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Income Tax Appellate Tribunal, “D” BENCH : KOLKATA
Before: Hon’ble Shri M.Balaganesh, AM & Hon’ble Shri S.S.Viswanethra Ravi, JM]
IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH : KOLKATA [Before Hon’ble Shri M.Balaganesh, AM & Hon’ble Shri S.S.Viswanethra Ravi, JM] I.T.A No. 239/Kol/2015 Assessment Year : 2009-10 Eureka Forbes Ltd. -vs- ACIT, Range-10, Kolkata [PAN: AAACE 5767 F ] (Appellant) (Respondent)
For the Appellant : Shri Samir Chakraborty, AR Shri Abhijit Biswas, AR For the Respondent : Shri A. Bhattacharjee, Addl. CIT
Date of Hearing : 27.03.2018 Date of Pronouncement : 13.04.2018
ORDER Per M.Balaganesh, AM
This appeal is directed against the order of the learned Commissioner of Income Tax (Appeals) –XII, Kolkata [ in short the ld CITA] in Appeal No. 429/XII/Cir.10/13-14 dated 14.11.2014 against the order passed by the learned DCIT, Circle – 10, Kolkata [in short the ld AO] u/s 143(3) / 251/ 154 of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) dated 21.1.2014.
The only issue to be decided in this appeal is as to whether the disallowance u/s 14A of the Act read with Rule 8D of the Rules could be made in the facts and circumstances of the case.
2 ITA No.239/Kol/2015 M/s Eureka Forbs Ltd. A.Yr. 2009-10
The brief facts of this issue are that the assessee is a limited company engaged in the trading and servicing of vacuum cleaners, water filter cum purifiers and other small household appliances. The return of income for the Asst Year 2009-10 was filed by the assessee company on 29.9.2009 declaring total income of Rs 27,20,74,929/-. In the said return, the assessee had voluntarily disallowed a sum of Rs 65,43,851/- u/s 14A of the Act read with Rule 8D of the Rules in respect of exempt dividend income received in the sum of Rs 3,72,02,115/-. The workings of disallowance u/s 14A read with Rule 8D of the Rules made by the assessee in the return of income are as under:- Disallowance under Rule 8D(2)(i) - Rs Nil Disallowance under Rule 8D(2)(ii) - Rs 56,98,474 Disallowance under Rule 8D(2)(iii) - Rs 8,45,277 ------------------------ Rs 65,43,751 ----------------------- The assessment was completed u/s 143(3) of the Act on 30.12.2011 determining the total income at Rs 31,22,98,350/-. In this assessment, the disallowances were made towards repairs and maintenance and towards discounts and incentives to the tune of Rs 4,02,23,418/-. Later the ld AO passed an order u/s 143(3) / 251 of the Act dated 5.12.2013 pursuant to the order of the ld CITA, wherein the income was determined at Rs 27,31,91,562/-. Later the ld AO identified a mistake in computation of disallowance u/s 14A of the Act read with Rule 8D of the Rules and accordingly issued notice u/s 154 of the Act dated 2.12.2013 for rectifying the mistake. The assessee gave the workings of disallowance u/s 14A of the Act read with Rule 8D of the Rules made by it while arriving at the disallowance in the return of income in the sum of Rs 65,43,751/-. The assessee had applied second and third limb of Rule 8D(2) of the Rules for arriving at the disallowance figure of Rs 65,43,751/-.
Later the assessee in response to notice u/s 154 of the Act filed a letter dated 9.12.2013 filed before the ld AO on 12.12.2013, wherein it was contended that only the 2
3 ITA No.239/Kol/2015 M/s Eureka Forbs Ltd. A.Yr. 2009-10 third limb of disallowance under Rule 8D(2) of the Rules would be applicable and accordingly arrived at the disallowance figure of Rs 16,92,842/-. In other words, the assessee sought to replace the earlier disallowance figure offered in the return of income in the sum of Rs 65,43,751/- with Rs 16,92,842/-. The ld AO observed that the assessee had agreed that there was some error in the computation of disallowance u/s 14A read with Rule 8D of the Rules. The ld AO however did not agree to the aforesaid contention raised by the assessee and proceeded to make further disallowance of Rs 65,61,467/- in the order passed u/s 143(3) / 251/154 of the Act as under :-
Disallowance under Rule 8D(2)(i) - Rs Nil Disallowance under Rule 8D(2)(ii) - Rs 1,14,12,376 Disallowance under Rule 8D(2)(iii) - Rs 16,92,842 ------------------------ Rs 1,31,05,218 Less: Already disallowed by assessee Rs 65,43,751 ------------------------ Further disallowance made in 154 order Rs 65,61,467 ------------------------
The ld CITA in his order observed as under:-
“I have carefully considered the submission put forth on behalf of the appellant along with supporting documents furnished & judgement of the case law relied upon, perused the facts of the case including the observation of the AO in the impugned order under appeal. Even though I find some merits in the argument of the appellant that no disallowance under Rule 8D(2) (iii) was made in the previous assessment year in respect of interest expenses towards borrowed fund, but I am not inclined to entirely agree with the contention of the appellant that there is no factual change in this assessment year as compared to previous assessment year. It is true that no disallowance under Rule 8D(2) (iii) was made in the original assessment order and the disallowance out of interest towards borrowed funds was determined and disallowed while disposing the rectification notice issued u/s 154 by the Department & the petition· The appellant made u/s 154 of the Act. However, on perusal of the details' of 'investment in shares from the Audited Balance sheets (Schedule E), it reveals that in the 'instant assessment year, there is an increase in the investment in shares of Rs. 3,91,97,450/- as compared to the previous AY 2008-09 that means there is fresh investment in shares made during the year to this extent, It is further observed that the 3
4 ITA No.239/Kol/2015 M/s Eureka Forbs Ltd. A.Yr. 2009-10 appellant company debited Rs. 4.91 crore on account of interest expenses during the relevant year as compared to Rs. 1.8 crore in AY 2008-09. The appellant could not substantiate the facts that no borrowed fund was used for making fresh investment in shares during the year. It is also noted that the AO has not given any findings regarding the nexus of utilization of borrowed funds in acquiring the shares during the year under appeal. Instead, he has simply worked out the disallowable interest expenses out of debited interest on account of borrowed funds as per the provisions of Rule 8D(2)(ii). Whereas, the appellant has provided certain material evidence to explain that the borrowed funds have been utilized as working capital of the appellant company for its business and not utilized for· acquiring the shares of either the subsidiary companies or foreign companies. However. the explanation offered by the appellant cannot be accepted on its entirety as the appellant could not substantiate the facts that no borrowed fund was used for making fresh investment in shares during the year and hence, the possibility of utilization of the borrowed funds in acquiring the new shares during the relevant year under appeal cannot be ruled out.
In the light of the above discussion & findings. after perusing the entire facts and circumstances of the case, I am inclined to' agree with the contention of the appellant that the disallowance made by the AO out of interest towards borrowed fund as per provision of Rule 8D(2)(ii) is excessive keeping in view the exempt dividend income earned. Under this circumstances, I am of the view that proportionate disallowance of expenses out of total interest debited to P&L A/c towards borrowed fund would be. appropriate and reasonable. Therefore, the AO is directed to re-compute the disallowable interest expenses u/s 14A on the basis of proportionate diversion of borrowed funds towards acquisition of shares during the year under appeal and modify/restrict the disallowance accordingly. Thus, this ground of appeal is partly allowed.
5.2.2 I have carefully considered the submission put forth on behalf of the appellant along with supporting documents furnished, perused the facts of the case including the impugned order under appeal. After going through the submission of the appellant, I find force in the argument of the appellant that for determining the disallowable expenses u/s 14A of the I. T. Act r. w. Rule 8D(2) (ii) of the I. T. Rules while computing the average value of investment in shares. the investments made in foreign companies which yielded taxable dividend income requires to be excluded . However, in the instant case of the appellant, I find that the AO determined & disallowed under Rule 8D(2)(iii) of Rs.65,43,751/- in .the original assessment order and subsequently while disposing the petition of the appellant u/s 154 & departmental notice u/s 154 has modified and reduced the disallowance amount to Rs. 16,92,842/- accepting the appellant's contention in this regard. Therefore, this ground of appeal is dismissed being taken care of by the AO in his order u/s 154/143(3) of the Act.”
Aggrieved, the assessee is in appeal before us on the following grounds:
5 ITA No.239/Kol/2015 M/s Eureka Forbs Ltd. A.Yr. 2009-10 Ground No. I:
On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) - XII, Kolkata erred in confirming the action of the Additional Commissioner of Income-tax - 10, Kolkata ("the A.O.") of rectifying his order [passed U/S 143(3)], u/s. 154 of the Income-tax Act, 1961 ("the Act") on the ground that there is a mistake apparent from the record in calculation of disallowance u/s. 14A of the Act r.w.s. 8D of the Income-tax Rule, 1961 ("the Rules").
The Appellant prays that the order passed by the A.O. u/s, 154 of the Act be held as illegal and / or otherwise bad in law.
Without Prejudice to Ground No I: Ground No. 11:
I. On the facts and circumstances of the case, and in law, the CIT (A) erred in confirming the action of the AO in invoking provisions of section 14A of the Act r.w.s. 8D (ii) of the Rules on the alleged grounds that the interest expense have been incurred for earning dividend Income.
The Appellant therefore prays that the disallowance made by the AO u/s. 14A r.w.s. 8D (ii) be deleted.
Without Prejudice to Ground I & II: Ground III:
On the facts and circumstances of the case and in law, the CIT erred in confirming the action of the AO in not following the basis of disallowance u/s. 14A r.w.s. 8D(iii) as adopted in A.Y. 2008-09.
The Appellant prays that AO be directed to follow the basis of disallowance adopted in assessment year 2008-09.
Ground No. IV 1. The AO erred in levying interest u/s 234D of the Act. 2. The appellant prays that the interest chargeable u/s 234D of the Act be deleted/appropriately reduce.
6 ITA No.239/Kol/2015 M/s Eureka Forbs Ltd. A.Yr. 2009-10 Ground No. V
The Appellant craves leave to, add to, alter any/or amend the foregoing grounds of appeal.
We have heard the rival submissions and perused the materials available on record including the paper book of the assessee. The short point that arises for our consideration in this appeal is to determine the amount of disallowance to be made u/s 14A of the Act read with Rule 8D of the Rules. There is no dispute with regard to the applicability of Rule 8D(2) of the Rules. From the perusal of the balance sheet of the assessee, we find that the assessee is having sufficient own funds as under:- 31.3.2009 31.3.2008 Shareholders funds 104,39,51,047 99,68,34,145 Secured Loans 43,80,26,191 43,90,97,288 Investments 35,81,67,193 31,89,69,734
7.1. Hence it could be safely concluded from the above data, that the assessee is having sufficient own funds for making the investments and hence no disallowance of interest under Rule 8D(2)(ii) of the Rules could be made in the light of the decision of the Hon’ble Bombay High Court in the case of Reliance Utilites and Power Ltd reported in 313 ITR 340 (Bom) and HDFC Bank Ltd reported in 366 ITR 505 (Bom). Similar view has been taken by the Hon’ble Gujarat High Court in the case of Principal CIT vs India Gelatine and Chemicals Ltd (2015) 376 ITR 553 (Guj). Hence respectfully following the ratio laid down in the aforesaid decisions, we hold that no disallowance under Rule 8D(2)(ii) of the Rules is to be made in the instant case.We are aware of the fact that this would result in assessed income becoming lower than the returned income and it is well settled that the true income of the assessee is to be determined as per the provisions of the Act and as per law. Reliance in this regard is placed on the following decisions :-
7 ITA No.239/Kol/2015 M/s Eureka Forbs Ltd. A.Yr. 2009-10 a) CIT vs Bakelite Hylam Ltd reported in 237 ITR 392 (AP) b) Gujarat Gas Co. Ltd vs JCIT reported in 245 ITR 84 (Guj) c) Milton Laminates Ltd vs CIT reported in 37 taxmann.com 249 (Guj)
7.2. There is no dispute on the fact that no disallowance is to be made under Rule 8D(2)(i) of the Rules in the instant case.
7.3. With regard to disallowance to be made under Rule 8D(2)(iii) of the Rules, we hold that only dividend bearing investments should be taken into account for the purpose of computation thereon in the light of decision rendered by this tribunal in the case of REI Agro Ltd reported in 144 ITD 141 (Kol Trib). The ld AO is also directed to exclude investments made in foreign companies, if any, as the dividend received from such companies, if any, would not be exempt income and hence the provisions of section 14A of the Act read with Rule 8D of the Rules cannot be made applicable thereon.
7.4. The Grounds raised by the assessee are disposed off accordingly.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Court on 13.04.2018
Sd/- Sd/- [S.S. Viswanethra Ravi] [ M.Balaganesh ] Judicial Member Accountant Member
Dated : 13.04.2018 SB, Sr. PS
8 ITA No.239/Kol/2015 M/s Eureka Forbs Ltd. A.Yr. 2009-10 Copy of the order forwarded to: 1. M/s Eureka Forbs Ltd., 7, Chakraberia Road(South), Bhavanipur, Kolkata-700025. 2. ACIT, Range-10, Kolkata. 3..C.I.T.- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.