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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: SHRI G.S.PANNU & SHRI SANDEEP GOSAIN
ORDER PER G.S.PANNU,A.M:
The captioned appeal filed by the assessee pertaining to assessment year 2011-12 is directed against an order passed by CIT(A)-8, Mumbai dated 26/02/2016, which in turn, arises out of an order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) dated 15/03/2014.
The Revenue has raised the following Grounds of appeal:-
1. "On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs.15,19,000/- made by the AO without appreciating the fact that prior period expenses are not allowable as per the provisions of Income Tax Act as the assessee is following the mercantile system of accounting and services were received in earlier year, which fact the assessee was aware of." 2. "Without prejudice to ground No.l, on the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs.15,19,000/- made by the AO on treating such sum as capital expenditure. In doing so, the AO had relied on the decision of the Apex Court in the case of Brooke Bond India Ltd. v/s CIT [225 ITR 798 (SC)]." 3. "On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance u/s.14A of the I.T.Act at Rs.47,74,689/- made by the AO without appreciating the fact that the assessee has neither established that no part of interest-bearing fund as well as expenses so claimed has found its way into the investments in shares nor adduced any documentary evidences during the course of assessment proceedings before the A.O." 4. "The appellant prays that the order of CIT (A) on the above ground be set aside and that of Assessing Officer be restored." 3. The respondent assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of manufacturing and trading of pharmaceuticals, biological, etc. In so far as the first issue is concerned, it relates to an expenditure of Rs.15,19,000/- debited in the P&L Account on account of professional fee. The Assessing Officer noted that the professional fee was paid in relation to matters relating to the buy-back of the shares, which took place in earlier year. Therefore, the Assessing Officer disallowed the expenditure on twin reasons, viz, firstly, that it was a prior period expenditure and, secondly, that since the expenditure related to buy-back of shares it was capital in nature. The CIT(A) held that the professional fee bills in question were received by the assessee during the year under consideration, which related to the advice and documentation rendered to the assessee regarding the buy-back of shares. According to CIT(A), since the bills were received in the instant year, the liability crystallized during the year. The CIT(A) has also held
(AY. 2011-12) that expenditure pertaining to buy-back of shares was deductible as a revenue expenditure. Accordingly, the CIT(A) disagreed with the Assessing Officer on both the reasons and allowed the claim of the assessee.
Before us, the Ld. Departmental Representative has reiterated the stand of the Assessing Officer, which we have already noted in the earlier paras and the same is not being repeated for the sake of brevity.
On the other hand, the Ld.Representative for the assessee defended the order of the CIT(A) and pointed out that the Hyderabad Bench of the Tribunal in the case of Deccan Chronicles Holdings Ltd. vs. DCIT, order dated 16th September, 2014, has held that expenditure incurred in relation to buy-back of shares is not a capital expenditure, but was allowable as a business expenditure in terms of section 37(1) of the Act. On this basis, the decision of the CIT(A) is sought to be defended.
Having considered the rival submissions, we find no reasons to interfere with the decision of the CIT(A) which is based on the decision of our Co-ordinate Bench in the case of Deccan Chronicle Holdings Ltd. (supra). In so far as the objection of the Assessing Officer that it was a prior period expenditure, in our view, the same has been correctly negated by the CIT(A). Ostensibly, the impugned expenditure may pertain to an activity of an earlier year, so however, the CIT(A) has recorded a categorical finding that the liability for the same has crystallized during the instant year as requisite bills were received during the previous year relevant to the assessment year under consideration. For the said reasons, we find no infirmity in the ultimate decision of the CIT(A) in deleting the addition. Accordingly, the order of the CIT(A) is affirmed and Revenue fails on this aspect.
The second issue is with regard to a disallowance of Rs.47,74,689/- made by the Assessing Officer under section 14A of the Act on the ground that assessee has made investments in shares and securities, which is capable of generating exempt income. Notably, the Assessing Officer computed the disallowance by applying the formula contained in Rule 8D(2) of the Income Tax Rules,1962 (‘in short the Rules’). In this context, the CIT(A) has deleted the addition by holding as under:-
“ 5.2.5 The guiding principles enshrined in the above judicial decisions constitute an effective and objective litmus test to apply to any case for determining both the applicability of section 14A of the Act as well as that of Rule 8D of the Income Tax Rules. The facts of each case have to be carefully subjected to the litmus test of the following questions and answered objectively: 1. Whether there is any income earned by the assessee which is claimed to be exempt? (Answer has to be YES) 2. Whether investments were made in subsidiary/sister company and were for furthering business of assessee? (If YES then no disallowance of interest paid.) 3. Whether interest free funds were available sufficient to meet its Investments? (If YES, it can be presumed that the investments were from the interest free funds available.) 4. Whether the nexus between borrowed funds and investment has been established (only where it is shown that interest free funds are not available with the assessee)? (If NO, no disallowance of interest paid.) 5. Whether there is a finding of fact that any expenditure was incurred which is to be disallowed? (Answer has to be YES for application of r. 8D.) 6. Whether there is any expenditure, which has been established to have been incurred in relation to the earning of tax free income? (Answer has to be YES for application of r. 8D.) 7. Whether the AO has placed any material on record to controvert the contention of the assessee that no expenditure has been incurred for earning the exempt income? (Answer has to be YES for application of r.8D.)
Whether rule 8D was automatically invoked by the AD without examining and giving a finding of fact about the nature of expenditure for correctness of disallowance? (Answer has to be NO for application of r. 8D.) 5.2.6 Applying the ratio of the case laws cited above and the parameters to be examined for determining applicability of section 14A read with Rule 8D, I find that the assessing officer has not given any cogent or specific reason for dissatisfaction with the appellant's contention. Although he has himself stated that during the year under consideration, the appellant has not received any exempt dividend income, he has made the disallowance on the premise that the investment has a potential of earning tax exempt income in future. He has also not dealt with the fact that the appellant had ample interest free own funds or that the investments are either in foreign companies which have to be excluded or in Indian companies which are for strategic purpose. 5.2.7 In view of the above facts and in view of the citations given above, I do not find that the disallowance of Rs. 47,74,689/- made under section 14A read with Rule 8D is sustainable, Accordingly, this ground of appeal
is allowed.”
8. On this aspect, the only point made by the Ld. Departmental Representative is that CIT(A) erred in deleting the disallowance because assessee could not establish that no part of interest bearing fund was used to make the impugned investment.
9. On the other hand, the Ld.Representative for the assessee pointed out that the order of the CIT(A) is quite justified, inasmuch as, during the year under consideration no exempt income was received and, therefore, in terms of the judgment of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT, 378 ITR 33(Del) no disallowance is maintainable. Apart therefrom, it is also sought to be explained that the CIT(A) in para-5.2.2 of his order has clearly noted that assessee had enough interest free funds in the shape of Share Capital and Reserves & Surplus to cover the impugned investment and therefore, in terms of the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd., 313 ITR 340(Bom) it is to be presumed that the investments are made out of interest free funds. Ld.Representative for the assessee pointed out that such a (AY. 2011-12) proposition has also been found applicable in the context of section 14A of the Act by the Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd., 366 ITR 505(Bom) and in the case of HDFC Bank Ltd. vs. DCIT,383 ITR 529 (Bom). For all the above reasons, the decision of the CIT(A) has been sought to be defended.
10. We have carefully considered the rival submissions. Factually speaking, there is no dispute to the fact that during the year under consideration assessee has not received any exempt income and, therefore, on this count alone no disallowance under section 14A of the Act is merited following the ratio of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. (supra). The other finding of the CIT(A) with regard to the availability of sufficient interest free funds is also quite justified and is borne out of record as there is no material led by the Revenue to controvert the same. For the said reason also the disallowance of interest expenditure under section 14A of the Act is quite unjustified. Considering the aforesaid, we therefore, deem it fit and proper to affirm the action of the CIT(A) in deleting the disallowance made by the Assessing Officer under section 14A of the Act. Thus, on this aspect, Revenue fails.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on 24/05/2017