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Income Tax Appellate Tribunal, “C” BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-3, Chennai, in dated 31.03.2017.
:-2-: ITA No. 1360/Mds/2017
M/s. Priyanka Finance Pvt. Ltd., the assessee, is non-banking financial corporation carried on business of financial, monetary and Commercial agent and adviser and is also in the business of buying and selling of shares. In the assessment made for assessment year 2013-14, the AO found that the assessee has invested in equity shares of Rs. 44,86,394/- and Rs. 5,19,83,890/- in Delta Corporative Limited ad Link Intime India Pvt. Ltd., respectively. The assessee also had long term borrowings of Rs. 26,51,529/- and short term borrowings of Rs. 17,34,10,244/-. It has earned long term capital gains of Rs. 3,15,12,217/- and dividend income of Rs. 1,18,64,464/- which is claimed as exempt and this exempted income have been earned from these investments. The AO also found that the assessee has disallowed Rs. 1,41,176/- only , being 0.5% of average investments in equity shares, towards earning of exempt income. The AO considered that the amount of disallowance by the assessee is meagre when it is compared to the exempt income earned. He found that the assessee is having huge long term borrowings for which Rs. 2,10,39,541/- , interest has been paid. In view of that the AO was not satisfied that the disallowance made by the assessee, so he applied Rule 8D and computed the disallowances as under:
Expenses directly attributable to earning exempt income 2,96,331/- (Security transaction charges of Rs. 229283/-and expenses On Equity and F&O transactions of Rs. 67,048/-)
Under Rule 8D(ii) 14,12,766/-
:-3-: ITA No. 1360/Mds/2017 Since, the assessee has disallowed 0.5% of average value of investments, he did not make any further disallowance. Thus, the A O disallowed Rs. 17,09,097/-. Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) confirmed the disallowances and dismissed the appeal.
Aggrieved, the assessee filed this appeal pleading that on the facts and circumstances of the case and in law, the Hon’ble CIT(A) overlooked the facts and circumstances of the appellant’s case and (i) erred in sustaining the additional disallowance made by the learned AO u/s. 14A r.w.r. 8D for earning the exempt income. The appellant prays that the said action of the CIT(A) may be deleted;
(ii) erred in upholding the disallowance made by the learned AO amounting to Rs. 2,96,331/- u/s. 14A r.w.r. 8D(i) overlooking the fact that the appellant had suomotu disallowed the direct expenses incurred towards earning of exempt income.
The appellant prays that the disallowance of Rs. 2,96,331/- may kindly be deleted and (iii) erred in confirming the disallowance of an additional amount of Rs.
14,12,766/- u/s. 14A r.w.r. 8D(ii) made by the learned AO, disregarding the fact that borrowed funds were not utilised by the appellant for making the exempt income earning investments. Thus, the assessee prayed that the disallowance of Rs. 14,12,766/- may kindly be deleted.
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The AR filed paper book comprising copies of financial statements of Priyanka Finance Private Limited (‘amalgamated company’) as on 31.03.2012 i.e., prior to amalgamation, financial statements of Oracle Corporate Services Limited (‘amalgamated company’) as on 31.03.2012 i.e., prior to amalgamation, and financial statements of Priyanka Finance Private Limited (‘amalgamated company’) as on 31.03.2013 i.e., post to amalgamationand submitted that in order to disallow the expenditure u/s. 14A r.w.r 8D(i), there must be a live nexus between the expenditure incurred and the income not forming part of the total income. The assessee has already disallowed the Security Transaction Charges of Rs. 1,02,877/- incurred by it in relation to exempt-income yielding investments in its computation of income. On perusal of the other expenditures debited to the profit and loss account, it is clearly understood that no link can be drawn between the expenditures incurred and the exempt income earned. Hence, no further disallowance is called for under the first limb of Rule 8D (i). However, the A O, while computing the disallowance u/s Rule 8D(i), had computed a total disallowance of Rs. 2,96,331/- being Security Transaction Charges amounting to Rs. 2,29,823/- and FNO transaction expenses of Rs. 67,048/-. In this regard, the AR submitted that out of the Security Transaction Charges of Rs. 2,29,823/-, Rs. 1,02,877/- can only be attributed to earning of exempt income and the balance of Security Transaction charges and FNO transaction charges are not related to the earning of dividend income. Hence, he pleaded that the :-5-: ITA No. 1360/Mds/2017 disallowance u/s 14A be restricted to Rs. 1,02,877 only, as is suomotu disallowed by the assessee in its computation of Income.
4.1 On the disallowance made under Rule 8D(ii), the A R submitted that the assessee has incurred interest expenses of Rs. 2,10,39,541/- on short term and long term borrowings. Further, the assessee has also earned interest income of Rs. 95,80,410/- from the loans given to various parties.
The assessee is also in business of real estate and therefore it required funds to finance its projects. The said loan and advances was used for entirely business purpose. The AR drew our attention to the schedule of non-current investments of the balance sheet. It can be seen from it that the total investment as on 31.03.2013 is Rs 8,70,15,525/-, of which the investments in immovable properties, income from which is not exempt, amounts to Rs.3,05,45,241/-. It is apparent that the said investments are not to be considered for the disallowance u/s14A. The balance investments of Rs 5,64,70,284/-, being investments in quoted and unquoted equity instruments were acquired as a result of the amalgamation of Oracle Corporate Services limited (OCSL) with the assessee company and no funds borrowed by the assessee company have been utilized for acquisition of these investments.
The said investments were being held by OCSL , while no investment was held by the assessee prior to the amalgamation of the two, which can be verified from the pre-amalgamation balance sheets of OCSL and the assessee
:-6-: ITA No. 1360/Mds/2017 and all these documents were enclosed with the written submissions made before the CIT(A) as Annexure B and Annexure C , respectively. The major reason for increase in the impugned investments are due to the amalgamation of the two companies, as it is evident that no part of the borrowed funds could have been spent on making the investments during the year. Therefore, no interest expense can be attributed to the earning of dividend income from such investments. Consequently, the premise that borrowed funds have been utilized for investment purposes is baseless and no disallowance of interest expenditure u/s 14A r. w. r. 8D(ii) is warranted.Per contra, the DR supported the orders of the A O and the CIT (A).
We heard the rival submissions , gone through the orders and relevant material. Though, the assessee has not laid the above materials before the AO and it has not taken the above plea before the AO, as is seen from the assessment order, it furnished those material and took the above pleas before the CIT (A). However, on such material and the pleas ,the CIT (A) has neither called for a report from the AO nor examined them on his own while rendering his decision. Since the facts require verification, on the facts and circumstances of this case we set aside the order of the CIT (A) and restorethe matter to the A O for a fresh examination. After giving adequate opportunity to the assessee, the AO shall pass a speaking order.
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In the result, the assessee’s appeal is treated as allowed for statistical purposes.
Order pronounced on Thursday, the 12th day of October, 2017 at Chennai.