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Income Tax Appellate Tribunal, BENCH ‘D’ KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri Waseem Ahmed AM ]
ORDER PER N.V.VASUDEVAN, JM:
This is an appeal by the Revenue against the order dated 06.09.2016 of C.I.T- (A)-4, Kolkata relating to A.Y.2011-12.
The Assessee is a company engaged in the business of rendering consultancy services and investments. The assessee earned dividend income of Rs.10,82,405/- and long term capital gain on sale of shares of Rs.68,38,930/-. Both the aforesaid items of income were exempt under Chapter-III of the Act. Under section 14A of the Income Tax Act, 1961 (Act) any expenditure incurred in earning income which does not form part of the total income under the Act cannot be claimed as a deduction.
3. The assessee computed disallowance of expenses of a sum of Rs.2,06,890/- u/s 14A of the Act. The AO proceeded to determine the expenses that have to be disallowed u/s 14A of the Act as he was not satisfied with the quantum of expenses disallowed by the assessee u/s 144 of the Act. The AO found that there was interest expenses debited in the profit and loss account of Rs.2,61,58,696/-. Besides the above the expenses under the head ‘ administrative and other expenses’ debited in the profit Bonanza Trading Co. Pvt. .Ltd. A.Y.2011-12 and loss account was a sum of Rs.1,71,96,889/-. The AO was of the view that there was a failure on the part of the assessee to show that borrowed funds on which interest was paid and claimed as deduction were not used for the purpose of making investments that yielded tax free income. The AO was also of the view that the managerial skills of the personnel, directors and staff was also used for managing investments. He was of the view that disallowance of expenses in terms of section 14A r.w. Rule 8D of the Act should be made. The AO accordingly computed disallowance u/s 14A of the Act read with Rule 8D of the IT Rules, 1962, as follows :-
Before the CIT(A) the assessee challenged the disallowance in terms of rule 8D(2)(ii) and 8D(2)(iii) of the IT Rules. With regard to disallowance of interest expenses under Rule 8D(2)(ii) the assessee submitted that all the investments were made out of the assessee’s own funds and not out of any borrowed funds on which interest was paid and filed the following chart before CIT(A) : Month Investment Investmen Invest Fund Source of Aggregate in t ments Received Fund Excess of Subsidiary Sold sale over purchase Opening 4,50,99,991 - April Nil Nil - May’10 Nil Nil 1,14,00,000 Interest free - loan received Bonanza Trading Co. Pvt. .Ltd. A.Y.2011-12
from Shareholder s June’10 98,75,745 Nil 15,24,255 July’10 2,00,000 Nil 13,24,255 August’10 1,00,000 Nil Nil 13,24,255 September’ Nil Nil 13,24,255 10 October’10 5,26,71,5 Nil 7,00,00,000 Advance 1,73,28,494 06 against sale of property November’1 3,91,06,1 1,32,8 5,50,00,000 Advance 4,65,07,710 0 56 5,372 against sale of property December’1 3,48,57,2 42,29, 1,58,80,259 0 75 824 January’11 1,00,000 Nil Nil 1,58,80,259 February’11 Nil nil 1,58,80,259 March’11 38,00,000 2,18,3 3,39,15,295 5,666 Total 14,05,10, 3,93,5 13,64,00,00 682 0,862 0
The assessee submitted that all the loans funds reflected in the balance sheet of Rs.25.02 crores was not interest bearing and that loan amount to the extent of Rs.4.43 crore did not carry any interest. The assessee submitted that the assessee had interest free own funds available during the previous year viz. Rs.8.55 crores (share capital) Rs.4.43crores (non interest bearing loans), besides the advance received towards sale of the assesse’s properties of Rs.12.50 crores. The total interest free funds which was available with the assessee was Rs.25.48 crores whereas the value of investments as on the last date was only Rs.22.3 crores. The assessee relied on the decision of the Hon’ble Bombay High Court in the case of CIT vs ICICI Bank 330 of 2012 dated 23.07.2014 wherein it was held that if there is interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised loans it can be presumed that the investments were from interest free funds available with the assessee. The assessee therefore prayed that disallowance under Rule 8D(2)(ii) should be deleted.
Bonanza Trading Co. Pvt. .Ltd. A.Y.2011-12
As far as disallowance under Rule 8D(2)(iii) of the Rules namely other expense was concerned the assessee submitted that in computing average value of investments while applying the formula specified under Rule 8D(2)(iii), the AO should take into consideration only investments which yielded dividend income and not the entire investments. The assessee in this regard placed reliance on the decision of ITAT in the case of REI Agro Ltd in dated 19.06.2013.
The CIT(A) agreed with the submissions of the assessee with regard to disallowance in terms of Rule 8D(2)(ii) of the Act and held that the assessee had enough own funds much in excess of the investments made which yielded exempt income and therefore no disallowance under Rule 8D(2)(ii) could be made. With regard to disallowance under Rule 8D(2)(iii), the CIT(A) held that the said disallowance should be made by taking into consideration only the investments that yielded exempt income.
Aggrieved by the order of the revenue has preferred the present appeal before the tribunal raising the following grounds of appeal :
1. On the facts and in circumstances of the case Ld. CIT(A) had erred to allow relief on this ground on the view that considering that the appellant had enough funds of its own, much in excess of the investment's made which yielded exempt income and amply evidenced by its audited accounts, without considering the failure from the part of the assessee the assessee did not maintain any separate accounts or Bank A/c etc. for business and investment. Moreover the assessee company had utilized the managerial skills of the personnel, directors, staff and infrastructure of the office for managing investments etc. through which is earned exempted income.
2. On the facts and in circumstances of the case Ld. CIT(A) had erred to give direction of fresh examination regarding investment made by the assessee which yield exempted income, which is not permissible as per sec. 251 (1 )(a) of the IT Act w.e.f. 01.06.2001
The appellant craves leave to add./alter /modify the grounds of appeal.”
Bonanza Trading Co. Pvt. .Ltd. A.Y.2011-12
The ld. DR, at the time of hearing, reiterated the stand of the revenue as contained in the grounds of appeal. The ld. Counsel for the assessee drew our attention to the availability of own funds by drawing our attention to the chart showing the source of investments as that of assessee’s own funds. He further placed reliance on the decision of the Hon’ble ITAT in the case of REI Agro vs DCIT in dated 19.06.2013 with regard to disallowance under Rule 8D(2)(iii) of the Rules. With regard to ground no.2 raised by the revenue it was submitted by him that the CIT(A) did not set aside the order of the AO and directed the AO to make examination afresh. The direction was only with regard to verification of figures with regard to correct computation of value of average value of investments by excluding investments that yielded tax free income and thereafter applying formula in Rule 8D(2)(iii) of the Rules.
10. We have considered the rival submissions. In our view there is no merit in this appeal by the revenue. As rightly contended by the ld. Counsel for the assessee the availability of own funds of the assessee to the tune of Rs.28.85 crores and the fact that the closing value of investment in the balance sheet as on the last date of the previous year was Rs.22.3 crores clearly demonstrates that the assessee had sufficient own funds which were more than the value of investments. Apart from the above the source of investments on each of the investments made by the assessee during the previous year has been explained by the assessee in a chart filed before CIT(A). The factual accuracy of this chart has not been disputed by the revenue. In such circumstances we find no merits in this appeal by the revenue challenging the deletion of addition in terms of Rule 8D(2)(ii) of the rules,. In so far as the disallowance of other expenses under Rule 8D(2)(iii) of the rules is concerned we are of the view that direction of CIT(A) to include only investments which yielded dividend income while computing average value of investments before applying the formula of Rule 8D(2)(iii) of the Rules is in accordance with the decision of the tribunal in the case of REI Agro Ltd (supra). Hence there can be no grievance to the revenue in this regard. We do not find any merit in the appeal by the revenue and the same is dismissed. Bonanza Trading Co. Pvt. .Ltd. A.Y.2011-12
In the result the appeal by the revenue is dismissed. Order pronounced in the open Court on 14.02.2018