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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
These two appeals by the assessee are arising out of the common order of Commissioner of Income Tax (Appeals)-48, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-48/I.T-587 & 399/DCCC-14/2-13-13 & 2014-15, dated 06-08- 2015. The Assessments were framed by Dy. Commissioner of Income Tax, Centre Circle-2(4), Mumbai (in short DCIT or AO) for the assessment year 2011- 12 & 2012-13 vide orders dated 29-11-2013 & 18-02-2015 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).
First, we will deal with AY 2012-13
2. The only issue in this appeal of the assessee is against the order of the CIT(A) in confirming the disallowance of expenses by the Assessing Officer in 2 & 4950 /Mum/2015 Mirah Realtors Pvt. Ltd. (11-12 & 12-13) respect to expenses attributable towards exempt income by invoking the provisions of section 14A of the Act read with Rule 8D of the I T Rules, 1962. For this the assessee has raised following three grounds: - “1. The Ld. CIT(Appeals) erred in confirming the addition made by Ld. A.C.I.T. on account of disallowance of Rs. 4,86,75,007/- U/s 14A r.w. Rule 8D.
2. The Ld. CIT (Appeals) erred in holding that expenses attributed towards earning exempt income even when there were no nexus.
3. The Ld. CIT (Appeals) erred in considering the facts that the major investments were for acquiring strategic business stake.”
3. Briefly stated facts are that the assessee company is in the business of builder and real estate development. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has earned dividend income and claimed the same as exempt. The Assessing Officer noted that the assessee has earned dividend income of ` 2,15,625/-. But now, before us, the learned counsel for the assessee has fairly conceded that the dividend earned by the assessee is more than that noted by the Assessing Officer but he could not disclose how much. This fact has to be verified. He further noted that the assessee has debited an amount of ` 7,05,04,489/- as interest on loan forming part of its Finance Cost and disclosed investment at ` 240,03,15,873/- According to the Assessing Officer there is exempt income as well as expenses but the assessee has not disallowed any amount towards earning of exempt income. Accordingly, he invoked Rule 8D of the I T Rules r.w.s. 14A of the Act and disallowed interest expenses at ` 3,62,37,670/- and 0.5% of average value of investment at ` 1,24,37,337/- thereby total disallowance was made at ` 4,86,75,007/- Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) also confirmed the action of the 3 & 4950 /Mum/2015 Mirah Realtors Pvt. Ltd. (11-12 & 12-13) Assessing Officer by relying on the order of his predecessor in assessee’s own case for A.Ys 2006-07 to 2010-11, wherein vide para 2.10 to 2.13 it has been observed as under:
“2.10 I had dispassionately considered the contention of the appellant as well as the facts of the case. The appellant claims that it has made strategic investment in its group concerns or companies and, therefore, value of investment so made be excluded while computing disallowance under Rule 8D of I T Rules. The appellant claims that total value of strategic investment in shares at the end of the fiscal is of Rs 2,49,24,995/- and further by way of contribution to share capital in its partnership firm is of Rs 1,20,67,989/- I have examined the claim so made, however, I find that the appellant has made such a claim merely by relying on the percentage of its shareholding in companies or percentage of profit or loss in partnership firms without being specific in regard to the benefits it has derived from such ‘strategic’ investments or how it could be said to have been made in furtherance of its business, other than exempt income.
2.11 In this context it would be pertinent to understand the concept of strategic investment which in business or strategic parlance means an investment that a corporation or affiliated firm makes in a young company that offers to bring something of value to the corporation itself or with an aim that it could become customers for corporation product. In strategic investments one
4 & 4950 /Mum/2015 Mirah Realtors Pvt. Ltd. (11-12 & 12-13) company makes investment in another company. These two companies enter into agreements that they are designed to serve shared goals. The strategic investment begins with identifying and evaluating various projects and making a selection that likely to boost the company’s competitive advantage. The two companies may enter into supply and sourcing contracts, technology sharing agreements or research and development agreements. The strategic investment gives the investing company access to resources at fairly low cost. For instance, when targeted company’s business is to develop technology, which the investing company finds useful, the later can make a strategic investment in the former company instead of developing its own technology.
2.12 In the light of above, one can examine appellant’s claim of strategic investments in terms of its investments in shares of various companies and by way of capital contribution in partnership firm vis-a-vis appellant’s business of a builder and developer of real estate, though no such activities have been carried out during the year under consideration. In present case the appellant has simply made a claim that it has made strategic investments in shares of various companies or contribution to partnership firm. However, he has not brought anything worth the name on record to show that investment in shares was strategic for the growth of its business. In view of this matter, the appellant’s claim of exclusion of strategic investment 2.13 It may be pertinent to mention here that in the appellant’s own case for AY 2006-07 t 2010-11, the CIT(A) vide his order no. CIT(A)-37/IT.581 to 585/ACCC-14/11-12 dtd. 19.6.2012 confirmed the disallowance made by the AO u/s. 14A r.w.r. 8D, thereby dismissing the appellant’s appeals for those years. Therefore, following the order of CIT(A) no interference is called for in working of disallowance made by AO under Rule 8D of I.T. Rules.”
Aggrieved, now the assessee is in second appeal before the Tribunal.
Before us the learned counsel for the assessee submitted that assessee’s non-current investment to the tune of ` 2,55,60,91,693/- as disclosed in the balance sheet as on 31.03.2012, the majority is assessee’s strategic investment in its group concern or companies and for this he drew our attention to balance sheet as on 31.03.2012 Schedule 7 wherein non-current investment in equity shares in subsidiary companies and associate companies are depicted at ` 2,55,60,91,693 except the other investments of about 44,40,94,455/-. According to learned counsel except this amount of ` 44,40,94,455/- others are strategic investment and no disallowance of strategic investment should be made. When a query was put to learned counsel for the assessee, he fairly stated that the matter can be referred to the file of the Assessing Officer for verification of investments in subsidiary companies and associate companies, which forms part of strategic investments in its group concerns or companies. The Assessing Officer, according to him, will allow the net interest i.e. interest received of ` 7,12,34,936/- in case there is nexus with the interest payment. In case the investment is out of interest bearing funds only net of interest should be disallowed. Similar arguments were placed by assessee’s counsel with regard to average value of investment i.e. 0.5% for making disallowance.
We have heard the contentions and have gone through the facts and circumstances of the case. We find that the plea of the learned counsel for the assessee is quite reasonable that only net of interest expenses and interest received should be disallowed qua the receipt of dividend income because the assessee has mainly invested in subsidiary companies and associate companies for which the assessee claimed to have made strategic investment in its group concerns or companies. In view of the above directions, we restore the matter back to the file of the Assessing Officer. The appeal of assessee is allowed for statistical purposes.
In for AY 2011-12
The only issue in this appeal of the assessee is against the order of CIT(A) confirming the action of the Assessing Officer in disallowing expenses relatable to exempt income by invoking the provisions of section 14A of the Act read with Rule 8D of the I T Rules, 1962. For this the assessee has raised the following three grounds:
“1. The Ld. CIT(Appeals) erred in confirming the addition made by Ld. A.C.I.T. on account of disallowance of Rs. 4,43,72,441/- U/s 14A r.w. Rule 8D.
The Ld.CIT (Appeals) erred in holding that expenses attributed towards earning exempt income even when there were no nexus.
The Ld.CIT (Appeals) erred in considering the facts that the major investments were made for acquiring strategic business stake.”
7 & 4950 /Mum/2015 Mirah Realtors Pvt. Ltd. (11-12 & 12-13) 7. At the outset, it is noticed that the exempt income earned by the assessee during the year i.e. dividend income is ` 2,15,625/- and claimed the same as exempt. The Assessing Officer while framing assessment made disallowance under Rule 8D of the IT Rules of interest expenditure of ` 3,36,68,824/- and 0.5% of average value of investment at ` 1,07,03,617/- thereby the Assessing Officer disallowed a sum of ` 4,43,72,441/-. The CIT(A) confirmed the action of the Assessing Officer.
The learned counsel for the assessee filed copy of the Tribunal order in the case of assessee’s sister concern, whereby the Tribunal has restricted the disallowance qua the exempt income earned by the assessee and that in the assessment year under consideration in assessee’s case the exempt income is only `2,15,625/-. We find that the Hon’ble Delhi High Court in the case of Joint Investments Pvt Ltd vs CIT (372 ITR 694) has restricted the addition to the extent of exempt income only by observing as under:
9. In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing Rs. 2,97,440 as a disallowance under s. 14A had to be rejected. Taikisha Engg. India Ltd. (supra) says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO-an aspect which is completely unnoticed by the CIT(A) and the Tribunal. The third, and in the opinion of this Court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs. 48,90,000, the disallowance ultimately directed works out to nearly 110 per cent of that sum, i.e., Rs. 52,56,197. By no stretch of imagination can s.
8 & 4950 /Mum/2015 Mirah Realtors Pvt. Ltd. (11-12 & 12-13) 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.
For the above reasons, the impugned order of the Tribunal is set aside. The question of law is answered in favour of the assessee. Consequently, order of the AO is set aside. The initiation of penalty proceedings also is set aside. The matter is remitted to the AO for fresh consideration in accordance with the above directions. The appeal is partly allowed.
As the issue is covered by Hon’ble Delhi High Court (supra), respectfully following the said decision, we direct the Assessing Officer to restrict the disallowance of expenses qua the exempt income at ` 2,15,625/-. The appeal of assessee is partly allowed.
In the result, both the appeal of assessee is partly allowed. 10.
Order pronounced in the open court on 25-10-2017.