CESC LIMITED,KOLKATA vs. THE DCIT RG-6, KOLKATA, KOLKATA

3. Ground no. 2 of the revenue’s appeal and ground no.2 of assessee’s appeal is against the order of Ld. CIT(A) in holding that while computing disallowance u/s. 14A read with rule 8D of the I. T Rules, 1962 (hereinafter called “Rules”) only dividend yielding investment are to be considered and disallowance of Rs.10,76,91,188/- should be rectified accordingly.

3.1. Briefly stated facts of the case are that during the course of assessment proceedings the AO observed that the assessee company claimed exempt dividend income of Rs.3,08,00,805/- during the year and added back an amount of Rs.6,25,966/- on account of administrative expenses u/s. 14A in its computation of Income. However, according to AO, the calculation has not been done in accordance with sec. 14A read with Rule 8D of the Rules Being dissatisfied with the correctness of the claim made by the assessee in respect of such expenditure in relation to income which does not form part of total income under the Act, the AO computed the disallowance u/s. 14A read with Rule 8D of the Rules which comes to Rs.10,83,17,154/-, (the detailed calculation has been given by the AO in assessment order). Since the assessee company has already added back Rs.6,25,966/- in its computation of income, the AO added back Rs.10,76,91,188/- (Rs. 10,83,17,154/- -

4 & 1187/Kol/2014 CESC Ltd. , AY- 2010-11 Rs.6,25,966/-) to the total income of the assessee company. Aggrieved, assessee preferred an appeal before the Ld. CIT(A), who following decision of Hon’ble jurisdictional High Court in the case of CIT Vs. REI Agro Ltd. in ITAT 161 of 2013 order dated 23.12.2013 directed the AO to compute the disallowance as per Rule 8D, figure of investment in clause (ii) and clause (iii) only those investments should be taken which have yielded exempt income during the year and accordingly, the disallowance was reduced. Aggrieved, both the revenue as well as assessee is in appeal before us.

3.2. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee had own funds in form of equity and free reserves of Rs.4882.89 cr. (as at the beginning of the year) and gross sales of Rs.3449.04 cr. which is far in excess of even the total investments as at 31.03.2010 which aggregates to only Rs.678.58 cr. So, assessee has own surplus funds, so presumption is that assessee has used its own funds for investment and not the borrowed funds for investment. We hold that the assessee has got sufficient own funds to make the investments and when that point is not in dispute, no disallowance could be made u/s 14A of the Act read with Rule 8D(2)(ii) of the Rules. Reliance in this regard is placed on the following decisions:-

CIT-vs.- Reliance Utilities & Power ltd. reported in 313 ITR 340 (Bom.)

Interest on borrowed capital- investments by assessee- finding that investments were from interest free funds available with assessee-borrowed capital for the purposes of business- interest deductible under Income Tax Act u/s 36(1)(iii).

G.D. Metsteel Pvt. Ltd. –vs.- ACIT reported in 142 TTJ 641 (Mumbai Tribunal) Held that the investments are made by the assessee’s own funds and have been made in the earlier years, no disallowance u/s 14A is required to be made. The Head Note reads as under:-

“Business expenditure-Disallowance under section 14A-Apportionment of expenditure- When investments are made from own funds, merely because the assessee had to subsequently borrow the funds for business use, it cannot be said that the borrowed funds have been used for the purposes of investments”.

CIT –vs.- HDFC Bank Ltd reported in 366 ITR 505 (Bom.) Held, dismissing the appeal, (i) that the finding of fact given by the Tribunal was that the assessee’s own funds and other non-interest bearing funds were more than the investment in the tax-free securities. This 5 & 1187/Kol/2014 CESC Ltd. , AY- 2010-11 factual position was not one that was disputed. Undisputedly, the assessee’s capital, profit reserves, surplus and current account deposits were higher than the investment in the tax free securities. In view of this factual position, it would have to be presumed that the investment made by the assessee would be out of the interest free funds available with the assessee.

Similar views were expressed in the following decisions:-

Woolcombers of India Ltd. –vs.- CIT reported in 134 ITR 219 (Cal.) East India Pharmaceuticals Works Ltd. –vs.- CIT reported in (1997) 224 ITR 627 (SC).

We find that though the decision in the case of Reliance Utilities power Ltd. was rendered in the context of allowability of interest u/s 36(1)(iii) of the Act, the analogy drawn thereon would apply with equal force for adjudicating the issue of disallowance u/s 14A of the Act. We also find that the Hon’ble Bombay High Court in the case of CIT –vs.- HDFC Bank Ltd. reported in 366 ITR 505 (Bom.) had also held the same view.

In view of the aforesaid facts and findings and respectfully following the judicial precedents relied upon hereinabove, we hold that the ld. CIT(A) had erred in directing the AO to compute Rule 8D(ii) on the scrips which yielded dividend and, therefore, we modify the order to that extent and direct no disallowance to be made under Rule 8D(ii) of the Rules read with section 14A of the Act. Accordingly, the ground no. 2 raised by the assessee is partly allowed.

However, coming to Rule 8D(2)(iii) of the Rules, we note that assessee had earned exempt income to the tune of Rs.3,08,00,805/-. We note that the Ld. CIT(A) rightly directed disallowance @ .5% on the dividend earning scrip as held by Coordinate bench in the case of REI Agro Ltd. Vs. DCIT 144 ITD 141. We confirm the Ld. CIT(A)’s order on computation of disallowance under Rule 8D(iii) of the Rules and order accordingly. Therefore, this ground of appeal of revenue is dismissed and assessee’s ground 2 of appeal is partly allowed.

6 & 1187/Kol/2014 CESC Ltd. , AY- 2010-11 4. Ground no. 3 of assessee’s appeal is against the order of Ld. CIT(A) in holding that the disallowance made u/s. 14A of the Act by invoking Rule 8D of the Rules will have to be added back while computing the book profit for the purpose of sec. 115JB of the Act.

4.1. We have heard rival submissions and gone through the facts and circumstances of the case. We also note that the issue is squarely covered by the decision of Hon’ble jurisdictional High Court in the case of CIT Vs. Jayshree Tea & Industries Ltd. vide GA No. 1501 of 2014, ITAT 47 of 2014 dated 19.11.2014 wherein the similar question arose which reads as under: “2. Whether on the facts and in the circumstances of the case the Ld. Tribunal has erred in law in upholding the order of CIT(Appeals) that disallowance under Section 14A of the I. T. Act, 1961, amounting to Rs.2,20,15,787/- is not to be considered for book profit for calculation of book profit under section 115JB of the I. T. Act, 1961?” On this question, the Hon’ble High Court has observed as under: “We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 u/s. 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal.” We also note that the Special Bench of ITAT Delhi bench in ACIT Vs. Vireet Investment (P) Ltd. (2017) 82 taxmann.com 415 (Delhi.Trib (SB) has held as under:

“6.22. In view of above discussion, we answer the question referred to us in favour of assessee by holding that the computation under clause (f) Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s. 14A read with Rule 8D of the Income-tax Rules, 1962.” Respectfully following the orders of Hon’ble High Court and Special bench, (supra), we restore the matter to AO to calculate the book profit u/s. 115JB of the Act as per the dictum of Hon’ble High Court. It is reiterated that the disallowances made under the provisions of Sec. 14A r.w.s 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act. Therefore, the AO shall work out disallowances in terms of the clause (f) to Explanation-1 of Sec. 115JB of the Act independently after considering the expenses debited in the profit & loss account as mandated under the provisions of law. Accordingly, this issue of assessee’s appeal is allowed for statistical purpose.

5. Ground no. 1 of assessee’s appeal is against the order of Ld. CIT(A) in confirming the action of AO in disallowing a sum of Rs.123 lakhs on account of provision for leave encashment based on actuarial valuation. Brief facts of the case are that the assessee had 7 & 1187/Kol/2014 CESC Ltd. , AY- 2010-11 debited an amount of Rs.398 lakhs to its P&L Account for leave encashment. Out of this, an amount of Rs.275 lakhs had been paid during the year but the balance sum of Rs.123 lakhs remained unpaid. The AO added back the same by invoking provision of sec. 43B(f) of the Act. On appeal, the Ld. CIT(A) confirmed the disallowance of Rs. 123 lakhs made u/s. 43B(f) of the Act. Aggrieved, assessee is before us.

“4. After hearing rival submissions and going through the facts and circumstances of the case and the order of the Tribunal cited supra, we find that the issue is dealt by the Coordinate bench of this Tribunal as under:

“3. At the outset, ld. senior counsel for the assessee submitted that in all these three appeals, the issue relates to allowability of provision for leave encashment in terms of sub-section (f) of section 43B of the Income Tax Act. The assessee had advanced its claim relying on the decision of the Hon’ble Kolkata High Court in the case of M/s. Exide Industries Ltd. reported in 292 ITR 470. However, the Assessing Officer did not accept the assessee’s claim observing that Department has preferred a Special Leave Petition before the Hon’ble Supreme Court and stay of the order of the Hon’ble Kolkata High Court was granted by the Hon’ble Apex Court. Ld. senior counsel submitted that under identical circumstances, Tribunal has restored the matter to the file of Assessing Officer to decide the issue in accordance with the decision of the Hon’ble Apex Court in the case of DCIT, Circle-8, Kolkata –vs.- M/s. Ernst & Young Pvt. Ltd. in ITA No. 1787/Kol./2008. He, therefore, submitted that the matter may be restored back to the file of Assessing Officer.

8 & 1187/Kol/2014 CESC Ltd. , AY- 2010-11 decision of the Hon’ble Apex Court in the case of M/s. Exide Industries Ltd. (supra)”. Respectfully following the same we set aside the orders of authorities below on this point and restore the matter back to the file of Assessing Officer for adjudication as per the decision of the Hon’ble Apex Court in the case of M/s. Exide Industries Ltd.(supra).

In view of the above and respectfully following the same, we set aside the orders of the authorities below and restore the matter back to the file of Assessing Officer for adjudication as per the decision of Hon’ble Apex Court in the case of M/s. Exide Industries Ltd. (Supra). This ground of appeal of assessee is allowed for statistical purposes.”

Order is pronounced in the open court on 13th June, 2018.