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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri A. T. Varkey, JM & Dr. A. L. Saini, AM]
Per Shri A.T.Varkey, JM
The appeal filed by the Revenue is against the order of Ld. LD. CIT(A)-2, Kolkata dated 22.11.2016 for AY 2013-14.
Ground nos. 1 and 2 of the revenue’s appeal is against the order of Ld. CIT(A) in deleting the disallowance u/s. 14A of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) read with Rule 8D of the Income-tax Rules, 1962 (hereinafter referred to as the “Rules”). 3. Briefly stated facts of the case are that from the Tax Audit Report the AO observed that a sum of Rs.1,63,302/- being the direct expenditure relating to exempt income has been disallowed and added back by the assessee in its computation of total income under rule 8D(2)(i) of the Rules. But no separate computation of disallowance of expenses has been furnished by the assessee. According to AO, related interest expenses ought to have been disallowed by the assessee in accordance with the provisions of sec. 14A of the Act read with Rule 8D(2)(ii) of the Rules. But on examination, the AO found that the disallowance of interest expenses made by the assessee was not in conformity with Rule 8D(2)(ii) of the Rules. Hence, he determined the related interest expenditure u/s. 14A of the Act at Rs.3,91,07,732/- against the interest expenditure claimed by assessee at Rs.37,56,87,038/- Jay Shree Tea & Industries Ltd. , AY- 2013-14 and accordingly, added back to the returned income of the assessee. The AO also disallowed expenditure under Rule 8D(2)(iii) of the Rules @ .5% of average value of investments of Rs.102,47,40,000/- i.e. Rs.51,23,700/-. Accordingly, the AO made the total disallowance at Rs.4,43,94,734/- and deducted the amount added back by assessee at Rs.1,63,302/-, therefore, total disallowance comes to Rs.4,42,31,432/-. Aggrieved, assessee preferred appeal before the Ld. CIT(A), who deleted the addition by following decision of ITAT in assessee’s own case for AY 2008-09 and deleted the disallowance made under Rule 8D(2)(iii) of the Rules by following the Hon’ble Delhi high Court decision in the case of CIT Vs. Holcim India Pvt. Ltd. in ITA No. 486/2014. Aggrieved, revenue is before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that during the course of assessment proceedings the AO found that the assessee has not made any disallowance on account of interest expenses under Rule 8D(2)(ii) of the Rules. Thus, the AO worked out the disallowance of the interest as per the provision of Rule 8D(2)(ii) of the Rules at Rs.3,91,07,732/- and added back the same to the total income of the assessee. On appeal, the Ld. CIT(A) after hearing the submission of the assessee that no borrowed fund has been utilized in the impugned investment as there was sufficient own fund available with it deleted the addition by following the order of the ITAT in assessee’s own case for AY 2008-09. Aggrieved, revenue is before us. We note that the issue i.e. disallowance made under Rule 8D(2)(ii) of the Rule is squarely covered in favour of the assessee and against the revenue by the Coordinate Bench decision in assessee’s own case in for AYs 2010-11 and 2011-12 dated 02.06.2017 wherein vide para 7 the ITAT has held as under: “7. We have heard rival contentions of both the parties and perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon. At the outset, we find that issue raised by Revenue is covered in assessee’s own case in ITA No. 675/Kol/2014 for A.Y. 2009-10 dated 03.02.2017, the relevant extract of order is reproduced below:- “It is observed that a similar disallowance on account of proportionate interest expenditure by applying Rule 8D(2)(ii) was made in assessee’s case for A.Y. 2008-09 and the order of the ld. CIT(Appeals) deleting the said disallowance was upheld by the Tribunal vide its order dated 13.07.2016 passed in ITA No. 2773/KOL/2013 for the following reasons given in paragraphs no. 6 & 7 of its order:- “6. We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. Admittedly the disallowance u/s 14A to the tune of Rs.92,89,825/- have been made by the ld. AO by invoking the provisions of Rule 8D(2)(ii) of the Rules. We find that the assessee company is having
Jay Shree Tea & Industries Ltd. , AY- 2013-14 share capital of Rs.10.67 crores and sufficient free reserves of Rs.123.67 crores as on 31.3.2007 and Rs.137.99 crores as on 31.3.2008, but whereas the total investments as on 1.4.2007 was A.Ys. 2010-11 & 201-12 DCIT Cir-4 Kol. Vs. M/s Jay Shree Tea & Inds. Ltd. Page 4 Rs.105.86 crores and as on 31.3.2008 was Rs.94.68 crores. We find that the ld. CIT(A) had given relief after going through the copy of the agreement of consortium of the banks and sanction letters of the banks submitted by the assessee that the loan was sanctioned for the purpose of working capital and purchase of fixed assets. 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 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.
6.1. 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).
6.2. 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 rightly deleted the disallowance u/s 14A of the Act in the facts and circumstances of the case to the tune of Rs.92,89,825/-. Accordingly, the ground no. 1 raised by the revenue is dismissed”.
As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to that of A.Y. 2008-09, we respectfully follow the decision of the Coordinate Bench rendered in A.Y. 2008-09 and uphold the impugned order of the ld. CIT(Appeals) deleting the disallowance made by the Assessing Officer on account of proportionate interest under Rule 8D(2)(ii). Ground No. 1 of the Revenue’s appeal is accordingly dismissed.”
Jay Shree Tea & Industries Ltd. , AY- 2013-14 Respectfully following the decision of co-ordinate Bench in assessee’s own case (supra) as there was no change in the facts of the case. We uphold the impugned order of the Ld. CIT(A). Hence, AO is directed accordingly. This ground of Revenue’s appeal is dismissed.”
Respectfully following the decision of Coordinate Bench cited supra and since there is no change in facts or law in the present case, we uphold the impugned order of the Ld. CIT(A) in deleting the addition as made by the AO under Rule 8D(2)(ii) of the Rules. However, coming to Rule 8D(2)(iii) of the Rules, we note that assessee had earned exempt income to the tune of Rs. 1.53 cr. However, the Ld. CIT(A) erred in relying on Hon’ble Delhi High Court decision in Holcim India Pvt. Ltd. wherein it was held that when there is no exempt income, no disallowance u/s. 14A of the Act is called for. Therefore, we set aside the order of Ld. CIT(A) on this issue and direct 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 order accordingly. Therefore, this ground of appeal of revenue is partly allowed.
5. Ground no. 3 of revenue’s appeal is against the order of Ld. CIT(A) in deleting the addition of notional interest of Rs.75,00,000/- on sticky loan. Briefly stated facts are that the AO observed from the note to Financial Statement of Accounts contained in the Annual Report that the assessee company has not recognized income on account of interest earned on sticky loan amounting to Rs.5,00,00,000/-. According to AO, since the assessee was following mercantile system of accounting, an amount of interest of Rs.75,00,000/- calculated @ 15% on the said sum of Rs. 5,00,00,000/- he added to the returned income of the assessee. On appeal, the Ld. CIT(A) directed to delete the addition by following the Coordinate bench decision in assessee’s own case in dated 02.02.2013. Aggrieved, revenue is before us.
6. We have heard rival submissions and gone through the facts and circumstances of the case. We note the issue is squarely covered in favour of the assessee by the decision of Hon’ble jurisdictional High Court in assessee’s own case vide GA No. 1501 of 2014, ITAT 47 of 2014 dated 19.11.2014 wherein the similar question arose which reads as under: “3. 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 addition of notional interest of Rs.12,87,900/- on sticky loans was not warranted by disregarding that the assessee followed mercantile system of accounting and as per accounting standard interest accrued should have been recognized on accrual basis?”
Jay Shree Tea & Industries Ltd. , AY- 2013-14 On this question, the Hon’ble High Court has observed as under:
So far as the question no. 3 is concerned, the department has accepted the position as we find from the orders made earlier and even from the appeal therefrom being Income Tax Appeal No. 151 of 2009 in this assessee’s case where the department did not carry any challenge in that regard.
Therefore, following order of Hon’ble High Court cited supra, we dismiss this ground of appeal of revenue.
7. Ground no. 4 of revenue’s appeal is against the order of Ld. CIT(A) in deleting the addition of Rs. 14,43,103/- on account of depreciation on plant and machinery and other business assets purchased out of amount withdrawn from the credit available with NABARD. Briefly stated facts as observed by the AO are that the assessee company had withdrawn amounts from NABARD in earlier years and out of those amounts it purchased plant and machineries and other business assets. The AO as has been done in earlier years, 40% of the depreciation of Rs.14,43,103/- claimed on plant and machineries and other assets purchased out of NABARD withdrawals was disallowed and added back for taxation. Aggrieved, assessee has preferred an appeal before the Ld. CIT(A), who directed to delete the addition by following the Coordinate bench decision in assessee’s own case in dated 02.02.2013. Aggrieved, revenue is before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note the issue is squarely covered in favour of the assessee by the decision of Hon’ble jurisdictional High Court in assessee’s own case vide GA No. 687 of 2013, ITAT 63 of 2013 dated 17.06.2013 wherein the Hon’ble High Court has observed as under: “Having regard to the law, we are of the view that the learned Tribunal very rightly confirmed the deletion of disallowance of the claim of the assessee to depreciation as made by the learned Commissioner of Income Tax (Appeals).” Therefore, following order of Hon’ble High Court cited supra, we dismiss this ground of appeal of revenue.
9. Ground no. 5 of revenue’s appeal is against the order of Ld. CIT(A) in deleting the addition of Rs.4,43,94,734/- made by the AO at the time of computation of book profit ignoring the provision of clause (f) of explanation 1 to section 115JB of the Act. Briefly stated facts are that during the course of assessment proceedings the AO computed the book profit u/s. 115JB of the Act as under:
Jay Shree Tea & Industries Ltd. , AY- 2013-14 Particulars Amount Amount Profit as per revised return: Rs.29,21,88,924/- Add: i) Expenses disallowable u/s. 14A Rs. 4,43,94,734/- of the Act Book profit u/s. 115JB Rs.33,65,83,658/- Rounded off : Rs.33,65,83,660/- Since the amount of tax computed under normal provisions of the Act is more than the tax on the book profit computed u/s. 115JB, According to AO, the assessee is required to pay the tax calculated on the total income computed under normal provisions of the Act and hence, he added a sum of Rs.4,43,94,734/- to the book profit computed u/s. 115JB of the Act on account of disallowance u/s. 14A of the Act. On appeal, the Ld. CIT(A) directed to delete the addition by following the Coordinate bench decision in assessee’s own case in dated 02.02.2013. Aggrieved, revenue is before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that the issue has been dealt with by this Tribunal in ITA No. 2009- 2010/Kol/2014 for AYs. 2010-11 and 2011-12 dated 02.06.2017, wherein the Tribunal has held as under: “16. We have heard rival contentions of the parties and perused the materials available on record. Issue in the instant case is with regard to the disallowance made by AO under the provision of clause (f) to Explanation-1 of Sec. 115JB of the Act. The AO while determining the profit under the normal provision of the Act has disallowed the interest expenses under Sec. 14A r.w.r. 8D(2)(ii) of Income Tax Rules 1962. The AO in his assessment order at the same time, while determining the profit under the provision of MAT also added the same amount of disallowance made u/s. 14A r.w.s 8D(2)(ii) of IT Rules. In this regard, we find that various courts has held that the disallowance made under the normal provision u/s.14A of the Act cannot be imported or cannot be equated to the disallowance made u/s. 115JB of the Act. It is because the provisions of MAT are self-contained code and begins with non-obstante clause. Therefore it has no relation with other provision of the Act. Indeed, the impugned issue of assessee is covered in its favour in assessee’s own assessment in ITA No.684/Kol/2012 for AY 2008-09 dated 08.02.2013 and there is no dispute with regard to that. However subsequent to the ITAT order in the own case of the assessee, the Hon'ble jurisdictional High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 has held that the disallowance in relation to exempted income needs to be made as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:- “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 under section 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal. We accept the submission of Mr. Khaitan, learned Senior Advocate that the provision of section 115JB in the matter of computation is a Jay Shree Tea & Industries Ltd. , AY- 2013-14 complete code in itself and resort need not and cannot be made to section 14A of the Act.” Therefore, the argument placed by Ld. AR for the assessee that the instant issue is already covered in favour of assessee does not hold good. Indeed 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 as per the direction of the Hon'ble jurisdictional High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra). 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. Thus this ground of appeal
of the Revenue is partly allowed.” We also note that the issue is squarely covered by the decision of Hon’ble jurisdictional High Court in assessee’s own case 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.” Respectfully following the order of Hon’ble High Court, (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 revenue’s appeal is allowed for statistical purpose.
In the result, the appeal of revenue is partly allowed for statistical purposes.
Order is pronounced in the open court on 8th June, 2018.