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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Shri Aby. T. Varkey, JM & Shri M.Balaganesh, AM ]
This appeal by the Revenue arises out of the order of the Learned Commissioner of Income Tax (Appeals)-8, Kolkata [ in short the ld CITA] in Appeal No. 274/CIT(A)- 8/Circle-30/Kol/14-15 dated 08.05.2015 against the orders passed by the ACIT, Circle- 30, Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 23.04.2012 for the Assessment Year 2010-11.
At the outset, we find that there is a delay of three days in filing the appeal before us by the Revenue, for which a delay condonation petition has been filed explaining reasons for the delay. In view of concession given by the Ld. AR for condonation of the delay, we hereby condone the delay and admit the appeal of the revenue for adjudication.
The only issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in restricting the disallowance u/s 14A of the Act to the tune of Rs. 2 lacs as
The brief facts of this issue is that the assessee filed his return of income for the assessment year 2010-11 on 31.07.2010 declaring total income of Rs. 1,34,72,010/-. Thereafter a revised return was furnished on 27.07.2011 declaring total income of Rs 1,57,41,906/- which was processed initially u/s 143(1) of the Act and later the case was selected for scrutiny. The assessee is engaged in the activity of trading and investment in shares. The assessee had suo-moto disallowed a sum of Rs. 2 lacs u/s 14A of the Act as expenses incurred for the purpose of earning exempt income. The Ld. AO however worked out the disallowance made u/s 14A of the Act read with Rule 8D of the Rules at Rs. 53,08,501/- ignoring the contentions of the assessee that the borrowed funds were not utilized for the purpose of making investment in shares and mutual funds. The Ld. AO made disallowance of Rs. 51,08,501/- u/s 14A of the Act after giving credit for disallowance already made by the assessee.
4.1. Before the Ld. CIT(A), the assessee explained that M/s Shreekant Phumbra, engaged in the activity of trading and investment in shares is a member of the National Stock Exchange (NSE). M/s Shreekant Phumbra & Co. engaged in the activity of investment in shares is a member of Calcutta Stock Exchange (CSE). The assessee maintains separate books of accounts for the proprietorship firms and his personal accounts. However, the incomes of the two proprietorship firms are consolidated with the individual income of the appellant for computation of taxable income. In addition to this, the income of the assessee’s minor son, Master Shashwat Phumbra is also clubbed with the assessee’s income. During the subject assessment year, the assessee has earned exempt income and suo moto disallowed an amount of Rs. 2,00,000/- u/s 14A, being the expense incurred for earning exempt income.
3 Shri Sreekant Phumbra A.Yr.2010-11 5. The assessee also furnished a table explaining the position of shares held as investment and as stock in trade in various concerns as below: Sl. Name of the Concern Investment in Shares held as Interest expense No. Shares (Rs.) stock-in-trade debited during (Rs.) the year (Rs.) 1 Shreekant Phumbra, 25,409,413.49 Individual 2 M/s Shreekant Phumbra, 1,49,11,882.52 19,42,12,938.46 74,44,302.49 Proprietorship firm 3 M/s Shreekant Phumbra & 6,92,50,126.04 Co., Proprietorship firm TOTAL 10,95,71,422.05 19,42,12,938.46 74,44,302.49 Based on the aforesaid table it was explained that interest expense had accrued only in the case of Shreekant Phumbra, where the shares were acquired both for the purpose of investment and trading. It was submitted that no loans were taken during the year in the individual file of the assessee and in M/s Shreekant Phumbra & Co. Hence, no interest expense was incurred in these two files. Secured and unsecured loans were taken only in M/s Shreekant Phumbra for an amount of Rs. 10,30,42,261/- on which interest was paid to the tune of Rs. 74,44,302.49. It was submitted that no part of the borrowed funds were diverted for investment in shares during the year. It was also stated that the capital of the assessee in proprietary concern M/s Shreekant Phumbra was sufficient enough for the purpose of investing in shares. The assessee presented the following facts and figure from his balance sheet in support of this contention: Current Year Previous Year Particulars (Rs) (Rs) Proprietor’s Fund (a) 23,50,20,043.29 20,63,61,714.68 Increase in own funds during the year (c) 2,86,58,328.61 Investments as at year end 1,49,11,882.52 1,49,11,882.52 Increase in Investments during the year (d) 0.00 Accordingly, it was pleaded that no part of the interest paid on loan could be attributed/linked for the investment made by the assessee and hence, no disallowance 3
4 Shri Sreekant Phumbra A.Yr.2010-11 could be made under second limb of Rule 8D(2) of the Rules. It was also pleaded alternatively that the net interest expenditure was negative i.e. interest expense – interest income (74,44,302 – 1,13,33,219) to the tune of Rs. 38,88,917/- hence, even assuming borrowed funds were used in investment in shares, no disallowance could be made under the second limb of Rule 8D(2). The assessee further submitted that he had earned dividend income of Rs. 23,52,325/- during the year and filed the breakup of the same together with the opening balance of investments and closing balance of investments in the personal file as well as in the proprietorship concern. He placed reliance on the decision of this Tribunal in the case of R.E.I. Agro Limited vs. DCIT in I.T.A. No. 1331/Kol/2011 wherein it was held that only dividend bearing investments should be considered for the purpose of computing disallowance under Rule 8D. Accordingly, based on the facts and figures as emanating from the balance sheet of the assessee in respect of personal file as well as proprietorship concerns, the assessee worked out the disallowance under Rule 8D(2) of the Rules at Rs. 1,72,627/- being disallowance made under third limb of Rule 8D(2). Accordingly, it was pleaded that since the assessee had already disallowed 2 lacs u/s 14A in the return of income no further disallowance is required to be made u/s 14A of the Act.
5.1. The Ld. CIT(A) initially observed that no satisfaction was recorded by the Ld. AO in terms of Rule 8D(1) of the Rules as to how the disallowance made by the assessee suo moto was incorrect having regard to the accounts of the assessee and observed that the ld AO could not blindly resort to Rule 8D(2) without recording such satisfaction. In this regard he placed reliance on the certain decisions of this Tribunal. Without prejudice to this finding, the Ld. CIT(A) went into accounts of the assessee and workings for the disallowance of Rs. 1,72,627/- worked out by the assessee by taking into account only dividend bearing investment and after taking into account that own funds were sufficiently available to the assessee and also by ruling that no disallowance could be made under second limb of Rule 8D(2) in view of negative interest expenditure 4
5 Shri Sreekant Phumbra A.Yr.2010-11 (net) , finally concluded that the disallowance already made by the assessee in the sum of Rs. 2 lacs should not get disturbed. Accordingly, he directed the Ld. AO to delete the disallowance made u/s 14A of the Act in the sum of Rs. 51,08,501/-. Aggrieved the Revenue is in appeal before us on the following grounds:
1. That the Ld. CIT(A) has erred in facts is starting restricting the disallowance u/s 14A to Rs. 2,00,000/- on grounds that the A.O. could not invoke Rule 8D as the AO has not recorded any satisfaction with reference to the books of accounts regarding the computation made by the assessee as incorrect, which is contrary to the fats as the A.O. has done so in Para 4.1 through 4.2 in the assessment order.
2. That the Ld. CIT(A) has erred in not considering the decision of ITAT cited by the Assessing Officer.
3. That the appellant craves leave to add, alter, modify, include or delete any of the above grounds of appeal.
We have heard the rival submissions at the outset we are in agreement with the argument of the Ld. DR that the Ld. AO had indeed gone into the accounts and observed that the assessee had made suo moto disallowance of Rs. 2 lacs which is without any basis and which is not in accordance with Rule 8D of the Rules and which was made without considering all the investments made by the assessee in shares and mutual funds. He also observed that since no evidence was furnished by the assessee to support the plea that own funds were sufficiently available with the assessee for making investments. These observations would clearly prove that the Ld. AO had indeed gone into account of the assessee and found that the calculation made by the assessee suo moto in the sum of Rs. 2 lacs was incorrect and thereafter proceeded to make disallowance in terms of Rule 8D(2) of the Rules. Hence, the action of the Ld. AO in this regard does not deserve any disturbance. However, we find that the Ld. CIT(A) had given a categorical finding that the assessee was having sufficient own funds at his disposal which is much more than investments made, and also in view of fact that there was no net interest expenditure ultimately and hence, there could not be any 5
6 Shri Sreekant Phumbra A.Yr.2010-11 disallowance under second limb of Rule 8D(2). This finding of the Ld. CIT(A) were not controverted by the Revenue before us. We find that the Ld. CIT(A) had accepted to the workings of the assessee given before him for disallowance under the third limb of Rule 8D(2) by taking into account only those investments which had related exempt income in line with the decision rendered by this Tribunal in the case of REI Agro Ltd. (Supra). No infirmity could be found in the said action of the Ld. CIT(A). Since, the disallowance worked out by the assessee thereon amounted to Rs. 1,72,627/- which was much less than the suo moto disallowance made by the assessee in the sum of Rs. 2 lacs, the Ld. CIT(A) fairly directed the Ld. AO to restrict the total disallowance u/s 14A of the Act to the tune of Rs. 2 lacs. We do not find any infirmity in the order of the Ld. CIT(A) in this regard. Accordingly, the grounds raised by the Revenue are dismissed.
In the result, the appeal of the Revenue is dismissed. Order pronounced in the Court on 11.08.2017