JKS INFRASTRUCTURE PVT. LTD.,KOLKATA vs. ITO, WARD - 1(2), KOLKATA,

This is an appeal filed by the assessee against the order of Ld. CIT(A)-1, Kolkata dated 04.02.2016 for AY 2010-11.

The only issue in dispute is against the action of Ld. CIT(A) in confirming the disallowance made u/s. 14A of the Income-tax Act, 1961 (hereinafter referred to as the “Act”). The Ld. Counsel at the outset itself submitted that he is against the action of the Ld. CIT(A) in upholding the working of Rule 8D(2)(ii) of the Income Tax Rules, 1962 (hereinafter referred to as the “Rules”) and is restricting his argument only in respect of the disallowance made by the AO in respect to working of Rule 8D(2)(ii) of the Rules which has been upheld by the Ld. CIT(A) ignoring the fact that the interest expenditure of the assessee was entirely for the project at Panvel. The Ld. Counsel in order to buttress his argument drew our attention to the audited accounts in Schedule 16 point no VII of the audited accounts. From a perusal of the same, we note that the assessee has invested a sum of Rs.64,82,03,535/- as on 31.03.2010 and Rs.45,43,06,704/- as on 31.03.2009 under fixed assets. We note that the said asset is a business asset from which the assessee had earned rental income of Rs.6,15,41,073/-. We note that the entire interest expenditure was on the 2 JKS Infrastructure, AYs- 2010-11 secured loan taken by the assessee for the project at Panvel and the interest expenditure was not used for acquiring the investment which earned exempt income and therefore no disallowance is called for invoking Rule 8D(2)(ii). He relied on the decision of the coordinate bench in the case of ACIT Vs. Champion Commercial Co. Ltd. ITA No. 644/Kol/2012 for AY 2008-09 wherein it has been held that the common interest expenses which are to be allocated in terms of the formula under Rule 8D(2)(ii) of the Rules will only be such interest expenses as are neither directly attributable to borrowings specifically used for tax exempt income or receipt, nor are directly attributable to borrowings specifically used for taxable incomes or receipts. The following illustration was provided by the Tribunal in Champion Commercial (supra), which demonstrates the ‘incongruity’: “In the case of A & Co. Ltd., total interest expenditure is Rs.1,00,000, out of which interest expenditure in respect of acquiring shares from which tax free dividend earned is Rs.10,000. Out of the balance Rs.90,000, the assessee has paid interest of Rs.80,000 for factory building construction which clearly relates to the taxable income. The interest expenditure which is “not directly attributable to any particular receipt or income” is thus only Rs.10,000. However, in terms of the formula in Rule 8D(2)(2), allocation of interest which is not directly attributable to any particular income or receipt will be for Rs. 90, 000 because, as per formula the value of A(i. e. such interest expenses to be allocated between tax exempt and taxable income) will be "A = amount of expenditure by way of interest other than the amount of interest included in clause (i) [i. e. direct interest expenses for tax exempt income] incurred during the previous year.” Let us say the assets relating to taxable income and tax exempt income are in the ratio of 4: 1. In such a case, the interest disallowable under Rule 8D(2) (ii) will be Rs.18,000 whereas entire common interest expenditure will only be Rs.10,000.”

We note that the decision in Champion Commercial (supra) was tested by the Hon’ble Delhi High Court in CIT Vs. Bharati Overseas Pvt. Ltd. of 2015 dated 17.12.2015 wherein the plea of the Revenue was that the Tribunal being the creature of statute (Income Tax Act) cannot read down the Rules framed therein i.e. in this case Rule 8D(2)(ii), and therefore, the Tribunal travelled beyond the scope of its jurisdiction and powers, was repelled by Hon’ble High Court taking note of the affidavit filed by the Revenue before the Hon’ble Bombay High Court in Godrej & Boycee Mfg. Co. Ltd. Vs. DCIT (2010) 328 ITR 81 (Bom) wherein the constitutionality of Rule 8D(2)(ii) of the Rules was examined by the Hon’ble High Court and the view of the Tribunal was the stand taken in consonance with the affidavit filed by the Revenue. We, therefore, find force in the submission of the Ld. Counsel that the secured funds taken by the assessee were in fact utilized in the warehousing project at Panvel and the assessee has earned rental income of 3 ITA No.241/Kol/2016 JKS Infrastructure, AYs- 2010-11 more than Rs. 6 cr. and the entire interest expenditure was for the secured loan and not for acquiring investments which has earned exempt income. From a perusal of the notes to accounts it is discerned that the loan was a secured bank loan for Warehouse project in Panvel. Thus the CIT(A) totally ignored the relevant facts and the action of his is thus erroneous. We note that the AO or CIT (A) did not bring on record any evidence to suggest that the loans were used for purchase of shares/mutual funds, hence the interest could not be disallowed invoking rule 8D(2)(ii) of the Rules.

In the result, appeal of the assessee is partly allowed.