ACIT, NON CORPORATE CIRCLE 15(1), CHENNAI vs. SIBELCO INDIA MINERALS PVT LTD, HYDERABAD

आदेश / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal is filed by the Revenue, aggrieved by the order of the Learned Commissioner of Income Tax(A)-15, Chennai dated 16.08.2017 pertaining to assessment year 2011-12.

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assessee. I took up the case for adjudication after hearing the ld.D.R.

Ld.CIT(A) erred in directing the AO to exclude investments made in

subsidiary company while computing disallowance under Rule 8D or

restrict the disallowance eu/s.14A to the extent of income earned

during the year.

engaged in the business of mining, processing of industrial minerals

and trading in imported clay, and it had taken approval from FIPB

Unit, Department of Economic Affairs, Ministry of Finance

Government of India vide it s approval dated 21.02.2008. The

assessee filed its return of income for assessment year 2011-12 on

29.02.2011 declaring Rs.Nil income During the course of

assessment proceedings, the AO sent a questionnaire wherein applicability of sec.14A r.w.Rule 8D on investment of `7.96 crores

made in F.Y 2008-09 was raised. In reponse, AR replied on

04.03.2015 that “the copy of FDI approval with regard to increase in

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share capital for `17.20 crores for the purpose of investment in

subsidiary Adarsh India Mining Private Limited is enclosed herewith. As it is clearly brought out that the investments of `7.96 Crores in

Adarsh India Mining Private Limited is through increase of share

capital to the extent of Rs. 17.20 that the after getting all approvals

from FIPB and RBI, the question of disallowance u/s r.w.r. 8D does

not have any merit. According to ld. Assessing Officer,AR’s

explanation is not acceptable as there is investment made by the

assessee large interest expenses have been claimed. Assessee has

not satisfactorily explained the total expenditure related to

investment. Accordingly, the assessment u/s.143(3) of the Act was completed on 16.03.2015 disallowing `39.24.837/- u/s.14A of the

Act. Aggrieved by the order of ld. Assessing Officer, the assessee

carried the appeal before the Ld.CIT(A).

appellant has made his submission on the aforesaid issue. The

ld.A.R submitted that the assessee had increased the Share Capital by `1 7.20 crores in FY 2008-09. This increase was exclusively for

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the investment in Adarsh India Mining Pvt Ltd which has since

become 100% subsidiary of the assessee. The assessee is engaged

in mining industry and it had taken approval from FIPB Unit,

Department of Economic Affairs, Ministry of Finance, Government of

India vide its approval dated 21.02.2008 for investing in the above

said company. In the said approval it is very clearly mentioned that

the investment in Adarsh India Mining Private Limited is through fresh

issue of shares of Shri Vaya Gimpex Mining Private Limited by

M/s.Sibelco Belgium, the holding Company. The entire banking

facilities enjoyed by the assessee which are shown under unsecured

loan are being in the nature of working capital limits. These limits are

like Overdraft, packing credit, bill discounting, etc which are of short

term nature and is to be utilized only for the purpose of stock and

book debts. As it is clearly brought out that the Investments of Rs.

7.96 Crores in Adarsh India Mining Private Limited is through

increase of share capital to the extent of Rs. 17.20 that to after

getting all approvals from FIPB and RBI, the question of disallowance

u/s 14A r.w.Rule 8D does not have any merit. The assessee had

made submission at the time of personal hearing to the learned AO

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vide letter dated 02.03.2015. In the said submissions the facts with

regard to the source of funds for investment in subsidiary company

has been clearly brought out.

5.1 Further, ld.A.R submitted before Ld.CIT(A) that Adarsh India

Mining Private Limited is a 100% subsidiary of Sibelco India Minerals.

The entire production of Adarsh India is exclusively purchased by

Sibelco India. As the mine license is in the name of Adarsh India

which cannot be transferred, Sibelco India had bought the Company.

This investment by Sibelco India is not for the purpose of earning

dividend income or capital gains. These investments have been

made to get quality feldspar and quartz materials for the purpose of

Sibelco. This clearly supports the fact that the assessee is not into

the business of investment and these investments in subsidiary

company is out of business expediency. Hence these investments in

subsidiary are not to be reckoned for dis-allowance u/s 14A r.w.r 8D.

The assessee relied upon EIH Associated HOTELS Ltd vs. DCIT

(ITAT Chennai), in I.T.A. No. 1503/Mds/2012, Interglobe Enterprises

Ltd Vs DCIT (ITA 1362 & 1032 Delhi1TAT, Oriental Suctura1

Engineers Pvt. Ltd. (Del.) (HC)— 2010(2). Further, before Ld.CIT(A),

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ld.A.R enclosed the copies of Honorable CIT in the assessee’s own

case pertaining to AY 2009-10 and AY 2010-11 wherein identical

issues has been dealt with and relief given in favour of the assessee.

In view of the above, the ld.A.R pleaded before Ld.CIT(A) to delete

the addition of Rs. 39,24,837/ - under section Section 14A of the Act.

5.2 The Ld.CIT(A) after taking note of the appellant’s investment

portfolio at Rs.7.96 crore, the AO applied Rule 8D and made

disallowance u/s.14A of the Act. Before the CIT(A), the appellant’s

AR has categorically stated that 100% of investment was made in

subsidiary company which ought to have been excluded while

computing the disallowance u/s. 14A by relying on certain decisions

and also the decision of the CIT(A)-15, Chennai in the appellant’s

own case in assessment year 2009-10 vide ITA No. 458 / CIT(A)-15 /

20 13- 14 dated 25/5/20 16. The relevant portion of the decision is

reproduced hereunder:

“5.3 . . . . . . . … … … As it is clearly brought out that the investments of Rs 7.96 crores in Adarsh India Mining Private Limited is through increase of share capital to the extent of Rs. 17.20 that to after getting all approvals from FIPB and RBI, the question of disallowance u/s 14A r.w.r. 8D does not have any merit. Adarsh India Mining Private Limited is a 100% subsidiary of Sibelco India Minerals.

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The entire production of Adarsh India is exclusively purchased by Szfo India As the mine license is rn the name of Adarsh India which cannot be transferred, Sibelco India had bought the company. This investment by the Sibelco India is not for the purpose of earning dividend income or capital gains. These investments have been made to get quality feldspar and quartz materials of the purpose of Sibelco .the clearly supports the fact that the assessee is not into the business of investment and these investments in subsidiary company is out of business expediency. Hence these investments in subsidiary are not to be reckoned for disallowance u/s. 14A r. w. r. 8D, the assessee relies upon EIH Associated Hotels Ltd. Vs DCIT (ITAT Chennai), I. T. A. No. 1503/Mds/2012, Ingerglobe Enterprises Ltd vs DCIT (ITA 1362 & 1032 Delhi ITAT, Oriental Structural Engineers Pvt. Ltd. (Delhi)(HC)-2010(2)TMI21. 5.3.1 The appellant has invested in 100% subsidiary, i.e. Adarsh India Mining Private Limited it is not into the business of investment. As held by the Hon ‘ble ITAT Chennai in the case of EIH Associates Hotels Ltd. vs DCIT vide ITA No. 1503/Mds/2012, dated 17.07.2013 the investments made by the appellant in its subsidiary are not to be reckoned for disallowance u/s 14A r.w.Rule 8D, the AO is directed to re-compute the average value of investment under the provision of Rule 8D after deleting investments made by the appellant in subsidiary company. This ground of appeal is partly allowed.”

5.3 Before the CIT(A), the appellant’s AR made a submission

that there was no dividend income from the investment in the

subsidiary company and therefore, the disallowance

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u/s. 14A was not warranted in view of the decisions of the

jurisdictional High Court, in the cases of M/s.Redington India Pvt. Ltd.

and Chettinad Logistics Pvt. Ltd. The Hon’ble High Court of Madras

has held in those decisions that if there is no exempt income,

disallowance u/s. 14A is not called for and the relevant jurisdictional

High Court is extracted herein below:-

a) Hon’ble Madras High Court’s decision in the case of Redington

India) Ltd. Vs. Addl. CIT- 3921TR 633

Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (Condition precedent) - Assessment year 200 7-08 - Whether provision of section 1 4A is relatable to earning of actual income and not notional or anticipated income, hence, where there is no exempt income in a year, there cannot be a disallowance of expenditure in relation to an assumed income - Held, yes [Para 15] [In favour of assessee] b) Chettinad Logistics Put. Ltd. -80 taxmann.corn 221 (Mad.)

“Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (General principle) - Assessment year 2011-12 - Whether section 1 4A can only be triggered, if assessee seeks to square off expenditure against income which does not form part of total income under Act; rule 8D only provides for a method to determine amount of expenditure incurred in relation to income, which

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does not form part of total income of assessee and it cannot go beyond what is provided in section 14A - Held yes - Whether where no exempt income i.e., dividend, was earned in relevant assessment year by assessee, section 1 4A could not be invoked - Held yes [Para 8] [Matter remanded]”

5.4 Following the above judgements, the Ld.CIT(A) directed the ld.

Assessing Officer as follows:-

a) To verify the appellant’s claim that 100% of the investment was made in subsidiary company and if so, to exclude the same from the computation under Rule 8D. b) To examine the appellant’s submission that there was no exempt income in the relevant previous year and therefore, disallowance u/s.14A was not warranted.

5.5 Hence, the Ld.CIT(A) directed the ld. Assessing Officer to

either delete the disallowance u/s. 14A or to restrict the disallowance

u/s.14A based on the above direction. Ld.CIT(A) decided the case in

favour of the assessee. Against the order of Ld.CIT(A), now the

Revenue is in appeal before us.

material on record. In my opinion, if the assessee advanced non-

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interest bearing funds to the subsidiary company, then there

cannot be any disallowance u/s.14A r.w.Rule 8D as per the

decision of this Tribunal in the case of EIH Associated HOTELS

Ltd vs. DCIT reported in 2013- TIOL-796-ITAT-MAD wherein held

that:-

“…. The investments made by the assessee in the subsidiary company are not on account of investment for earning capital gains or dividend income. Such investments have been made by the assessee to promote subsidiary company into the hotel industry. The assessee is not into the business of investment and the investments made by the assessee are on account of business expediency. Any dividend earned by the assessee from investment in subsidiary company is purely incidental. Therefore the investment made by the assessee in its subsidiary is not to be reckoned for disallowance U/s.14A r.w.r.8D. The Assessing Officer is directed to re-compute the average value of investment under the provisions of Rule 8D after deleting investments made by the assessee in subsidiary company.” Taking note of the above decisions and the decision of the Chennai bench of the Tribunal in ITA No.156/Mds/13 cited supra, we hereby remit the matter back to the file of Ld. Assessing Officer to examine the issue involved in this case afresh and pass appropriate order as per law and merits and in the light of the decisions cited herein above. While doing so, we also direct the Ld. Assessing Officer to consider the decision of the Tribunal in the case M/s Agile Electric Sub Assembly Pvt. Ltd. cited supra wherein it was held as follows:- ‘”7.2 In regard to applicability of Section 14A of the Act read with Rule 8D also; the above view will be applicable. Moreover in the case EIH Associated Hotels Ltd v. DCIT reported in 2013 (9) TMI 604 in ITA No.1503, 1624/Mds/2012 dated 17th July, 2013, it has been held by the Chennai Bench of the Tribunal as follows:- “Disallowance U/s. 14A rw Rule 8D – CIT upheld disallowance – Held that – investments made by the assessee in the subsidiary company are not on account of investment for earning capital gains or dividend income. Such investments have been made by the assessee to promote

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subsidiary company into the hotel industry. A perusal of the order of the CIT(Appeals) shows that out of total investment of Rs.64,18,19,775/-, Rs.63,31,25,715/- is invested in wholly owned subsidiary. This fact supports the case of the assessee that the assessee is not into the business of investment and the investments made by the assessee are on account of business expediency. Any dividend earned by the assessee from investment in subsidiary company is purely incidental. Therefore, the investments made by the assessee in its subsidiary are not to be reckoned for disallowance U/s. 14A r.w.r. 8D. The Assessing Officer is directed to re-compute the average value of investment under the provisions of Rule 8D after deleting investments made by the assessee in subsidiary company – Decided in favour of assessee.” For the above said reasons, we hereby hold that in the case of the assessee the provisions of Section 14A read with Rule 8D will not be applicable in regard to investments made for acquiring the shares of the assessee’s sister concerns. Accordingly we restrain ourselves from interfering with the Order of the Ld.CIT(A) on this regard.” Therefore, following the aforesaid decision of the Tribunal, we hereby direct the learned Assessing Officer to delete the addition made by invoking the provisions of section 14A r.w. Rule 8D of the Act, subject to verification that investments are made by the assessee in its sister concerns only and from its interest free funds.” 8. Following the above decision of the Tribunal, we remit back the matter to the file of the learned Assessing Officer to verify whether the investments are made by the assessee out of its interest free funds in its sister concern for strategic reasons and if found so delete the addition and if found otherwise, pass appropriate orders as per merit & law.”

6.1 Further, when the assessee has no exempted income, the

provisions of the section 14A r.w.Rule 8D cannot be invoked as

already held by jurisdictional High Court in the case of Redington

(India) Ltd. cited supra and also similar view was taken by

Jurisdictional High Court in the case of Chettinadu Logistics cited

supra. Accordingly, this issue is remitted to the file of ld. Assessing

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Officer to examine the issue in the light of the above cited judgements of jurisdictional High Court and to decide afresh after giving opportunity of hearing to the assessee.

Chennai, Dated the 04th December, 2017. K s sundaram.

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF