ITO, WARD-6(3), KOLKATA, KOLKATA vs. M/S. NAGREEKA CAPITAL & INFRASTRUCTURE LTD., KOLKATA

Since these three appeals relate to the same assessee, different Assessment Years, and identical issues are involved, therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.

M/s Nagreeka Capital & Infrastructure Ltd. 128 & 129/Kol/2015 Assessment Year: 2009-10 3.None was present on behalf of the assessee, although notices were sent to the assessee by registered post, therefore, these appealsare being decided without the presence of the assessee, ex parte. 4.The appeal of Revenue in ITA No.127/Kol/2015 for Assessment Year 2009-10, is taken as the lead case.

The grounds of appeal raised by the Revenue (in lead case, ITA No.127/Kol/2015) reads as under: “That on the facts and in circumstances of the case, the CIT(A) erred on facts as well as in law in holding that the assessee was having sufficient fund for investment and while computing disallowance under rule 8D only those investments should be taken into account which have yielding exempt income, ignoring the fact that investment is enough to invoke disallowance u/s 14A even if no exempt received in any particular period has decided by the divisional bench of Delhi ITAT in the case of ITO Vs Cheminvest Ltd and circular no.5/2014 dated 11/02/2014 issued by the CBDT.” 6.The brief facts qua the issue are that theassessee filed its return of income on 21.09.2009 showing total income at Rs. Nil. The assessee’s case was selected for scrutiny u/s 143(2) of the Act and the Assessing Officer has completed the assessment by making the disallowance u/s 14A read with rule 8D. During the assessment proceedings the assessee had submitted that he had suo- moto disallowed Rs.9,79,576/- for the purpose of section 14A read with Rule 8D, the details of which are as follows: (a) 1% of Dividend of Rs.2,19,78,582/- Rs.2,19,786/- (b) Demat Charges Rs.1,95,705/- (c) STT on long term capital gain Rs.5,64,085/- Rs.9,79,576/- But the Assessing Officer did not accept the above disallowance made by assessee because the assessee did not follow the relevant Rules and provisions of section 14A. The assessee also submitted to the AO a separate calculation for the expenses disallowable as per Rule 8D(2). But having examined the calculation the AO observed that in determining the quantum of expenses disallowable, the assessee Page | 2 M/s Nagreeka Capital & Infrastructure Ltd. 128 & 129/Kol/2015 Assessment Year: 2009-10 had stressed the need for reducing own fund from average value of investment and argued that the remaining balance should only be considered as investment made out of interest bearing borrowed fund upon which proportionate disallowance should have to be required only to be made. The Assessing Officer calculated the disallowance under section 14A read with rule 8D as follows: (a) Average of investment on close of the year Rs.63,82,04,411/- Less: Capital & Reserves Rs.52,24,56,820/- Rs.11,57,47,591/- Other assets Rs.40,02,07,843/- Rs.51,59,55,434/- Total interest payment during the year Rs.6,44,67,810/- Therefore, proportionate interest is attributable towards net investment of Rs.11,57,47,591/- is only Rs.1,44,62,477/-. (b) Average of investment of Rs.63,82,04,411/- one half percent on average value of the investment is Rs.31,91,022/- Further, the assessee has incurred Rs.1,95,705/- as Demat charges. Accordingly, total disallowance u/s.14A r.w.r 8D was computed as under: (i) Direct expenditure: (a) Demat charges Rs.1,95,705/- (b) Proportionate interest attributable towards net investment Rs.1,44,62,477/- Rs.1,46,58,182/ (ii) Interest incurred for earning exempt income Rs.NIL (iii) 5% of average value of investment Rs.31,91,022/- Total disallowance u/s.14A: Rs.1,78,49,204/- 7.Aggrieved by the addition made by the Assessing Officer u/s.14A r.w.r 8D, the assessee filed an appeal before the ld. CIT(A) who has allowed the assessee’s appeal partly. During the appellate proceedings, the ld. CIT(A) observed that the excess amount invested in shares considered to be out of borrowed funds would be to the extent of Rs.11,57,63,621/- and the disallowance on the same u/s.14A would be as under: Page | 3 M/s Nagreeka Capital & Infrastructure Ltd. 128 & 129/Kol/2015 Assessment Year: 2009-10 i) Direct expenses Rs.195705/- ii) Prop. interest Total interest × Investment out of borrowed fund ÷ Average of Total assets 64467810×115747591 = 8143966 916260406 Total disallowance Direct Expenses195705 Prop Interest. 8143966 8339671 Therefore, ld.CIT(A) pointed out that the disallowance under Rule 8D(2) (i) may be at Rs.1,95,705/- and under rule 8D (2) (ii) may be at Rs. 81,43,966/-. The ld. CIT(A) noted that as per section 14A r.w.r 8D(2)(i) and 8D (2) (ii) the direct expenses and proportionate interest respectively, the total disallowance should be Rs.83,39,671/- ( Rs.1,95,705 +Rs.81,43,966/-) only whereas the ld. Assessing Officer had disallowed Rs.1,78,49,204/-. During the appellate proceedings, the ld. CIT(A) observed that based on the submission made by the assessee, the direct expenses to the extent of Rs.9,79,576/- and a major part of investment in shares was out of own funds and only a part of which was from borrowed capital i.e. to the extent of only Rs.11,57,63,521/-. Therefore, the ld. CIT(A) noted that the disallowance if any towards proportionate interest should be restricted to the same. In this regard, the availability of own funds had not been considered or disproved by the Assessing Officer. Further, Assessing Officer had disallowed proportionate interest not under Rule 8D(2)(ii) but under Rule 8D(2)(i) which is only in respect of Direct Expenses. On the other hand, the assessee has given detailed working of the invested funds as above including the availability of borrowed funds. Therefore, the ld. CIT(A) noted that the assessee’s contention had been supported by the details of availability of utilization of own funds, further considering the decision rendered by the Hon’ble Bombay High Court in CIT Vs. HDFC Bank Ltd.366 ITR 505, the benefit of the assessee’s own funds being available for investment in shares would Page | 4 M/s Nagreeka Capital & Infrastructure Ltd. 128 & 129/Kol/2015 Assessment Year: 2009-10 have to be allowed. Accordingly, the Assessing Officer was directed by the CIT(A) to restrict the disallowance towards proportionate interest under Rule 8D(ii) on the amount of average investment from borrowed funds i.e. 11,57,47,951/- only and recompute the same on this basis, apart from the expenses already disallowed under Rule 8D(2)(i) & (iii). This way, the ld. CIT(A) partly allowed the assessee’s appeal and directed the Assessing Officer to compute disallowance under rule 8D (2)(ii) considering the average investment from borrowed funds at Rs.11,57,47,951/- 8.Not being satisfied with the order of the ld. CIT(A), the Revenue is in appeal before us.The ld. DR for the Revenue has relied on the CBDT Circular No.5/2014 dated 11.02.2014. Besides, the ld DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and is not being repeated for the sake of brevity.