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Income Tax Appellate Tribunal, BENGALURU BENCH B, BENGALURU
Before: SHRI VIJAY PAL RAO
PER S. JAYARAMAN, ACCOUNTANT MEMBER :
This is an appeal filed by the Revenue against the order of the CIT(A)-4, Bengaluru, dt.24.03.2016, for the A. Y. 2011-12.
M/s. John Distilleries P. Ltd, the assessee, is engaged in the manufacturing of Indian Made Foreign Liquor. While making the assessment for A. Y. 2011-12, the AO noted that as per the balance sheet, the assessee’s total capital and reserve was Rs.100,38,67,874/- and that in comparison to total investment (including investment in company to be ITA.1209/Bang/2016 Page - 2 acquired) is only Rs.5,08,67,874/-. The AO also found that the assessee has admitted a total dividend income of Rs.42,067/-. The AO disallowed Rs.1,24,54,220/-, u/s.14A read with rule 8D. This included disallowance of Rs.1,16,07,892/- being proportionate indirect interest attributable to exempt income and Rs.8,46,328/- being 0.5% of the average amount of tax exempt investments. Aggrieved, the assessee filed appeal before the CIT (A).
The CIT (A), in his order in Appeal No.361/19/C-4(1)(1)/CIT(A) - 4/2014-15, dt.24.03.2016 allowed the appeal partly, on the following lines by applying the principles laid down by this Tribunal in assessee’s own case for A. Y. 2010-11, in ITA.1429 & 1565/Bang/2014, dt.24.02.2016.
On disallowance of Rs.1,16,07,892/- being proportionate indirect interest expenditure attributable to exempt income, since the assessee’s share capital and reserves far exceeded the investments, he deleted the proportionate indirect interest expenditure disallowed at Rs.1,16,07,892/-.
In respect of interest disallowance of Rs.8,46,338/- being 5% of average amount of tax exempt investments, relying on the ITAT order in assessee’s own case (supra), he directed the AO to restrict the disallowance to the extent of receipt of exempt income at Rs.42,067/-, on the ratio that once exempt income is earned, it implies that certain expenditure is attributable to it should also be disallowed.
ITA.1209/Bang/2016 Page - 3
Being aggrieved, the Revenue filed this appeal with the following grounds :
2. On the facts of the case, the Ld. CIT (A) has erred in holding that in case the nexus between the investment and interest bearing funds is not established, section 14A r.w.r. 8D has not applicability at all, when it is stated in Circular No.5/2014 dated 11/02/2014 that the disallowance u/s.14A r.w.r 8D has to be made even when the tax payer on a particular year has not earned any exempted income.
3. On facts of the case, the Ld. CIT (A) is justified in deleting the 14A addition made under Rule 8D when the AO has rightly made the disallowance after analyzing the investment portfolio and the balance sheet given by the assessee.
The Ld. DR presented his case on the line of grounds of appeal. The AR of the assessee relied on the ITAT order (supra) and the jurisdictional High Court decision in CIT v. Microlabs Ltd, reported in 383 ITR 390. The relevant portion is extracted as under :
“.....It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income.
The Hon’ble Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s.14A towards any interest expenditure can be made. This view was again confirmed by the Hon’ble Bombay High Court in CIT v. HDFC Bank Ltd. of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds ITA.1209/Bang/2016 Page - 4
were more than the investments in tax free securities, no disallowance of interest expenditure u/s.14A can be made.
In the light of above said decisions, we are of the view that disallowance of interest expenses in the present case of Rs.49,42,473 made under Rule 8D(2)(ii) of the I. T. Rules should be deleted. We order accordingly.”
We have considered the rival submissions, the decision of the jurisdictional High Court (supra) and this Tribunal decision in the assessee’s own case for A. Y. 2010-11, in ITA.1429 & 1565/Bang/2014, dt.24.02.2016 . Based on them, we dismiss the Revenue’s appeal.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 28th day of April, 2017.