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Income Tax Appellate Tribunal, DELHI BENCH: ‘C’ NEW DELHI
Before: SHRI N. K. SAINI & MS SUCHITRA KAMBLE
This appeal is filed by the respondent against the order dated 30/5/2014 passed by CIT(A)-LTU, New Delhi.
The grounds of appeal are as under:-
“1. On the facts and circumstances of the case and in law, Ld.CIT(A) has erred in directing to exclude the amount of Rs.87,38,06,716/- (being investments made by the assessee in M/s Munjal Kiriu Industries (P) Ltd, M/s Hero Chassis System (P) Ltd. And M/s Hero Global Design Ltd.) for working out the amount of average and investment for the purpose of computation of disallowance u/s 14A, by holding that there is no nexus between the interest paid by the appellant and the investments made in these companies.”
The brief facts are as under:-
During the Assessment Year the Assessing Officer observed that the assessee has invested Rs.88,26,71,955/- in the assets which will result in tax exempt income. The assessee was asked to show cause as to why disallowance u/s 14A should not be made. The assessee submitted the reply. After going through the submissions of the assessee, the AO observed that the assessee never kept the two business activities viz exempt income earning activity and other regular business activity separate nor itself given a working for allocating expenses to exempt income. When assessee has such type of business arrangement, where it is difficult to segregate the two types of business i.e. exempt income earning activity and other business, for attributing expenses to exempt income, the Rule 8D is applicable. Thus, the Assessing Officer rejected the claim of the assessee and expenses attributable to exempt income was computed as per Rule 8D of the Income Tax Rules, 1962. Thus, the Assessing Officer disallowed Rs. 4,77,63,602/- and added back to the total income of the assessee.
4. Aggrieved by the above action, the assessee filed appeal before the CIT(A). The CIT(A) held relating to disallowance u/s 14A, uphold the decision of the AO in invoking the provisions of Rule 8D for the purpose of making disallowance under Section 14A and further hold that for the purpose of working of “Average investment”, the A.O shall take into account only the investments in Hero MVL Alternate Fuel (P) Ltd., Hero Transmission (P) Ltd. and M/s Satyam Computers (P) Ltd. Secondly, the CIT(A) held that there is merit in the submission of the assessee that the A.O ought to have taken the figures of total assets of Rs.4,26,45,00,989/- instead of net assets of Rs.3,76,08,02,051/-. The A.O was thus, directed to recomputed the disallowance under Rule 8D by the CIT(A).
The Ld. DR submitted that the assessee company had been incurring heavy losses for the past 7 years and was borrowing huge amount of funds for the purpose of its business. Yet, at the same time, it had given loss advances to the parties mentioned hereinabove. The Assessing Officer rightly observed that there are no business purposes or advantage brought out by the assessee to justify such huge advances without impression being given to related concerns or without any commercial reason particularly without its financial condition was bad. The Assessing Officer also relied on Hon’ble Punjab & Haryana High Court in case of CIT Vs. Abhishek Industries Ltd. 286 ITR 1 where in it was held that as per the issue of establishment of nexus of funds borrowed vis-à-vis funds diverted towards sister concern on interest free basis is concerned. In our view, the stand of the assessee that onus of nexus of fund available by the assessee with funds advance to sister concern without interest is on revenue is not correct. The Assessing Officer has rightly relied upon the jurisdictional high court in case of ELMER Havells Electrics Vs. CIT 277 ITR 549 wherein it was held that concern which itself was raising loss advances interest free loans to sister concern is not justified. The Assessing Officer also relied upon the judgment of Hon’ble Madras High Court in case of K. Sumasundran & Bros wherein it is held that the assessee to make large borrowing and create a liability for payment of interest thereon not only for the year in which borrowing was made with the subsequent year as well keep loan outstanding and therefore after divert the amount borrowed by taking it out of business by giving it interest free to sister concern. Accordingly, the advance to above parties is held to be non business purpose. The Assessing Officer made disallowance u/s 14A read with Rule 8D after examining that the assessee has borrowed funds which have been utilized for investments. The assessee also paid interest these borrowed funds, therefore, the assessee increase directed and indirect in respect of investments which will result in exempt income and hence Section 14A read with Rule 8D is extracted in this case. Thus, the argument of the assessee before the Assessing Officer was rejected and expenses attributable to exempt income was computed as per Rule 8D of the Income tax Rules 1962. The CIT(A) was erroneous in allowing the this issue by holding that company had not earned any dividend income during the year and no new investments were made during the year. The said investments were existing investments and was made in earlier years with the assessee had transferred its undertakings on a slump sale basis.
The Ld. AR relied upon the order of the CIT(A).
We have heard both the parties it is pertinent to note that the CIT(A) has observed that the company had not earned any dividend income during the year as well as no new investment was made during the year. The investments which were doubted by the Assessing Officer were made in earlier years when the assessee had transferred its undertakings on slump sale basis under which equity shares as per the approved scheme of different merger were allotted to it. From the records it can be seen that the investment was made prior to this assessment year. Therefore, it cannot be doubted that the investment was not a genuine investment. There is no nexus between the interest paid by the assessee and investment made in these companies there was no sufficient evidence brought on record by the Assessing Officer as well while investing the dividend income and interest them merely doubting the investing because it is interest free loan cannot be under the provisions of Section 14A read with Rule 8D. Out of the existing investments, investments in M/s Munjal Kiriu Industries (P) Ltd., M/s Hero Chassis System (P) Ltd. and M/s Hero Global Design Ltd. were made in earlier years when the assessee had transferred its undertakings on slump sale basis., under which equity shares as per the approved scheme of de-merger were allotted to it. The assessee had made investments in equity shares of M/s Satyam Computers Ltd., which have been valued at Rs.73,26,582, as on 31.03.2010 and also had made investments in Hero MVL Alternate Fuel (P) Ltd., a sister concern in the F.Y.2008-09. These investments held for yielding tax exempt dividend income. The assesse has not disallowed the expenses incurred for earning exempt income out of such investments and there is no evidence that working capital loan may not have been deployed for making such investment, therefore, the lack of satisfaction of the AO with the claim of the assessee that no expenses were incurred for earning dividend income from such investments. The AO while disallowing this has not brought on record anything to establish that the assessee had incurred any expenses while earning this exempt income and he has not given any finding in this respect. Therefore, the action of the AO in disallowing the dividend income u/s 14A read with Rule 8D is not just and proper.
In case of CIT-II vs. Hero Cycles Ltd. (ITA No. 331/2009 (O&M): decided on 04.11.2009) the Punjab and Haryana High Court held that “Disallowance under Section 14A requires finding of incurring expenditure where it is found that for earning exempt income no expenditure has been incurred, disallowance under Section 14A cannot stand.” In this case AO has not given such finding about incurring the expenditure on earning the dividend income as well as to the extent of the investment made by the Assessee. In case of Maxopp Investment Ltd. V. Commissioner of Income-tax, New Delhi [2011] 15 taxmann.Com 390 (Delhi HC) it was held that while rejecting the claim of the assessee with regard to the expenditure or no expenditure in relation to exempt income, the AO must specify cogent reasons for the same and has to show why he is not satisfied with the correctness of the assessee’s claim. IN the present case AO failed to specify any cogent reasons with regard to expenditure. In case of CIT vs. Walfort Share and Stock Brokers (P) Ltd. 326 ITR 1 (SC) it was held that “For attracting Section 14A, there has to be proximate cause for disallowance, which is its relationship with the tax exempt income.”
In light of the ratio laid down in the abovementioned judgment of the Supreme Court and High Court, the finding given by the CIT(A) is upheld herewith.
In result, the appeal is dismissed.
Order pronounced in the Open Court on 15th MAY, 2017.