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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: Shri Mahavir Singh & Shri G Manjunatha
Date of hearing 11-01 -2018 Date of pronouncement 24-01-2018 O R D E R Per G Manjunatha, AM : These three appeals filed by the assessee are directed against separate but identical orders of CIT(A)-51, Mumbai dated 18-11-2015 for the assessment year 2008-09, 2009-10 & 2010-11. Since facts are identical and issues are common, these appeals were heard together and are disposed of by this common order, for the sake of convenience.
The assessee has raised more or less common grounds of appeal for all the assessment years. For the sake of brevity, grounds of appeal raised for AY 2008-09 are reproduced below:-
2 Geltec P Ltd
“1.On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has erred in rejecting the claim of the appellant that no legal claim can be raised before the Appellate Authority in the appeal proceedings against the order passed by the Assessing Officer u/s. 143(3) r.w.s 153A. The conclusion reached by the Learned Comrnr. of Income Tax (Appeals) is erroneous. The appellant prays that the legal claim of the appellant be accepted at the Appellate proceedings.
2.On the facts & circumstances of the case the appellant prays that the disallowance u/s. 14A made by the Learned Assessing Officer at Rs. 55,04,079/- be deleted. 3.On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has ignored the fact that the appellant has already disallowed Rs. 4,15,543/- u/s 14A at the time of filing the return of income. The Learned Commr. of Income Tax (Appeals) has computed the disallowance u/s 14A at Rs.4,15,543/- and has made the addition of Rs. 55,04,079/- resulting into the addition of Rs.4,15,543/plus the addition of Rs.55,04,079/-. The appellant prays that the addition made by Learned Commr. of Income Tax (Appeals) of Rs.55,04,079/- may be deleted.
4.On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has erred in making addition to the book profit of Rs.30,15,774/- being the disallowance u/s 14A. The appellant prays that the addition to the book profit to the extent of Rs.30,15,774/- is not justified and the addition to the book profit be restricted to Rs.4, 15,543/-. 5.On the facts & circumstances of the case the Learned CIT (Appeals) has erred in not dealing with the ground relating to levy of interest u/s. 234A. The appellant prays that the interest levied u/s. 234A at Rs. 2,49,290/- may be deleted.
6.On the facts & circumstances of the case the Learned CIT (Appeals) has erred in not dealing with the ground relating to levy of interest u/s. 234B. The appellant prays that the interest levied u/s. 234B at Rs. 4,50,916/- may be deleted.”
3 Geltec P Ltd 3. The brief facts of the case are that the assessee company engaged in the business of manufacturing pharmaceutical products, filed its returns of income for the assessment years under consideration u/s 139(1) of the Income-tax Act, 1961. A search & seizure action u/s 132 of the Act, was conducted on Universal group on 16-09-2011. The assessee company is a group company in Universal group and was covered under the search & seizure action u/s 132(1) of the Act.
Consequent to search, notices u/s 153A were issued calling for returns of income. In response to the notices, the assessee has filed returns of income on 28-02-2013. The assessments were completed u/s 143(3) r.w.s. 153A on 27-03-2014 for the assessment years 2008-09 to 2010- 11 wherein the AO has made addition towards disallowance of expenditure incurred in relation to exempt income u/s 14A and also made adjustments to book profit computed u/s 115JB of the Income-tax Act, 1961 in respect of disallowance u/s 14A of the Act. Aggrieved by the assessment order, the assessee preferred appeal before CIT(A).
Before the CIT(A) assessee challenged addition made by the AO towards disallowance of expenditure incurred in relation to exempt income u/s 14A and also re-computation of book profit by making adjustment towards disallowance of expenditure u/s 14A of the Act. 4. The CIT(A), for the detailed reasons recorded in his order, rejected ground raised by the assessee insofar as disallowance of expenditure
4 Geltec P Ltd u/s 14A for the AY 2008-09 by holding that it was seen from the assessment order that the AO did not make any new addition in order u/s 153A, therefore, the assessee has no cause for grievance as far as disallowance of expenditure u/s 14A of the Act. The CIT(A) further observed that since the assessee has made fresh claim of relief out of the original assessment order, in view of the decision of Hon’ble Rajasthan High Court in the case of Jai Steels vs CIT 259 CTR 281(Raj) cannot make any fresh claim to seek deduction or claim expenditure which has not been claimed in original assessment, which already stood concluded. The CIT(A) further observed that insofar as rectification application filed by the assssee which was pending before the AO, therefore, the AO was directed to take a decision on the rectification application filed by the assessee, as per law. If the assessee is still left with any grievance thereafter can approach the appellate authority. Insofar as assessment years 2009-10 and 2010-11, the CIT(A) upheld addition made by the AO towards disallowance of expenditure u/s 14A in respect of proportionate interest disallowance, but no further addition to suo moto disallowance made by the assessee towards direct expenditure and other expenses u/r 8D(2)(i) and 8D2)(iii) of I.T. Rules, 1962 could be made. The CIT(A) also upheld the action of the AO in re-computing book profit u/s 115JB of the Act in respect of addition made towards disallowance of expenditure u/s 14A. Aggrieved
5 Geltec P Ltd by the order of CIT(A), assessee is in appeal before us.
The first issue that came up for our consideration is addition towards expenditure incurred in relation to exempt income u/s 14A of the Act. The Ld.AR for the assessee submitted that the AO was incorrect in disallowing expenditure in respect of interest expenses without appreciating the fact that there is no nexus between investment in shares which yielded exempt income and interest expenses. The Ld.AR further submitted that the assessee’s investments are covered out of its own interest free funds and no part of interest bearing fund has been used for making investments, therefore, the AO was incorrect in disallowing proportionate interest expenses by invoking rule 8D(2). The Ld.AR further submitted that insofar as assessment year 2008-09, the AO has made addition of Rs.55,04,079 u/s 14A ignoring the fact that the assessee has made suo moto disallowance of Rs.13,15,774 in the original return of income filed. Even though revised computation is not acceptable, the disallowance contemplated u/s 14A should be restricted to suo moto disallowance worked out by the assessee. The Ld.AR, on the other hand, strongly supported orders of the CIT(A).
We have heard both the parties and considered materials available on record. The assessee has taken a common ground of appeal for all the three assessment years challenging disallowance worked out by the AO in respect of expenditure incurred in relation to exempt income u/s 6 Geltec P Ltd 14A of the Income-tax Act, 1961. The assessee has suo moto disallowed direct expenditure incurred in relation to exempt income u/r 8D(21)(i) and also other expenses u/r 8D(2)(iii) @0.5% of the average value of investments. However, the assessee did not disallow interest relatable to exempt income u/s 8D(2)(ii). It is the contention of the assessee that when investments are covered out of own funds, the question of disallowance of interest expenditure by invoking rule 8D(2) does not arise. The assessee referring to the decision of Hon’ble Bombay High Court in the case of CIT vs HDFC Bank Ltd (2011) 366 ITR 505 (Bom) submitted that where assessee’s own funds and other non interest bearing funds were more than investment in tax free securities disallowing a part of interest payments u/s 14A cannot be made. The assessee also relied upon the decision of the jurisdictional High Court in the case of CIT vs Reliance Utilities Power Ltd (2009) 313 ITR 340.
7. Having heard both the sides and considered material on record, we find merits in the arguments of the assessee for the reason that when interest free funds are more than the investments in tax free securities, a general presumption is drawn that the investments in tax free securities are out of interest free funds available with the assessee. Therefore, the question of disallowance of interest u/r 8D(2) does not arise. This legal proposition was further supported by the decision of Hon’ble Bombay
7 Geltec P Ltd High Court in the case of CIT vs HDFC Bank Ltd (supra) wherein it was held that where assessee’s own funds and other non interest being funds were more than investments in tax free securities, disallowing a part of interest payment u/s 14A cannot be made. In yet another case, the Hon’ble Bombay High Court in the case of CIT vs Reliance Utilities Power Ltd (supra) held that if there are funds available both interest free and overdrafts and / or loans are taken, then a presumption would aris that investment would be out of the interest free funds generated or available with the company, if the interest free funds are sufficient to meet the investments. In this case, the assessee demonstrates with evidences that its interest free funds are more than its investments in shares, which yield exempt income, therefore, we are of the considered view that the AO was incorrect in disallowing proportionate interest by invoking Rule 8D(2)(iii) of Income-tax Rules, 1962. Hence, we delete the addition made towards proportionate interest and restricts suo moto disallowance made by the assessee in respect of direct expenses and other expenses as per Rule 8D(2)(i) and 8D(2)(iii) of I.T. Rules, 1962.
As per the original return of income filed by the assessee u/s 139(1) without having recourse to the return filed u/s 153A where the assessee has revised its suo moto disallowance u/s 14A of the Income-tax Act, 1961 as the assessee cannot make any fresh claim in the assessments which are concluded or reached finality.
8 Geltec P Ltd 8. The next issue that came up for our consideration is recomputation of book profit u/s 115JB for making addition towards disallowance worked out u/s 14A of the Income-tax Act, 1961. The AO made adjustments towards book profit by making addition towards disallowance worked out u/s 14A of the Income-tax Act, 1961. It is the contention of the assessee that no adjustments could be made towards disallowance worked out u/s 14A of the Income-tax Act, 1961as computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to computation as contemplated u/s 14A r.w.r.8D. The assessee relied upon the Special Bench decision of Delhi Tribunal in the case of ACIT vs Vireet Investments (P) Ltd (2017) 82 taxman.com 415.
Having heard both the sides and considered material on record, we find that the issue of re-computation of book profit in respect of disallowance u/s 14A is directly covered in favour of the assessee by the ITAT, Special Bench decision in ACIT vs Vireet Investments (P) Ltd (supra) wherein it was held that clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to computation as contemplated u/s 14A r.w.r.8D. The Hon’ble Bombay High Court in the case of CIT vs Mangal Finance & Investments (P) Ltd in of 2013 dated 10th February, 2015 held that an amount disallowed u/s 14A of the Act cannot be added to arrive at book profit for the purpose of 9 Geltec P Ltd section 115JB of the Act. Therefore, we are of the considered view that the AO was incorrect in recomputing book profit u/s 115JB in respect of addition made u/s 14A of the Act. Hence, we direct the AO to delete addition made towards disallowance worked out u/s 14A of the Income- tax Act, 1961 to book profit computed u/s 115JB of the Act.
The next issue that came up for our consideration is levy of interest u/s 234B of of the Income-tax Act, 1961. The levy of interest u/s 234B is mandatory and consequential in nature in line with the total income computed. Therefore, we direct the AO to recompute interest liability u/s 234B in accordance with law after giving effect to our order.
In the result, appeals filed by the assessee are partly allowed. Order pronounced in the open court on 24th January, 2018.