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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI INTURI RAMA RAO
: Shri R. Vijayaraghavan, Advocate अपीलाथ� क� ओर से/ Appellant by : Shri ARV Sreenivasan, JCIT ��यथ� क� ओर से /Respondent by : 19.02.2019 सुनवाई क� तार�ख/Date of Hearing : 28.02.2019 घोषणा क� तार�ख /Date of pronouncement आदेश / O R D E R PER INTURI RAMA RAO, ACCOUNTANT MEMBER: These appeals filed by the Assessee are directed against the common Order of the Learned Commissioner of Income Tax (Appeals)- 17, Chennai (hereinafter called as ‘CIT(A)’) dated 15.11.2017 for the Assessment Years (AY) 2013-14 & 2014-15.
Since, the identical facts and issues are involved in these appeals, we proceed to dispose the same vide this common order. & 171/Chny/2018 (AYs: 2013-14 & 2014-15) :- 2 -: 3. For the sake of convenience and clarity the facts relevant for the AY 2013-14 in are stated herein.
The Assessee raised the following grounds of appeal in AY 2013-14: “1. The order of the Commissioner of Income tax (AppeaLs) is contrary to Law, facts and in the circumstances of the case.
2. The Commissioner of Income tax (AppeaLs) erred in confirming the disallowance of Rs.2,15,98,413/- u/s 14A by applying rule 8D (Normal & MAT). 2.1 The Commissioner of Income tax (Appeals) ought to have appreciated that for attracting Section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. 2.2 The Commissioner of Income tax (Appeals) ought to have appreciated that the expression “expenditure incurred” in sec 14A refers to actual expenditure and not to some imagined expenditure, in relation to or in connection with or pertaining to exempt income. 2.3. The Commissioner of Income tax (Appeals) ought to have appreciated that provisions of Rule 8D have to be interpreted within the framework of sec 14A and any expenditure which cannot be established to have been incurred in relation to earning exempt income cannot be disallowed. 2.4 The Commissioner of Income tax (Appeals) ought to have appreciated that majority of the dividend income is received onLy from the Investments in shares of subsidiary/group companies. The investment in subsidiary/group companies are strategic investments and are historical. These investments are made for the purpose of holding controlling stake in the subsidiaries/group concerns and business expediency and are not made primariLy for the purpose of earning any dividend income. 2.5 In the following cases it was held that where the investments are primarily in group concerns and object of investment is hoLding controlling stake, business expediency there is no reason to believe that the assessee would have incurred any administrative expenses in holding these investments; EIH vs. DCIT (ITAT Chennai) (2009) 126 TTJ 0246 Interglobe Enterprises Ltd 2014-TIOL-729-ITAT-DEL/ Garware WaLl Ropes Ltd vs. ACIT 65 SOT 86 Mum. J.M.Financial Ltd v ACIT 2014-TIOL-202-ITAT-MUM & 171/Chny/2018 (AYs: 2013-14 & 2014-15) :- 3 -: 2.6 The Commissioner of Income tax (Appeals) ought to have appreciated that the Investments in Mutual Funds are handled by the outsourced intermediary who doesn’t charge any fees, as they earn commission from the concerned mutual funds. Therefore there is no cost in making these investments. Although the appellant has not incurred any expenditure attributable to earning dividend income, they have apportioned expenditure in relation to executive salary based on time devoted in the concerned investments although the empLoyment of these executives is not for this purpose and offered a sum of Rs.28,57,808/- in the memo of Income.
2.7 The appellant submits that all the Investments referred to above were made out of surplus funds generated. The paid-up capital and reserves & surplus of the Company as on 31.03.2013 was Rs.919,87,16,989 and the surpLus generated during the year was Rs.117,92,90,510 and investments made during the year were Rs.171,90,03,721/-.
2.8 The Commissioner of Income tax (Appeals) ought to have appreciated that no borrowings were involved in making the above referred investments. The borrowings of the company as on 31.03.2013 were only for working capital purposes and no additional borrowings were made during the ASSESSMENT YEAR 2013-14. Hence the question of attributing interest towards investments earning exempt income i.e., dividend income does not arise. 2.9 The Commissioner of Income tax (Appeals) erred in not following the identical issue in Assessee’s own case for the earlier assessment year 2008- 09,2009-10,2010-11 and 2012-13 in ITA No- 1444,1445 and 1446/2014 by order dated 06.06.2016 and 2329/2016 by order dated 22.12.2016 respectively, wherein the ITAT has concluded that provisions of Section 14A and Rule 8D will not be applicable, where investments are made in sister concerns or subsidiary companies for strategic purposes and also with respect to investment made in mutual funds and bonds, the income received from which are taxable. 2.10 The Commissioner of Income tax (Appeals) ought to have appreciated that 14A disallowance cannot be added back to the book profits under MAT u/s 115JB. The Kolkata Tribunal in DPSC Ltd Vs DCIT 2016-TIOL-788-ITAT-KOL and Chennai Tribunal in Beach Minerals Company Pvt Ltd Vs ACIT held that the disallowance u/s 14A could not be added to the book profits computed u/s 11 5JB.”
The brief facts of the case are as under:
The appellant is a company incorporated under the provisions of the Companies Act, 1956, it is engaged in the business of manufacturing & 171/Chny/2018 (AYs: 2013-14 & 2014-15) :- 4 -: of Diesel Engines. The return of income for the AY 2013-14 was filed on 30.11.2013 disclosing income of Rs. 110,03,09,980/-. Against the said return of income, the assessment was completed at a total income of Rs. 112,47,44,900/- after making certain disallowances. The disallowance inter alia includes the addition u/s. 14A of the Income Tax Act, 1961 (in short ‘the Act’) of Rs. 2,15,98,413/- with which we are concerned. During the course of assessment proceedings, the AO noticed that the appellant had earned dividend income of Rs. 38,59,17,643/- tax free interest income of Rs. 20,77,866/-. The AO also noticed that the assessee had made borrowings for the purpose of making investments. He presumed that the borrowed funds were used for the purpose of making the investments, which yielded tax free income therefore, he invoked the provisions of s. 14A of the Act rejecting the contention of the appellant that there was no interest expenditure was incurred to make the investments. It is a matter of record that the appellant on its own disallowed a sum of Rs. 28,57,808/- u/s. 14A of the Act.
Being aggrieved by the above additions, an appeal was preferred before ld. CIT(A), who vide impugned order had confirmed the action of the AO for invoking the provisions of s. 14A r/w Rule 8D of the Income Tax Rules. Being aggrieved, the appellant is in appeal before us in the present appeal. & 171/Chny/2018 (AYs: 2013-14 & 2014-15) :- 5 -: 7. The ld. Counsel for the assessee Mr. R. Vijayaraghavan, Advocate contended that the provisions of 14A r/w Rule 8D of the Rules cannot be invoked in the present case, inasmuch as, the investments, which yielded the tax free income in the form of dividend were made much before the insertion of provision of s.14A of the act and the investments were made out of own funds and the own funds far exceeds the investments and therefore he submitted that the matter should be remanded to the file of AO for the purpose of verification of these aspects. On the other hand, the ld. Sr. DR had no serious objection to remand the matter.
We find merit in the submission, made on behalf of the appellant that the matter require remission to the file of AO for the purpose of verification whether investments have been made out of the own resources or borrowed. Since, the AO had not dealt with this aspect in the assessment proceedings despite the assertion made this behalf. We remit this appeal to the file of the AO to verify whether the investments were made out of own or borrowed funds. Thus, the appeals filed by the assessee partly allowed for statistical purposes.
ITA No.170/Chny/2018 for AY 2014-15:
Since, the facts in AY 2013-14 are identical to the facts in for AY 2014-15 on the & 171/Chny/2018 (AYs: 2013-14 & 2014-15) :- 6 -: reasons mentioned therein, we set aside the order of lower authorities, and remand the matter to the AO. Hence, the above captioned appeal filed by the assessee is partly allowed for statistical purpose.
In the result, both the appeals filed by the assessee are partly allowed for statistical purposes
Order pronounced on the 28th day of February, 2019 in Chennai.