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Income Tax Appellate Tribunal, “E”
Before: SHRI RAJENDRA, AM & SHRI SANDEEP GOSAIN, JM
आदेश / O R D E R
Per Sandeep Gosain, Judicial Member:
The present Appealfiled by the revenue is against the order of Commissioner of Income Tax (Appeals)-7, Mumbai dated
Sicom Investment & Finance Ltd. 31.10.14 for AY 2011-12 on the ground mentioned herein below:- 1. "Whether in the facts and the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 1,24,17,850/-made by the A.O. u/s. 14A r.w.s. 8D of I.T. Rules without appreciating the fact that for invoking disallowance under section 14A it is not material that the assessee should have earned such exempt income during the financial year under consideration."
2. "The appellant prays that the order of CIT(A) on the above ground be setaside and that of the Assessing Officer be restored."
"The appellant craves leave to amend or alter any ground or add a newground which may be necessary."
As per the facts of the present case, the assessee is engaged in the business of finance. The original return of income for the year under consideration was e-filed on 23.09.11 declaring total income at Rs. 10,34,10,430/-. Thereafter the assessee filed revised return of income on 26.03.13 declaring total income at Rs. 8,35,15,520/-. Thereafter the case was selected for scrutiny
Sicom Investment & Finance Ltd. and during the course of investigations, it was found by the AO that the assessee has earned dividend income of Rs.38,368/- which has been claimed as exempt u/s. 10(34) of the Act. It was further submitted that the assessee is having investment of Rs.17,61,40,913/-, income from which is exempt from tax. In response to a query raised by the AO vide letter dated 17/2/2014, the assessee filed a reply on 25/2/2014 stating that it has earned dividend income of Rs.38,368/- from the investments made in the shares of M/s. HCC Ltd. in the year ended 31/3/2005. Further, no exempt income has been earned in respect of other investments made during the year under consideration. It was submitted that the investments have been made from its own funds and no borrowed funds have been used for making such investments. In this respect, reliance was placed by him on the decision in the case of Reliance Utilities & Power Ltd and the assessee worked out the disallowance u/s. 14A at Rs. 1,634/- being the proportionate salary paid to the Chartered Accountant who has been assigned the task of maintainingthe investment register. After examining the above contentions of the assessee, the AO noted that the decision in the case of CIT v. Reliance
Sicom Investment & Finance Ltd. Utilities & Power Ltd. relates to the disallowance of interest expenditure u/s. 36(1)(iii) of the Act and therefore distinguishable from the case of the assessee and hence computed the disallowance of section 14A r.w.r. 8D which comes to Rs. 1,33,03,387/-. In view of the above, the AO made an addition of Rs. 1,33,03,387/- to the book profit of the assessee by relying on the order of the ITAT Mumbai in the case of M/s. RBK Share Broking Pvt. Ltd. (ITA No, 7546/Mum/2011) for the A.Y. 2008-09. Aggrieved by the order of AO, the assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of both the parties partly allowed the appeal of the assessee and restricted the addition to Rs. 8,85,536/-. Now before us, the revenue has preferred the present appeal by raising the above grounds.
3. The sole ground raised by the revenue is against challenging the order of Ld. CIT(A) in deleting the disallowance of Rs. 1,24,17,850/-made by the A.O. u/s. 14A r.w.r. 8D of I.T.
Sicom Investment & Finance Ltd. Act without appreciating the fact that for invoking disallowance under section 14A. 4. We have heard the counsels for both the parties and we have also perused the material placed on record as well as the orders passed by revenue authorities.
Before we decide the merits of the case, it is necessary to evaluate the orders passed by Ld. CIT(A). The Ld. CIT(A) has dealt with the above grounds raised by the revenue in its detailed order. The operative portion of the order of Ld. CIT(A) is contained in para no. 5 of its order and the same is reproduced below:-
5. The above grounds are taken together as they address a commonissue. I find from the record that the AO vide letter dated 17/02/2014 had asked the AIR of the assessee to explain why disallowance u/s. 14A should not be worked out as per Rule 8D. In view of the above, there is no merit in the contentions of the learned A/R that the AO has not brought on record any fault in the computation made by the appellant.
The AO has mentioned at para 5.1 of the assessment order that. the assessee has earned
Sicom Investment & Finance Ltd. dividend income of Rs.38,368/- which it has claimed exempt u/s. 10(34) of the Act.
I find from the balance sheet of the appellant company that the share holders funds (net worth) as on 31/03/2010 was Rs. 30,32,70,898/-. The total investments in quoted and unquoted shares as on 31/03/2010 was Rs.17,80,73,701/-. I also find that the share holders funds (net worth) as on 31/03/2011 was Rs.64,45,91,716/-. The total investments in quoted and unquoted shares as on 31/03/2011 was Rs.17,61,40,913/-.
In the case of CIT v. K. Raheja Corporation (P) Ltd. (ITA No. 1260 of 2009) dated 8/8/2011, the Hon'ble Bombay High Court held as under:
"In absence of any material or basis to hold that interest expenditure directly or indirectly was attributable for earning dividend income, interest expenditure could not be disallowed u/s. 14A.
In the case of CIT v. HDFC Ltd.(ITA No. 330 of 2012) Order dated 23/07/2014, the Hon'ble Bombay High Court held that in view of the factual position as per the judgement in the case of CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Born), it would have to be presumed that the investment made
Sicom Investment & Finance Ltd. by the assessee would be out of the interest free funds available with the assessee. In the relevant years, the assessee claimed that no disallowance of interest be made u/s. 14A of the I.T. Act, 1961 in view of the fact that the assessee had interest free funds available more than the investment in tax free securities. The AO rejected the claim and made disallowance of interest u/ s. 14A on proportionate basis. The Tribunal deleted the addition.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under: i) We find that the facts of the present case are squarely coveredby the judgement in the case of Reliance Utilities and Power Ltd. 313 ITR 340 (Born). The findings of fact given by the ITAT in the ent case is that the assessee's own funds and other non-interest bearing funds were more than the investment in the tax-free securities. ii) In the present case, undisputedly the assessee's capital, profit reserve, surplus and current account deposits were higher than the investment in the tax-free securities. In view of the factual position, as per the judgement of this Court in the case of Reliance Utilities and Power Ltd. 313 ITR 340 (Born), it would have to be presumed that the Sicom Investment & Finance Ltd. investment made by the asses-see would he out of the interest-free funds available with the assesses. iii) We therefore, are unable to agree with the submission of SureshKumar that the Tribunal had erred in dismissing the appeal of the Revenue on this ground. iv) We do not find that the question gives rise to any substantialquestion of law. Appeal is therefore rejected.
In the case of Godrej Industries Ltd. (ITA No. 1090/Mum/09), the ITAT Mumbai held that when substantial evidence was brought on record by the assessee company to establish that investment in shares of Indian companies of Rs.3 16.46 crores was made by it out of its own funds and the borrowed funds were entirely utilised for the purpose of business and accordingly the disallowance of interest of Rs9.9 1 crores made by the AO u/s. 14A was deleted.
In view of the above position of law the disallowance of Rs. 1,24,17,850/- made by the AO as per clause 81)(2)(ii) is deleted.
In Maxopp Investment Ltd. v. CIT [2011] 15 taxmann.com 390 (Delhi))\the Court explained the method prescribed by Rule 8D(2) as under Sicom Investment & Finance Ltd. If one examines sub-rule (2) of rule 8D, it is found that the method for determining the expenditure in relation to exempt income has three components.
The first component being the amount of expenditure directly relating to income which does not form part of the total income.
The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any, particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest (other than the amount of interest included in clause (i)) incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income to the average of the total assets of the asscssee.
The third component is an artificial figure-0.5% of the average value of the investment income from which does not or shall not form part of the total income, as appearing in the balance sheets of the asscssee, on the first day and the last day of the previous year.
Sicom Investment & Finance Ltd. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under section 14A.
It is, therefore, clear that in terms of the said rule, the amount of expenditure in relation to exempt income has Iwo aspects - (a) direct and (b) indirect.
The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above.
In cases where the indirect expenditure is not by way of interest, a rule of thumb figure of 0.5% of the average value of the investment, -Hricome from which does not or shall not form part of the total income, is taken In view of the above, the disallowance @ 0.5% of average value of investment on the opening and closing day of the previous year made by the AO which comes to Rs.8,85,536/- as per clause 8D(2)(iii) is confirmed.
Sicom Investment & Finance Ltd. Thus the disallowance is restricted to Rs8,85,536/- in place of Rs. 1,33O3,387/-made by the AO.
After having gone through the facts of the present case as well as considering orders passed by revenue authorities and hearing the parties at length, we find that in identical circumstances, the Hon’ble ITAT in assessee’s own case in for AY 2010-11 had taken a view that disallowance @ 0.5% of the average value of investment on the opening and closing day of the previous year is to be taken and restore the matter back to the file of AO. Consequently thereof, the AO had passed order of assessment u/s 143(3) r.w.s 254 of the I.T. Act dated 27.12.16 for AY 2010-11. Now, as per the facts of the present case, the Ld. CIT(A) while deciding this ground has taken into consideration the facts and while relying upon the judgment in the case of CIT v. K. Raheja Corporation (P) Ltd. (ITA No. 1260 of 2009), CIT v. HDFC Ltd.(ITA No. 330 of 2012) and CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Born), rightly concluded that in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of 0.5% of the average value of Sicom Investment & Finance Ltd. the investment, income from which does not or shall not form part of the total income is to be taken and hence Ld. CIT(A) disallowed @ 0.5% of the average value of investment on the opening and closing day of the previous year and restricted the disallowance to Rs. 8,85,536/-. Moreover, no new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT (A). Therefore, there are no reasons for us to interfere into or deviate from the findings recorded by the Ld. CIT (A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. Resultantly, this ground raised by the revenue stands dismissed.
5. In the net result, the appeal filed by the revenue stands dismissed. Order pronounced in the open court on 6th Dec, 2017 Sd/- Sd/- (Rajendra) (Sandeep Gosain) लेखासदस्य / Accountant Memberन्याययकसदस्य / Judicial Member मुंबई Mumbai;यदनांकDated : 06.12.2017 Sr.PS. Dhananjay