacs earned on Loan & Advances given was not considered. Interest Expenses (net of Interest Income) has to be considered for calculation of disallowances as per Rule 8D should be Rs. 302.18 Lacs. Further, the “Average Total Assets” was erroneously calculated at Rs. 2,940.79 Lacs instead of Rs. 5,415.75 Lacs as per the audited Balance Sheet of the Assessee. After taking into consideration above adjustments, the disallowances as per Rule 8D worked out to be Rs. 115.73 Lacs instead at Rs. 362.40 Lacs as calculated by the Assessing Officer. The CIT(A) further observed that the A.O while making the assessment, has thus made the addition of Rs.362.40 lacs on the ground of disallowances u/s 14A of the Act. As a result, Demand Notice u/s 156 for Rs.65.69 Lacs has been raised. The A.O has also initiated penalty proceeding u/s 271(1)(c) of the Act for furnishing inaccurate particulars regarding above said additions of Rs.362.40 Lacs on the ground of disallowances u/s 14A of the Act. The Assessee made investment in shares and securities for earning capital appreciation and earning dividend Income is incidental to such activities. The dividend earned during the year is Rs. 65,150/- and the investments as on 31.03.2010 and the investments as on 31.03.2010 is Rs. 1878.48 Lacs. The Company incurred interest expenses to earn taxable income such as Trading Profit and capital gain. Further, the CIT(A) observed that Dividend Income was not arising on all investments held by the Company and earning of dividend income was due to holding of investments. The detail of Investment held and dividend income earned thereon is enclosed (Annex-1). During the relevant year, the Assessee Company earned exempt income in the form of dividend, u/s 10(34) of Rs. 65,150/- on investment in scares. As per section 14A, expenditure attributable to the exempt income has to be worked out and disallowed.
The CIT(A) held that sufficient interest free own fund is not available with the assessee for the investments, income from which does not or shall not form part of the total income under the IT Act. The CIT(A) further held that interest bearing borrowed fund are utilized for the investments and interest expenditures on borrowed funds are incurred in relation to investments, income from which does or shall not form part of the total income. No separate account is maintained by the assessee in respect of interest expenditure on borrowed funds utilized for the investments. Therefore, such indirect interest expenditures calls for disallowance under Rule 8D(2)(ii). AO disallowed Rs. 1,06,29,376/- under Rule 8D(2)(ii) by applying the prescribed formula and, therefore, no interference was called for as the AO was fully justified in disallowing the above indirect interest expenditure. Further, the CIT(A) held that considering the quantum of the investments, investment
activity during the year in the form of sale of investment of Rs. 50.21 lacs during the year it is evident that some administrative and managerial expenditures are incurred in relation to exempt income. In the P&L account the assessee has shown administrative expenditures of only Rs. 57,683/-. Therefore, disallowance u/s 14A cannot exceed the expenditures debited in the P&L account. AO has disallowed Rs. 9,51,795/- by applying the formula prescribed in Rule 8D. Since, the total expenditure incurred under this head is only Rs.57.683/-, therefore, the disallowance in excess of the expenditures debited in the P & L account cannot be justified. Therefore, disallowance on this account was restricted to Rs.57,683/-. In view of the above the disallowance made by the A.O u/s 14A was reduced from 1,15,73,171/- to Rs. 1,06,87,059/- by the CIT(A).
The Ld. AR submitted that the Assessee Company vide its letter dated 01/03/2013 submitted reply, stating therein that - “The company is dealing in purchase /sale of shares and securities of various companies as an investor as well as a trader from the previous year. During the previous year company has earned Rs 65,150/- as dividend income. There are no expenses directly attributable to earning tax free dividend earning as the payment of dividend is received directly to the account of the assessee through ECS banking payment system. The assessee did not make any effort and expenditure for collection of such payment. Therefore no expenses are incurred for earning dividend. The company incurred loss in its business due to loss on sale of investment in shares. The amount of dividend earned was negligible in comparison to investment loss. Hence it could be concluded that the loan taken I and interest paid was not to earn dividend but to do investments and take the benefit of appreciation of Investment and to do trading activities of shares. The dividend was earned in the normal course of investment. Hence Section 14A r.w.r. 8D of the IT Act is not applicable to assessee. Further the procedure adopted is very logically and defined. Hence no any hypothetical figure ban be worked out for any disallowances. Further there is no nexus between interest expenses and tax free dividend earning. Therefore, interest payment, which has got no relation with tax free dividend earning, cannot be disallowed. Disallowances u/s 14A cannot be made for an amount more than incurred for earning the exempted income. Therefore, it is necessary to work out the actual expenses incurred in this regard. No hypothetical formula for calculating the expenses can be applied. Therefore, interest payment which has got no relation with the Investment cannot be disallowed. Similarly any ad-hoc % on investment cannot be disallowed. More so when no substantial expenses has been incurred for earning tax exempted income. During the year, total additional funds received from various sources are Rs.15.32 Crores which has been utilized for acquiring Inventories and lending of Loans & Advances. No loan fund has been utilized for further Investments in Equity Shares. Hence the interest cost on such additional funds of Rs.15.32 crore cannot be apportioned over equity investments made.
The Ld. DR relied on the order of the Assessing Officer.
We have heard both the parties and perused all the materials available on record. The assessee company had made the investment in the Financial year 2008-09 (relevant to the A.Y. 2009-10) and in the concerned assessment year (A.Y. 2010-11), the assessee company did not made any fresh investment from the borrowed fund. The assessee company remained invested in the investment which were made in the F.Y. 2008-09 (2009-10) rather in the concerned F.Y. 2009-10 (A.Y.2010-11), the assessee company had sold the part of the investment made in Ratanmani metal & tubes Ltd. and earned on long term capital loss of Rs. 23,35,960/-. The additional funds amounting to Rs. 15.20 crore was borrowed by the assessee company only for the purpose of business activity which is trading in securities or loan provided to the other concerns. From the records it can be seen that the assessee has not incurred any expenses to earn a dividend income. The assessee made the investment to the tune of Rs. 19,28,89,872/- in F.Y. 2008-09 (A.Y. 2009-10) and the Assessing Officer did not find any ambiguity regarding any expenditure directly or indirectly attributable to the investment made by the assessee while scrutinizing the return for A.Y. 2009-10. In fact, the AO held that assessee did not incurred any expenses attributable to the dividend income of Rs. 1,71,551/- in A.Y. 2009-10. While rejecting the main contention of the assessee company regarding the disallowance under Rule 8D(2)(ii) of the Act, the CIT(A) ignored these facts. The decision of Cheminvest Ltd. Vs. ITO 121 ITD 318 (Del. SB) relied by both the authorities was set aside by the Hon’ble Delhi High Court in case of Cheminvest Ltd. Vs. CIT (2014) 61 taxmann.com 118(Delhi). The Ld. AR relied on the decision of Hon’ble Delhi High Court in case of Joint Investments Pvt. Ltd. Vs. CIT wherein it was held in para 9 that:
“9. In the present case, the A.O has not firstly disclosed why the appellant/assessee’s claim for attributing Rs.2,97,440/- as a disallowance u/s 14A had to be rejected. Taikisha Engg. India Ltd. (supra) says that the jurisdiction to proceed further and determine amounts is derived after examination of the account and rejection if any of the assessee’s claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the A.O an aspect which is completely unnoticed by the CIT(A) and the Tribunal. The third, and in the opinion of this Court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs.48,90,000, the disallowance ultimately directed works out to nearly 110 per cent of that sum, i.e, Rs.52,56,197. By no stretch of imagination can Section 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in S. 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income.” This proportion or portion of the tax exempt income surely cannot be swallow the entire amount as has happened in this.” case
Even the Hon’ble High Court in case of Joint Investments Pvt. Ltd. also reiterates that by no stretch of imagination can Section 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. In present assessee’s case the assessee has demonstrated that the assessee has not incurred any expenses to earn a dividend income in this particular Assessment Year as the assessee made the investment to the tune of Rs. 19,28,89,872/- in F.Y. 2008-09 (A.Y. 2009-10) and the Assessing Officer did not find any ambiguity regarding any expenditure directly or indirectly attributable to the investment made by the assessee while scrutinizing the return for A.Y. 2009-10. Thus the Assessing Officer as well as the CIT(A) both have totally ignored this fact. Hence the order of the CIT(A) is set aside.
In result, appeal of the assessee is allowed.
Order pronounced in the Open Court on 14th July, 2017.