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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH, JM & SHRI RAJESH KUMAR, AM
2 and 6452/M/2011 आदेश / O R D E R PER RAJESH KUMAR, A. M:
The cross appeals are filed by the respective parties against the order dated 22.6.2011 passed by the ld.CIT(A)-21, Mumbai for the assessment year 2008-09. Since issue involved in these appeals is same and therefore were clubbed together, heard together and are being dispose of by this consolidated order for the sake of convenience. 2. The grounds of appeal taken by the revenue are as under : “1) On the facts and in the circumstances of the case and in law, the CIT (A) erred in restricting the disallowance u/s 14A at Rs.72,34,402/- and in adhoc manner as against Rs.1,84,75,704/- computed by the AO without appreciating the fact that such disallowance u/s 14A had been computed correctly by the AO in accordance with the method prescribed under rule 8D of the Income Tax Rules, 1962. 2) On the facts and in the circumstances of the case and in law, the CIT (A) erred in considering the additional evidence filed by the appellant in regard to disallowance u/s 14A without giving the AO reasonable opportunity to examine the evidence in accordance with the mandatory requirements of Rules 46A of the Income Tax Rules, 1962. 3) Appellant prays that the order of CIT(A) on the above round be set aside and that of the AO be restored.
3. Grounds of appeal taken by the assessee are as under: 1(a) The learned CIT(A) erred in confirming the action of Assessing Officer in disallowing expenses of Rs. 26,45,331/- applying Rule 8D(iii).
3 and 6452/M/2011 The appellant submits that the above disallowance is wrongly made and the same ought to be deleted. b) Without prejudice to the above, the appellant submits that the disallowance u/s.14A is excessive and the same ought to be reduced substantially. 2. a) The learned CIT(A) erred in confirming the action of the Assessing Officer in treating the rental income of Rs.36,72,000/- as "income from house property" instead of the same taxed as "Business Income." Your appellant submits that under the facts and circumstances of the appellant's case the said rental income ought to be taxed as business income. b) The learned CIT(A) confirmed the action of the Assessing Officer of not granting depreciation on building. Your appellant submits that the depreciation on building is allowable on the rental income therefrom as the said income is assessable under the head "Profits and Gains of Business or Profession"
Computation of Book Profits u/s. 115JB . a) The learned CIT(A) erred in confirming the action of the Assessing Officer in making the disallowance u/s. 14A for computing book profits Your appellant submits that the above adjustment made to the computation of book profit u/s. 115JB is wrong and ought to be deleted. Without prejudice to the above the appellant submits that the addition to book profit is excessive and unreasonable and the same ought to be reduced substantially. b) The learned CIT(A) failed to appreciate that Rule 8D is prescribed under the authority of Sec. 14A which is only for the limited purpose of computing total income under chapter IV and cannot be extended to work out the addition under s. 115JB. Your appellant submits that Rule 8D cannot be applied for working out the disallowance u/s.14A for the purpose of S.115J B.
4 and 6452/M/2011
The assessee also taken additional ground vide application dated 1.7.2016 which reads as under :
1. 1. On the facts and circumstances the case, the Learned Assessing Officer ought to have restricted the disallowance under section 14A of the Act to exempt income earned by the appellant during the year under consideration. The Appellant submits that the disallowance under section 14A of the Act ought to have restricted to Rs.17,50,000/-- i.e. exempt income earned by the Appellant during the year under consideration”
5. At the outset, the ld.AR took us through the application for admission of additional grounds dated 1.7.2016 by for admission of additional ground the assessee as these grounds arose out of the legal and judicial pronouncements after the date of the order of first appellate authority and thus are purely of technical and legal nature. Therefore, he submitted the same may be admitted and be adjudicated upon. The ld. DR strongly objected to the admission of the additional ground.
We find from perusal of the additional grounds and the order of ld.CIT(A) that the issue raised by the assessee is purely of legal and technical nature which has arisen out of after judicial pronouncements subsequent to the adjudication by the ld.CIT(A). In our opinion the issue raised is purely of legal nature and deserved to be admitted. We, therefore, admit the same for adjudication hereinafter below.
5 and 6452/M/2011
The issue raised by the assessee in the additional ground is qua the fact that since the assessee has tax free income of Rs.17,50,000/- during the year and therefore the amount of disallowance u/s 14A cannot be exceeded the exempt income.
Brief facts of the case are that the assessee filed return of income on 27.9.2008 declaring a total loss of Rs.4,57,21,456/-, which was processed u/s 143(1) of the Act. The case of the assessee was selected for scrutiny. Thereafter the case of the assessee was selected for scrutiny and the statutory notices u/s 143(2) and 142(1) were issued and served upon the assessee. Thereafter, the AO vide order dated 26.3.2010 assessing the total income of the assessee at Rs.2,72,09,152/- under the normal provisions of the Act and under the special provisions of section 115JB of the Act , the total income was determined at Rs.2,03,89,843/- by making various disallowances under the provisions of section 14A of the Act Rs.1,84,75,704/- inter-alia various other disallowances. Aggrieved by the order of AO, the assessee preferred an appeal before the ld.CIT(A), who reduced the addition to Rs.72,34,402/- by giving detailed findings as has been incorporated in the appellate order as under : “2.3 I have carefully considered the facts of the case. 2.3(a) During the year the appellant received dividend of Rs.17,50,000/- on investment of shares of various companies. The dividend of Rs.17,50,000/- was claimed exempt under section 10
(34) of the Act. The appellant itself offered disallowance of expenditure of Rs.ll, 6 7,648/ - pertaining to expenditure incurred for earning of dividend. However, out of investment shares of various 6 and 6452/M/2011 companies, the appellant earned dividend on shares of only one company i.e. on shares of Emco Ltd. The appellant had explained that expenditure of Rs.1l,67,648/- offered for disallowance was pertaining to expenditure incurred on investments which had yielded dividend income. The appellant has argued that the expenditure incurred on investments which had riot yielded exempt income is, not required to be considered for disallowance. The appellant's argument is not correct. The Special Bench ITAT Delhi in the case of Chimenvest Ltd. Vs. ITO (2009) 121 ITD 318 has held that the. expenditure incurred on all investments are required to be considered for the purpose of disallowance u/s 14A whether or not the investments have yielded exempt income. In the facts and circumstances the appellants working of disallowance u/s 14A at Rs.11,67,648/- was not correct and was not as per provisions of section 14A of the Act.
2.3(b) As per decision of Bombay High Court in the case of Godrej & Boycee Mfg. Co Ltd 234 CTR 1 the provisions of section 14A r.w. rule 8D were applicable from A.Y. 2008-09 onward and not in earlier years retrospectively. The year under consideration is A.Y. 2008-09 and therefore provisions of section 14A and rule 80 were applicable in this year. As persub-section (1) of section 14A no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does notform part of total income under the Act. As per section 14 A(2) the AO shall determine such expenditure in accordance with the method prescribed i.eas per formula provided in rule 80(2) of the rules. However, the AO can determine such expenses as per rule 8D(2) only if the AO is not satisfied with the correctness of claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income. In the case under consideration, the appellant offered disallowance of expenditure in respect of investment in shares of only one company which had yielded exempt income and not in respect of investments which had not yielded exempt income. In view of ITAT Special Bench Delhi decision in the case of Chimenvest Ltd. Vs. ITO (2009) 121 ITD 318, the appellant's claim was not correct. Therefore, the AO correctly formed a satisfaction that appellant‟s claim was not correct. In the facts and circumstances the AO was justified in applying the provisions of rule 8D (2).
2.3(c) The next issue -for consideration is as to whether the AO correctly applied the provisions' of rule 8D (2). In my considered 7 and 6452/M/2011 view, the appellant has correctly argued that the CIT(A) has all powers to rectify the AO‟s working if he AO had not correctly applied the provisions of rule 8D(2) of the Rules. 2.3(d) The provisions of rule 8D prescribes determination of 3 type of expenses i.e (i) the direct expense which will include all the expenses including interest expenditure also if directly relatable to earning of exempt income, (ii) indirect interest expenses which is not directly attributable to earning of exempt income and (iii) administrative and managerial expenses (i.e. 0.5% of average investment) incurred for earning of investments. Therefore, if an expenditure is identifiable as directly incurred for the purpose of making investments, the determination of same will be as per sub clause (i) of rule 8D(2) and will not be considered under sub' clause [iii) of rule 8D (2).
2.3(e) In the case under consideration, the AD had determined indirect interest expenditure of Rs. 1,,58,26,788/- as per sub-clause (ii) of Rule 8D (2). In the said working the AO considered closing balance of investments at Rs. 100,28,06,328/-. The appellant has argue at e investments in shares of KLG systems Ltd at Rs.22,08,83,436/- and in shares of Magma Shirachi Finance Ltd at Rs. 75,64,19,780/- totaling to Rs. 97,73,02,216/- were incorrectly considered by AD in the closing balance of investments for the reasons that the payments thereof was made in next financial year and therefore no interest expenditure was incurred during the year for making these two investments. The appellant's argument is correct. The appellant has satisfactorily demonstrated that the payments for these two investments were made in next financial year. In the facts and circumstances the appellant's claim is correct that no interest expenditure was incurred during the year in respect of these two investments. Therefore, these two investments could not have been considered inclosing balance of investment for determining indirect interest expenditure under sub-clause(ii) of Rule 8D(2)
The appellant has also argued that its interest expenditure relating to investments was directly identifiable and therefore the same was required to be considered as direct expenses under sub clause (i) of rule 8D (2). I am in agreement with the appellant. The appellant in its submission, in above para‟s has satisfactorily explained and demonstrated that the interest expenditure relating to investments was at only Rs.45,85,485/ -. Appellants further argument is also 8 and 6452/M/2011 convincing and acceptable that since this interest expenditure was directly identifiable therefore, the same was required to be considered as direct expenses under sub-clause (i) of rule 8D(2). The A.O. is, therefore, directed to consider the interest expenditure of Rs,45,85,485/- as direct expenditure falling under sub clause (i) of Rule 8D(2).
2.3(f) This issue was also there in appellant's own case in A.Y.2006- 07 & 2007-08. In those years the disallowance made by A.D. u/s. 14A r.w. Rule 8D(2) of the Act was confirmed by the undersigned with some modifications. In the appeal orders of those years it was held that the appellant failed to prove that the interest expenditure was directly attributable to any particular income or receipt. It was also held that the appellant has not proved the nexus between the own funds and investments. However, in the year under consideration the appellant (in its submissions in above paras) has satisfactorily demonstrated the nexus between the investments and the borrowed/own funds. It is also worth to mention here that the appeal orders of A.Y.2006-07 & 2007-08 were passed by the undersigned before the decision of Hon'ble Bombay High Court in the case of Godrej & Boycee Mfg. Co. Ltd,. 234 eTR 1 in which it was held that the provisions of Rule 80(2) were not applicable prior to A.Y.2008-09. In the facts and circumstances the findings given by undersigned in A.Y.2006-07 & 2007-08 will not be applicable in this year.
2.3(g) It is worth to mention here that the A.O. made disallowance as per formula provided in Rule 8D(2) as under : (i) Direct expenditure Rs. 3,586/- [ii] Indirect interest expenditure by considering The closing balance of investments at Rs.lOO,28,06,328/- and average amount of Investments at Rs.52,90,66,147/- Rs.. 1,58,26,788/-
(iii) 0.5% of average investments Rs. 26,45,331/- Rs. 1,84,75,704/- In the above para 2.3(e) it has been explained that the total investments at Rs.97,73,02,216/- in the shares of M/s.KLG Systems Ltd. and Magma Shirachi Finance Ltd. were not required to be considered for the purpose of closing balance -of investment and 9 and 6452/M/2011 average investments for the reasons that no interest expenditure was incurred in respect of these two investments since the payments thereof were made in the next financial year. In the facts and circumstances in sub clause [ii] of Rule 8D(2) the closing balance of investments was required to be considered by A.O. at Rs.5,42,95,245/- and therefore, the average investments was to be considered at Rs.5,48,lO,605/-. In para 2.3(e) above, the appellant's this claim has been held to be correct. If these figures are applied in the formula provided in Rule 8D(2), the disallowance as per A.O. would have been as under.-
(i) Direct expenditure Rs. 3,586/- [ii] Indirect interest expenditure by considering the investments of Rs.97,73,02,216/- and therefore considering average amount of Investments at Rs.5,48,10,605/- Rs.. 16,75,420/- (iii) 0.5% of average investments Rs. 26,45,331/- Rs. 43.24.337/- Thus, even as per A.O's own working the total disallowance under sec.14A as per formula provided in Rule 8D was coming to Rs.43,24,377/-. On the other hand the appellant itself had offered direct interest expenditure under sub clause (i) of Rule 8D at Rs. 45,85,485/-.
2.3(h) The appellant has also argued that the investments in shares of Mjs.KLG Systems Ltd. and Magma Shirachi Finance Ltd. totaling to Rs.97,73,02,216/- were made on 28.03.2008 (the payments for which were made in next financial year) and therefore, there could not have been incurred managerial and administrative expenses for these investments to the extent of Rs.24,43,258/-. Appellant's this argument is not acceptable. Under sub clause (iii) of Rule 8D(2), the administrative and managerial expenses are determined which would have been incurred for the purpose of taking decision as well as purchasing of the investments. Though in the case under consideration the investment in these two scrips were made on 28.03.2008, however, all exercises relating to study of these two scrips, taking decision to purchase these two scrips and other works were completed by 28.03.2008 and only thereafter these two scrips were purchased. After purchase of the scrips there could not have been incurred any administrative or managerial expenses. Therefore, the appellant‟s argument on this issue are not accepted. Moreover, the determination of such expenses were strictly as per 10 and 6452/M/2011 formula provided in sub clause (iii) of Rule 8D(2) and there were no convincing reasons to deviate from such formula. The disallowance computed by A.D. under sub clause (iii) of Rule 8D(2) at Rs.26,45,331/- is upheld. In view of the above findings and discussion the disallowance under rule 8D(2) will be as under :
(i) Direct expenditure -demat charges Rs. 3,586/- interest expenditure Rs.45,85, 485/- (ii) Indirect interest expenditure Rs. Nil (there were no indirect interest expenditure In view of the discussion made above) (iii) 0.5% of average investments Rs. 26,45,331/- Rs. 72,34,402/- The disallowance made by A.O. u/s. 14A at Rs.1,84,75,704/- is reduced to Rs.72,34,402/-. This ground of appeal is partly allowed.”
9. The ld.AR vehemently submitted before us that the dividend income of the assessee during the year on various investments in shares was Rs.17,50,000/- which was claimed exempt u/s 10(34) of the Act. The assessee itself disallowed an amount of Rs.11,67,648/- as expenses pertaining to earning of the said exempt income. The ld. AR vehemently submitted that in view of several judicial pronouncements of the High Courts and Income Tax Appellate Tribunal, the amount of disallowance u/s 14A r.w.s.Rule 8D should not exceed the amount of exempt income. In defense of his arguments, the ld.AR relied upon the following decisions: 1) Joint Investments V/s CIT (372 ITR 694) (del) 2) Mls Daga Global Chemicals v. Asst. CIT being ITA No:5592/Mum/2012 dated 01.01.2015 3) M/s. Pinnacle Brocom Pvt. V/s ACIT 28th January, 2014 4) Mitsubishi Corporation India (P) Ltd V./s DCIT 11 and 6452/M/2011
(2015) (64 Taxmann.com 338)(Delhi)(Tribunal) 5) John Distilleries Ltd V/s DCIT (ITA No.1429/Bang/2014, order dated 24.2.2016) 6) J Kishore Oversees V/s JCIT (ITA No.656(Asr/2014,) order dated 18.3.2016
The ld. DR on the other hand relied on the orders of authorities below.
We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below and case law relied upon by the assessee. The undisputed facts are that the assessee has earned income of Rs.17,50,000/- from the investments in shares. Whereas the assessee suo motu disallowed a sum of Rs.11,67,648/-. Whereas as against this the AO disallowed a sum of Rs.1,84,75,704/- which reduced by the ld.CIT(A) to Rs.72,34,402/-. We find merits in the contentions of the ld.AR that the disallowance cannot exceed in any case u/s 14A r.w.r.8D from the amount of exempt income. In the case of M/s Daga Global Chemicals (supra) the Mumbai Bench of the Tribunal has held as under : “2.2. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is a limited company, engaged in trading of bulk and fine, chemicals, solvent and pharmaceutical raw materials declared its income at Rs.74,40,000/- on 26/09/2009. The assessee credited dividend income of Rs.1,82,262/- in its profit and loss account. The Assessing Officer while framing the assessment invoke section 14A r.w. Rule 8D by contending that assessee claimed various expenses which are related to exempt income in its profit & loss account and disallowed Rs.14,58,412/-. On appeal, before the ld. Commissioner of Income tax (Appeals) broadly the stand taken in the assessment 12 and 6452/M/2011 order was affirmed against which the assessee is in further appeal before this Tribunal. The totality of facts clearly indicates, as claimed by the assessee that no borrowed funds were utilized for earning the exempt income by the assessee and further the dividend were directly credited in the bank account of the assessee and no expenditure was claimed. What it may be, we find that the assessee only received Rs.1,82,362/- as dividend income, therefore, there is no question of disallowance of Rs.14,58.412/- by invoking section 14A r.w. Rule 8D under the facts available on record. It was also explained by the ld. counsel for the assessee that on identical fact in earlier years, no disallowance was made. In the present assessment year also, no borrowed funds were invested by the assessee for making investment in shares or for earning dividend income. At best, if any disallowance could be made that can be restricted to Rs. 1,485/- which were claimed as demat charges. Disallowance u/s 14A r.w. Rule 8D cannot exceed the exempt income. In view of this fact, we find merit in the claim of the assessee. The appeal of the assessee is therefore, allowed.
In the case of M/s Pinnacle Brocom Pvt Ltd, the Tribunal held as under:
7. We have carefully perused the orders of the authorities below and the relevant documentary evidences brought on record before us. It is an undisputed fact that the assessee is having own funds at Rs. 1.16 crores and the investment is only Rs. 30.44 lakhs. Thus it can be safely concluded that the investments have come out of own funds. Even the Hon‟ble Jurisdictional High Court of Bombay has held in the case of Reliance Utilities and Power Ltd. 313 ITR 340 that where both own funds and loan funds are utilized by the assessee, the presumption is that the investments have come from the own funds. However, at the same time, we cannot deny that no expenditures have been incurred for earning the dividend income. Considering the facts of the case in totality and in the interest of justice and fair play, we direct the AO to restrict the disallowance to Rs.11,565/- being the amount of dividend received during the year and delete the balance amount. The assessee gets part relief for ground No. 1.
In the case of Mitsubishi Corporation India (P.) Ltd.(supra), it has been held by the Delhi Tribunal:
13 and 6452/M/2011 “23. After considering the rival submissions and perusing the relevant material on record, we find it as an admitted position that the assessee did not earn any exempt income during the year. The Hon'ble jurisdictional High Court in CIT v. Holcim India (P.) Ltd. [2015] 57 Taxmann.com 28 (Delhi), has held that no disallowance u/s 14A can be made in the absence of any exempt income. In Joint Investments (P.) Ltd. v. CIT [2015] 372 ITR 694 (Delhi), it has been held that disallowance u/s 14A cannot exceed the exempt income. Since the assessee admittedly did not earn any exempt income during the relevant year, respectfully following the precedents, we hold that no disallowance u/s 14A can be made. This ground is allowed.” In the case of M/s.John Distilleries Ltd.,(supra) it has been held by the Tribunal: “10. The only issue is whether any disallowance is called for under rule 8D(2)(iii) or not. The contention of the assessee that no expenditure was incurred to earn dividend income of Rs.29,000/- was not accepted by the AO. As held by the Hon‟ble Delhi High Court in the case of Maxopp Investment Ltd. Vs. CIT (347 ITR 272) it is not the purpose of the expenditure which is relevant. Once exempt income is earned, it means that some expenditure being incurred in relation to the exempt income which should be disallowed by applying formula laid down in rule 8D(2)(iii). Therefore, action of the AO is correct in applying rule 8D(2)(iii) but the amount of disallowance should be restricted to the dividend income.”
The facts of the assessee‟s case are materially same as discussed in the various decisions of the Co-ordinate Benches of the Tribunal. We, therefore, respectfully following the decisions as mentioned hereinabove, we set aside the order of ld.CIT(A) and direct the AO to restrict the disallowance to Rs.17,50,000/- only. The appeal of the assessee is allowed.
Since we have decided the issue of additional ground filed by the assessee, therefore, the main grounds raised by the assessee require no adjudication.
14 and 6452/M/2011
The appeal of the assessee is partly allowed.
Ground no.1 taken by the revenue needs no adjudication, therefore dismissed.
Ground of appeal
no.3 is not pressed therefore dismissed.
18. Grounds of appeal no.2 is in respect of disallowance u/s 14A amounting to Rs.72,34,402/-.
19. The ld. DR at the outset submitted that the issue raised in this ground is against the assessee and in favour of the department by the decision of the Tribunal. The ld. AR very fairly agreed with the submissions of the ld.DR.
20. We have carefully considered the rival submissions and perused the material placed before us. We find that the assessee has let out its office building at Vakola, Santacruz to M/s Reliance Energy Ltd and received rent of Rs.36,72,000/- and also claimed depreciation of Rs.22,06,760/- on the said premises. The AO during the course of assessment proceedings relied on the decision of Hon‟ble Supreme Court in the case of Shambhu Investment Pvt Ltd V/s CIT reported 263 ITR 143 (SC) came to the conclusion that the rental income has to be taxed as income from house property and not business income and accordingly dismissed the said income. The ld. CIT(A) also confirmed the action of the AO. Now, we find that the case of the assessee stands covered in favour of the revenue 15 and 6452/M/2011 and against the assessee by a decision of co-ordinate Bench of the Tribunal in the case of Reliance Infrastructure & Consultants Ltd., V/s ACIT (ITA No. 5954 & 5955/Mum/2010) Assessment Year-2006-07 & 2007-08 order dated 8.10.2012, the relevant portion is reproduced below: “9. We have heard the rival contentions and perused the orders of the lower authorities. In the case of Shambhu Investment P. Ltd. v. Commissioner of Income-tax 263 ITR 143 (SC), the Hon‟ble Supreme Court has held that income derived from letting out of the property should be assessed as income from house property. The Ld. Counsel‟s contention that in the earlier year, the rental income has been taxed under the head „Income from House property‟ and therefore the same should be followed as per the rule of consistency cannot be accepted for the simple reason that the rule of consistency envisages that if there is only one view on the given set of facts, then the same view should be taken year after year. However, in the instant case, in the earlier year, the Revenue authorities may have taken a wrong view in-consistent with the ratio laid down by the Hon‟ble Supreme Court in the case of Shambhu Investment P. Ltd. v. CIT (supra), in our considerate view, the law laid down by the Hon‟ble Supreme Court is to be followed. Therefore, we do not find any merit in the arguments of the assessee, findings of the Ld. CIT(A) are confirmed. This ground of the assessee is dismissed.”