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Income Tax Appellate Tribunal, ‘ B’ BENCH : CHENNAI
Before: SHRI CHANDRA POOJARI & Shri Duvvuru RL Reddy
आदेश / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER
This appeal of the Revenue is directed against the order of the Commissioner of Income-tax (Appeals)-1, Chennai dated 27.12.2016 pertaining to assessment year 2012-13.
The only ground in Revenue’s appeal is with regard to deletion of disallowance made u/s.14A of the Act by Ld.CIT(A).
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The facts of the case are that assessee company has made investments in equity shares of `119,1,21,046/- as on year ending 31.3.2012 and `132,44,55,685/- as on year ending 31.3.2011. The assessee company has loans outstanding of `113,65,30,332/-. According to AO, the investments were made out interest bearing funds. Even if the assessee company has interest free funds and interest bearing funds, it cannot be presumed that, investments made out of interest free funds only or that investments were made out of interest bearing funds only. Since there are mixed funds (interest bearing and interest free) and hence, proportionate disallowance of interest was to be made. It is emphasized that, the entire interest expenditure has not been disallowed as envisaged in sec.36(1)(iii) of Income Tax Act but the disallowance is on proportionate basis. However, from the details of expenses submitted by the assessee, it was observed by the AO that certain expenses such as professional & consultancy charges, tent, travel and printing and stationery, fund maintenance, postal and courier etc. could have been incurred in relation to investment made in equity shares, out of which exempt income could be realized. Further, the assessee also may have to incur expense in relation to management and professional fee, so as to make informed choices for investment in equity shares baed on the market value and performance of the economy. Since assessee has made investments in equity shares, there would be a certain element of expenses incurred towards managing of those shares and also a time cot involved for utitising the funds invested to realize maximum profit. According to AO, the assessee’s claim that no dividend income has been earned and that no ITA No.579/Mds./2017 :- 3 -:
investments are made in the financial year 20l1-12, was not correct. Reliance is placed in the case of Cheminvest Ltd vs. ITO reported in 121 lTD 318 (2009), wherein the Hon’ble Delhi Tribunal has held that such disallowance under section 14A can be made in a year in which an exempt income has been earned or received by the assessee. Therefore, the amount of expenditure incurred in relation to the exempt dividend income in relation to the mandatory provisions of Rule 8D is worked out by AO as `62,90,942/- and the ld. Assessing Officer made disallowance u/s.14A amounting to `62,90,942/-. Aggrieved by the order of ld. Assessing Officer, the assessee carried the appeal before the Ld.CIT(A).
Before the Ld.CIT(A), the submission of the appellant was that the Appellant has not incurred expenditure to earn tax free income as contemplated in section 14A and it is clearly evident that there are no expenses relating exempt income in profit and loss account. Section 14A is a “disallowance” provision and not an “addition” provision. This means before invoking it, the impugned expenditure must be claimed as deduction in the first place. This is based on the simple proposition that what has not been claimed as deduction cannot be disallowed. The term ‘expenditure’ as used in the Section means what is paid out or away, something which is gone irretrievably. Expenditure means something that a trader pays out from his pocket. Expense has many forms, namely, accrued expense, administrative expense, business expense, capita expense, current expense, deferred expense, educational expense, entertainment expense, extraordinary expense, fixed expense, general administrative expense, medical expense,
ITA No.579/Mds./2017 :- 4 -: moving expense, operating expense, ordinary and necessary expense, organizational expense, put-of-pocket expense, prepaid expense, travel expense. The term “expenditure” as mentioned in Section 14A would take within its ambit not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial.
4.1 The Ld.CIT(A) relied on various case laws including Co-ordinate Bench of Chennai in the case of EIH Associated Hotels Ltd Vs DCIT in & 1624/Mds./2012 dated 17.07.2013 wherein held that” 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. Rule 8D. Accordingly, the Ld.CIT(A) directed the AO to re-compute the average value of investment under the provisions of Rule 8D after deleting investments made by the assessee in subsidiary company. Against the order of Ld.CIT(A), now the Revenue is in appeal before us.
We have heard both the parties and perused the material on record.
The main contention of the ld.A.R before us is that the investment was made in associated concern by name M/s.Chettinad Cement Corporation Pvt. Ltd., and it was a strategic investment. As such, there cannot be applicability of provisions of the section 14A r.w. Rule 8D of Rules. On the other hand, ld.D.R submitted that the assessee invested the borrowed funds, which carries interest and in such circumstances, the judgement of jurisdictional High Court in the case of CIT Vs. Chettinad Logistics Pvt. Ltd. in (2017) 98
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CCH 0151 and M/s.Redington (India) Ltd., Vs. ACIT in TCA No.520 of 2016(Mad.) cannot be applied. In our opinion, whether M/s.Chettinad Cement Corporation Pvt. Ltd., is an associated enterprise of assessee or not, was to be seen by the authorities below. However, the lower authorities have not gone into the above fact of the associated enterprise shareholdings pattern. Further, we also make it clear that the AO should consider the Order of Tribunal in the case of Mr.M.A.Alagappan Vs. ACIT vide order dated 03.04.2017 reported in 165 ITD 401 (Chennai Tribunal) wherein held that:-
“6. We considered the arguments of both the sides in detail. Sec.14A(1) declares the law that the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act shall not be allowed as a deduction in computing the taxable income of the assessee. Sec.14A(2) provides for determining the quantum of such expenditure which shall not be allowed as a deduction. That is the machinery provision as far as sec.14A is concerned. In that provision, it has been provided that if the Assessing Officer is not satisfied with the correctness of the computations made by an assessee, he shall compute the quantum in accordance with the method that may be prescribed. For this matter, Rule 8D has already been prescribed. Sub-sec.(3) further provides that even in a case where an assessee claims that no expenditure was incurred, the assessing authority has to presume the incurring of such expenditure as provided under sub-sec.(2) read with Rule prescribed. Therefore, it becomes clear that even in a case where the assessee claims that no expenditure was so incurred, the statute has provided for a presumptive expenditure which has to be disallowed by force of the statute. In a distant manner, literally speaking, it may even be considered for the purpose of convenience as a deeming
ITA No.579/Mds./2017 :- 6 -: provision. When such deeming provision is made on the basis of statutory presumption, the requirement of factual evidence is replaced by statutory presumption and the Assessing Officer has to follow the consequences stated in the statute. It means that even in a case where no expenditure is stated to have been incurred, the assessing authority has to apply Rule 8D. As the statutory presumption substitutes the requirement of factual evidence, the question of enquiry does not arise. Therefore, we are unable to agree with the argument of the learned A.R.” Hence, in the interest of justice, we remit the issue in dispute to the file of AO to examine the issue afresh in the light of judgement of above decision.
In the result, the appeal of the Revenue is partly allowed for statistical purposes.
Order pronounced on 23rd August, 2017, at Chennai.