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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI ANIL CHATURVEDI, AM & SHRI VIKAS AWASTHY, JM
आदेश / ORDER PER ANIL CHATURVEDI, AM :
This appeal filed by the assessee is emanating out of the 1. order of Commissioner of Income Tax (A) – 1, Nashik dt.01.09.2015 for the assessment year 2010-11.
The relevant facts as culled out from the material on record are as under :-
2.1 Assessee is a company stated to be engaged in the business of manufacturing of edible oil. Assessee electronically filed its
return of income for A.Y. 2010-11 on 30.09.2010 declaring total
income of Rs.76,12,770/-. The case was selected for scrutiny and
thereafter assessment was framed u/s 143(3) of the Act vide order
dt.19.03.2013 and the total income was determined at
Rs.77,93,620/-. Aggrieved by the order of AO, assessee carried
the matter before Ld.CIT(A), who vide order dt.01.09.2015 (in
appeal No.Nsk/CIT(A)-1/258/2013-14) granted partial relief to the
assessee. Aggrieved by the order of Ld.CIT(A), assessee is now in
appeal before us and has raised the following ground :
“In view of the fact that investment in shares at Rs.19,75,850/-, from which income (dividend) not forming part of the total income is generated, was made out of assessee's own capital of Rs.50,00,000/- and reserve and surplus of Rs.1,74,73,551/- totaling to Rs.2,24,73,551/- as on 31/03/2010 and undisputed fact that no expenditure was incurred for realizing dividend of Rs.7,500/- being directly credited by company to the bank account of assessee and in view of the fact that Assessing Officer had not recorded his dis-satisfaction of claim of assessee that no expenditure was incurred for earning exempt income and in view of decisions of jurisdictional Bombay High Court in the case of CIT Vs. Reliance Utilities & Powers Ltd. (2009) 313 ITR 340 (Bom) and CIT V/s. HDFC Bank Ltd. (2014) 107 DTR (Bom) 140 to the effect that whenever funds are available both interest free and over draft and I or loans taken, then a presumption would arise that investments are out of interest free funds available with assessee which are sufficient to meet the investment and in view of the decision of jurisdictional Bombay High Court in case of CIT Vs. Reliance Industries Ltd. to the effect that there was no findings to the fact of having incurred any expenditure for the purpose of earning dividend income, learned Commissioner of Income Tax, Appeals-I, Nashik erred in confirming disallowance of Rs.1,30,850/- U/s.14A r.w. Rule 8D.”
Thereafter, assessee has revised the ground of appeal and
the revised ground reads as under :
“In the facts, circumstances and position of law learned CIT(A)-1, Nashik erred in confirming disallowance U/s.14A r.w.s. Rule 8D(2)(ii) and 8D(2)(iii) at Rs.1,30,850/-“.
During the course of assessment proceedings on perusing
the Balance Sheet, AO noticed that assessee had made
investments and had earned dividend income but no expenses
were apportioned for incurring of exempt income. The assessee
was asked to show cause as to why the disallowance should not
be made. The assessee inter-alia submitted that it is having
sufficient interest free funds of its own and that no interest
bearing funds have been used for making investments and that no
expenditure has been incurred for earning exempt income and
therefore no disallowance u/s 14A is called for. The submission of
the assessee was not found acceptable to the AO. AO was of the
view that for the purpose of making investments and to control the
investments, assessee has used its office staff. He was further of
the view that in the absence of any separate accounts by which
the management and administrative expenses could be
segregated, there cannot be any doubt that some expenditure was
incurred for making or earning the exempt income. He also noted
that assessee borrowed certain funds and on which it paid
interest. In view of the mixed accounts, the plea of the assessee
that it had not borrowed funds for investments was not
acceptable. He thereafter by following the methodology prescribed
under Rule 8D of the Income Tax Rules, worked out the
disallowance of expenses u/s 14A at Rs.1,30,850/-. Aggrieved by
the order of AO, assessee carried the matter before Ld.CIT(A), who
upheld the order of AO by holding as under :
“5.2 The argument of the Ld.A.R. is perused and summarized as under :
The assessee’s own fund is invested in tax exempt investment. 2. No expense is incurred to earn exempt income. 5.3 I have considered the facts of the case, the submission of the appellant, the assessment order of the AO and material available on record. The case pertains to A.Y. 2010- 11. It is fairly settled that section 14A r.w.r. 8D is applicable for the assessment year. Section 14A of the I.T. Act is a special provision and provides for disallowances of expense relatable to exempted income. Section 14A(1) stipulates that for the purposes of computing the total income under Chapter IV, no deduction, shall be allowed in respect of an expenditure "incurred" by the assessee "in relation to" an income which does not form part of the total income under the Income tax Act.
5.4 If one reads subsection (3) along with subsection (2), it simply means that in a case where the assessee claims that no expenditure has been incurred in respect of the exempt income, the AO shall determine the amount of expenditure incurred in relation to such income in ·accordance with the method as may be prescribed in view of the provisions of subsection (2). Therefore, since from assessment year 2008- 09, rule 80 is applicable, the AO shall be free to compute the disallowance of expenditure as per this rule in respect of the exempt income in all such cases where the assessee claims that no expenditure has been incurred in respect of the said income and no suo-moto disallowance of expenditure has been made by the assessee. This is quite logical as well, because it cannot be the case of any investor that he has not incurred even a single penny for making such investment and earning of exempt income there-from. This is exactly the case of the appellant, where accounts are kept on a mixed fund basis, and for the purpose of investment in shares, mutual funds etc, separate accounts have not been kept. The appellant has not been able to establish the nexus between own fund and investment which was his duty to do. Therefore, the argument that own fund through which investment is made is dismissed. Although the appellant has given a number of arguments based on the facts of its 'case, still, in spite of that, due to reasons cited above, it cannot be accepted that the appellant has not incurred even a single penny for making investment, maintaining the investment portfolio and thereby earning exempt income. The argument of the assessee that investments are made through bank is testimony of the fact that expenditure is incurred for making tax free investment which will yield exempt income. The argument of the appellant that they have revised the return and paid tax on dividend income is not inconsonance with the provisions of the Act and therefore, dismissed. Even if the requirement of AO's satisfaction in this' regard is considered necessary, the very knowledge of the fact on the part of the AO that the appellant has not disallowed any expenditure suo-moto, was sufficient for her to compute the disallowance under rule 8D read with section 14A of the Act.
5.5 In the judgment of the Chennai Bench of ITAT in M/s. Laksmi Ring Travellers (TS-210-ITAT-2012 (Chny.) held that Sec.14A is a deeming provision for presumptive disallowance. Thus, Sec.14A disallowance would be attracted by the face of statute even when the assessee claims that no expenditure incurred in relation to exempt income. In a distant manner, literally speaking, it may even be considered for the purpose of convenience as a deeming 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 AO has to follow the consequence stated in the statute.
5.6 CBDT vide circular dated 11.02.2014 has clarified that such expenses will be disallowed u/s.14A even if there is no corresponding exempt income.
5.6.1 Reference is invited to the decision of Hon'ble Mumbai ITAT in the case of M/s. J.K. Industries Ltd. for A.Y.2008-09 ITA No.7088/Mum/ 2011 dated 21.11.2012. I n the said case the assessee was having investment of Rs. 19.43 crore on which he has earned exempt income and assessee had claimed that he has not incurred any expenditure for earning that income on these facts the Hon'ble ITAT inter- alia held,
"We have heard the rival contentions and we are of the view that on both the counts, i.e. the application of the ratio laid down by the Bombay High Court in Godrej & Boyce Mfr. Co Ltd., reported in 328 ITR 81(Bom), where the Hon'ble jurisdictional High Court has held that Rule 8D shall be applicable from assessment year 2008-09 onwards and also the ratio laid down by the Special Bench of the Hon'ble ITA T Delhi in the case of Cheminvest Ltd. Vs ITO 317 ITR AT 86 (Del-SB), relied on by the CIT(A), the case is against the assessees. Respectfully following the decisions as cited by the CIT(A), we have no reason to disturb the findings of the CIT(A), which we uphold."
5.6.2 The Hon'ble Special Bench of ITAT Mumbai in M/s. Daga Capital Management (P) Ltd. 26 SOT 603(Mum.) has held as under: • Section 14A is wide enough to cover all types of expense direct as well as indirect. • The word ‘ in relation to’ used in Section 14A are very broad expression • Section 14A applies to even incidental exempt income. • Section 14A would be applicable even if there is no direct and proximate connection between the exempt income and expenditure.
5.6.3 The Hon'ble Delhi High Court in M/s. Maxopp Investment has held that Section 14A will apply even in case where the main object of incurring expenditure is not to earn exempt income. 5.7 In view of the aforesaid discussion and relevant judicial pronouncement the claim of the appellant that Rule 8D is not applicable so no disallowance u/s. 14A r.w. rule 8D can be made is rejected.”
Aggrieved by the order of Ld.CIT(A), assessee is now in appeal
before us.
Before us, Ld.A.R reiterated the submissions made before
AO and Ld.CIT(A) and thereafter pointed to Schedule of
Investments at Page 57 of the Paper Book. From the Schedule of
Investments, he pointed that there are only two investments in
shares from which assessee could have earned dividends. He
submitted that the investments in shares of Omshree Agro Tech
Ltd., were made in F.Y. 2008-09 i.e., A.Y. 2009-10 and
investments in the shares of Omshree Agro Industries were made
in F.Y. 2004-05 i.e., A.Y. 2005-06 and that no new investments
were made during the year. He submitted that the availability of
interest free funds in the form of Share Capital, Reserves and
Surplus in the year in which the aforesaid investments were made
were far in excess of the investments and therefore no
disallowance on account of interest u/s Rule 8D(ii) is called for.
He pointed to the copy of the Balance Sheet placed at Page 30 of
the Paper Book. For the proportion that when interest free funds
are more than investments, then no disallowance under Rule
8D(ii) is called for, he relied on the decision of Hon’ble Bombay
High Court in the case of CIT Vs. HDFC Bank Limited reported in
366 ITR 505 (Bom.). He further submitted that during the year
under consideration, assessee had received dividend of Rs.7,500/-
from the shares of Shamrao Vitthal Co-op Bank Ltd., held by the
assessee. He submitted that these dividends were not eligible for
exemption u/s 10(34) of the Act and therefore no exemption is
claimed and in fact the income from dividends has been offered to
tax. He further submitted that from shares of Omshree Agro Tech
Ltd., and Omshree Agro Industries aggregating to Rs.19,75,850/-
no dividend has been earned during the year and since no
dividend has been earned during the year, there is no question of
disallowance u/s 14A r.w. Rule 8D of Income Tax Rules and for
this proposition, he relied on the decision of Special Bench of ITAT
in the case of ACIT Vs. Vireet Investment Pvt. Ltd., (2017) 154
DTR (Del) (SB) 241. He therefore submitted that no disallowance
u/s 14A r.w. Rule 8D is called for. Ld.D.R. on the other hand,
supported the order of AO and Ld.CIT(A) and further supported
the order of lower authorities.
We have heard the rival submissions and perused the
material on record. The issue in the present ground is with
respect to disallowance u/s 14A r.w. Rule 8D of the Income Tax
Rules. Before us, it is assessee’s submission that the investment
in shares of Omshri Agro Tech Limited of Rs.17,16,600/- were
made in F.Y. 2008-09 i.e., A.Y. 2009-10 and at that time the
interest free funds in the form of Share capital and Reserves and
Surplus were to the extent of Rs.1.72 crores. As far as the
investments in shares of Omshree Agro Industries of
Rs.2,59,250/- are concerned, it is assessee’s contention that the
same were made in the A.Y. 2004-05 i.e., A.Y. 2005-06 and as on
31.03.2005 the interest free funds available with the assessee
were to the tune of Rs.37.78 lakhs. The aforesaid contentions of
the assessee of having interest free funds in the form of Share
capital and Reserves and Surplus which are more than the
investments, has not been controverted by Revenue. Hon’ble
Bombay High Court in the case of HDFC (supra) has observed that
when interest free funds are more than the investments, there is a
presumption that the investments comes out of interest free funds
available with the assessee. The relevant observation of Hon’ble
High Court in the case of HDFC (supra) is reproduced
hereunder :-
“15. It is clear that for the first time in the case of HDFC Bank Ltd. (Supra) that this Court took a view that the presumption which has been laid down in Reliance Utilities and Power Ltd. (Supra) with regard to investment in tax free securities coming out of assessee's own funds in case the same are in excess of the investments made in the securities (notwithstanding the fact that the assessee concerned may also have taken some funds on interest) applies, when applying Section 14A of the Act. Thus, the decision of this Court in HDFC Bank Ltd.(Supra) for the first time on 23rd July, 2014 has settled the issue by holding that the test of presumption as held by this Court in Reliance Utilities and Power Ltd. (Supra) while considering Section 36(1)(iii) of the Act would apply while considering the application of Section 14A of the Act. The aforesaid decision of this Court in HDFC Bank Ltd. (Supra) on the above issue has also been accepted by the Revenue inasmuch as even though they have filed an appeal to the Supreme Court against that order on the other issue therein, viz., broken period interest, no appeal has been preferred by the Revenue on the issue of invoking the principles laid down in Reliance Utilities and Power Ltd. (Supra) in its application to Section 14A of the Act. Therefore, the issue which arose for consideration before the Tribunal had not been decided by this Court in Godrej and Boyce Manufacturing Co. Ltd. (Supra). It arose and was so decided for the first time by this Court in HDFC Bank Ltd. (Supra). Thus, there is no conflict as sought to be made out by the impugned order. Thus, impugned order has proceeded on a fundamentally erroneous basis as the ratio decindi of the order in Godrej and Boyce manufacturing Co. Ltd. (Supra) had nothing to do with the rest of presumption canvassed by the petitioner before the Tribunal on the basis of the ratio of the decision of this Court in HDFC Bank Ltd. (Supra).
At the hearing Mr. Suresh Kumar, Learned Counsel for the Revenue urged that on the facts of this case no fault can be found with the order of the Tribunal. It is submitted that, the petitioner was not able to establish before the Assessing Officer and the CIT(A) that the amounts invested in the interest free securities came out of interest free funds available with the petitioner. In that view of the matter, it is submitted by him that the order of this Court in HDFC Bank Ltd.(Supra) would not apply to the facts of the present case. We are unable to understand the above submission. The Assessing Officer passed the Assessment order on 22nd December, 2010 under section 143(3) of the Act. The CIT(A) passed an order on 21st November, 2011 dismissing the petitioner's appeal. On both the dates, when the orders were passed by the Assessing Officer and CIT(A), the authorities did not have the benefit of the order of this Court in HDFC Bank Ltd. (Supra) rendered on 23rd July, 2014. Once the issue is settled by the decision of this Court in HDFC Bank Ltd. (Supra), there is now no need for the assessee to establish with evidence that the amounts which has been invested in the tax free securities have come out of interest free funds available with it. This is because once the assessee is possessed of interest free funds sufficient to make the investment in tax free securities, it is presumed that it has been paid for out of the interest free funds. Consequently, we do not find any merit in the above submission made at the hearing on behalf of the Revenue."
Further it is assessee’s contention that no tax free income in
the form of dividend has been received during the year and the
dividends of Rs.7,500/- which has received from Shamrao Vitthal
Co-op Bank Limited has been offered to tax. The aforesaid
contention of the assessee has also not been controverted by
Revenue. On the issue that when no exempt income is received,
no disallowance u/s 14A is required to be made, we find that the
Hon’ble Delhi High Court in the case of Cheminvest Limited Vs.
CIT reported in (2015) 378 ITR 33 (Del) at para 23 of the order
has noted that the expression “does not form part of total income”
in Sec.14A of the Act envisages that there should be an actual
receipt of income, which has not includable in the total income,
during the year relevant to previous year for the purpose of
disallowing any expenditure incurred in relation to the said
income. In other words, Sec.14A will not apply if no exempt
income is received or receivable during the relevant previous year. In the present case, since the fact of not earning any exempt income is undisputed, therefore in view of the aforesaid decision of the Hon’ble Delhi High Court in the case of Cheminvest Limited (supra), we are of the view that no disallowance u/s 14A is called for on this count also. Thus, considering the totality of the aforesaid facts, we direct deletion of disallowance u/s 14A of the Act. Thus, the ground of the assessee is allowed.
In the result, the appeal of assessee is allowed.
Order pronounced on 28th day of February, 2018.
Sd/- Sd/- (VIKAS AWASTHY) (ANIL CHATURVEDI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER
पुणे Pune; �दनांक Dated : 28th February, 2018. Yamini
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent 3. CIT(A) -1, Nashik. 4. Pr.CIT-1, Nashik. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “ए” / DR, 5 ITAT, “A” Pune; गाड� फाईल / Guard file. 6.
आदेशानुसार/ BY ORDER // True Copy // // True Copy //
व�र�ठ �नजी स�चव / Sr. Private Secretary आयकर अपील�य अ�धकरण ,पुणे / ITAT, Pune.