M/S. RANBAXY HOLDING COMPANY,NEW DELHI vs. DCIT, NEW DELHI

Ranbaxy Laboratory Ltd. ever since its inception primarily with a view to M/s. Ranbaxy Holding Co. vs. DCIT have controlling stake in the parent company. The said investments in the shares of Ranbaxy were initially made out of its share capital and thereafter out of its available reserves and surplus as also out of borrowings made from time to time. The assessee explained that it has suo motto made disallowance u/s 14A while computing taxable income .

This practice is consistently followed even in earlier years in which assessment order u/s 142(3) have been passed and the practice adopted by the assessee have not been doubted. In the assessment year under appeal i.e. 2005-06, assessee declared income of Rs. 1.22 crore u/s under 115JB of the Act after considering the amount of disallowance u/s 14A on the basis as followed in earlier years. The Assessing Officer while passing the assessment u/s 143 (3) on 23rd May, 2007 has gone through the complete details/information, material on record, consider the basis of disallowance u/s 14A and after detailed examination and verification of facts and material on record determined the income of assessee by making disallowance u/s 14A of the I.T. Act of Rs. 17,07,39,306/-. In earlier year assessee made similar disallowance u/s 14A . Assessee explained the share capital, reserves and surplus available to the assessee from earlier year as well as in assessment year under appeal and disallowance under earlier year as declared by assessee has been accepted. It was further submitted that section 14A seeks to disallow expenditure incurred in relation to earning of tax free income. The section does not envisage disallowance of expenditure on estimate and requires nexus between expenditure incurred and earning

M/s. Ranbaxy Holding Co. vs. DCIT of exempt income to be established by the revenue. The assessee made fresh investments in shares to the tune of Rs. 609.92 crores out of which Rs. 597.34 crores were invested in the shares of Ranbaxy Laboratories Pvt. Ltd. It was explained that assessee has exhausted the share capital and reserves in investments and fresh investments were made entirely out of borrowed funds and assessee made disallowance out of interest on the same basis amounting to Rs. 15.36 crore and further details were also submitted to show that total disallowances were made by assessee suo motto in a sum of Rs. 17.07 crores which includes disallowance out of personnel, office and administrative expenses and depreciation in a sum of Rs. 25,24,665/-. The chart is reproduced at page 6 of the impugned order. Ld. CIT after considering the submissions of the assessee noted that the method of calculating the disallowance to be made u/s 14A has been provided in Rule 8D of I.T. Rules w.e.f. 24th March,. 2008. However assessment in this case is made on 23rd May, 2007 when such method was not provided. The Ld. CIT discussed the issue of disallowance of interest suo motto by assessee in a sum of Rs. 15.36 crores and reproduced the details in the impugned order and accepted the explanation of assessee that the disallowance of Rs. 15.36 crore suo motto made by the assessee on account of interest in relation to earning income (dividend) not forming part of total income and accepted by the Assessing Officer has been reasonably calculated and does not require intervention.

M/s. Ranbaxy Holding Co. vs. DCIT

Year under appeal in a sum of Rs. 609.93 crore found that the disallowance as made is lesser. Therefore further disallowance on this head should have been made in the sum of Rs. 72,07,020/- The Assessing Officer was directed to modify the assessment order accordingly.

The Ld. CIT should not exercise the power u/s 263 of the I.T. Act. He has relied upon decision of the Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83. He has relied upon decision of Delhi High Court in the case of CIT vs. DLF Ltd. 350 ITR 555 (Delhi) and decision of Kerala High Court in the case of CIT vs. Catholic Syrian Bank Ltd. 237 ITR 164. He has submitted that the AO examined the details as

per law and disallowed expenses u/s 14A of the I.T. Act which was based on past history of the assessee. Therefore if AO accepted one of

M/s. Ranbaxy Holding Co. vs. DCIT 17.07 crore has been added back by assessee suo motto on account of proportionate interest cost and also added other expenditure. The AO accepts the explanation of assessee with regard to disallowance of interest and made total disallowance of Rs. 17,07,39,306/-. The AO noted that it is difficult to accept that one can earn substantial dividend income without incurring the expenditure. The assessee has however pleaded before authorities below that assessee is following the same practice in making disallowance suo motto while computing income u/s 14A of the I.T. Act and in assessment year 2004-05 the AO in the order u/s 143(3) (PB 36) made disallowance u/s 14A in a sum of Rs. 2 lacs only. Ld. CIT also while exercising jurisdiction u/s 263 of the I.T. Act accepted the claim of assessee of disallowance of Rs. 15.36 crores suo motto made by assessee on account of interest in relation to earning dividend income not forming part of total income as accepted by the AO holding that it was reasonably calculated and does not require any intervention. Thus the Ld. CIT accepted the substantial portion of the assessment order even in the proceeding u/s 263 of the I.T. Act. The AO as well as Ld. CIT have thus accepted an estimation made by assessee for disallowing expenses u/s 14A of the I.T. Act based on past practice adopted by the assessee. The assessee at page 22A of paper book filed the details of administrative and personnel expenses etc. Ld. Counsel for assessee submitted that total expenditure incurred by assessee were Rs. 47,66,616/- out of which the direct expenses were incurred on the salary of Shri C.S. Jha, Shri Rajinder Sharma and Shri Daler Singh on M/s. Ranbaxy Holding Co. vs. DCIT which assessee suo motto disallowed 50% of the expenditure, however, for the rest assessee has disallowed 10% of the expenditure. The assessee also explained that since substantial investments have been made in purchase of shares of M/s. Ranbaxy Laboratories Pvt. Ltd. which is a group concern of the assessee in order to control the parent company therefore no such expenditure were required. The AO after examining the issue in detail accepted the explanation of the assessee that assessee rightly disallowed administrative and personnel expenses in a sum of Rs. 25,24,665/-. Therefore the view of the AO is based upon the past history of the assessee and as per material on record. It is admitted fact that Rule 8D of the I.T. Rule is not applicable to assessment year under appeal. Therefore so far the disallowance of administrative expenditure is concerned, we find that there was no precise formula prescribed for proportionate disallowance, therefore, no disallowance was called for. The assessee pleaded before AO that assessee did not incur any expenditure in connection with the earning of the dividend income and assessee disallowed suo motto expenses for abundant precaution. Therefore proportionate disallowance of administrative expenses [until Rule 8D came into force] suo motto made by the assessee was rightly accepted by the AO. The view of the AO was thus sustainable in law. If the Ld. CIT does not agree with the view of the AO which is as per law, the same would not give rise to invoking of jurisdiction u/s 262 of I.T. Act. Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. 243 ITR 83 held as under :-

M/s. Ranbaxy Holding Co. vs. DCIT

“9. The phrase ‘prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue- Rampyari Devi Saraogi v. CIT[1968] 67 ITR 84 (Supreme Court) and in Smt. Tara Devi Aggarwal v. CIT[1973] 88 ITR 323 (Supreme Court). “

“IT : Where disallowance of expenditure for exempted income was debatable and order of Assessing Officer could not be held as unsustainable, revisionary powers could not be exercised.”

“Conclusion : Assessee banks having made substantial investments in bonds, securities and shares which yielded tax free income, disallowance under s. 14A is to be made despite the fact that the assessee banks have not maintained separate accounts for the expenditure incurred towards interest paid on funds borrowed for investment in such securities, bonds and shares as well as overheads and administrative expenditure, matter is restored to the AO for making disallowance under s. 14A by reasonably estimating the interest expenditure incurred for earning the tax free income for the period prior to insertion of r.8D and thereafter by following the provisions of s. 14A (2) r/w r. 8D in the absence of any precise formula for proportionate disallowance, no disallowance is called for in respect of M/s. Ranbaxy Holding Co. vs. DCIT administrative cost attributable to earning of tax free income until r. 8D came into force.”

12. These decisions clearly support the case of the assessee that Ld. CIT wrongly exercised jurisdiction u/s 263 of the I.T. Act. Decisions cited by Ld. DR thus would not support the case of the revenue. In view of the above discussions, we are of the view it is not a fit case for invoking jurisdiction u/s 263 of the I.T. Act. We, accordingly, set aside the impugned order u/s 263 of the I.T. Act and quash the same. Resultantly the assessment order u/s 143(3) dated 23rd May, 2007 is restored.

Pronounced in the Open Court.