M/S. LUCAS INDIA SERVICE LTD.,CHENNAI vs. ACIT, CHENNAI

आदेश / O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER:

i. The Ld. CIT(A) has erred in upholding the order of the Ld.

AO who had invoked the provisions of Section 14A of the Act and made disallowance @ 5% of the exempt income for the assessment year 2005-06 and applied Rule 8D of the rules for computing the disallowance for the assessment year 2007-08, instead of applying the ratio laid down by the Hon’ble jurisdictional Madras High Court wherein it was held that estimate of 2% of dividend income

(exempt income) would suffice for disallowance as expenditure incurred for earning exempt income. ii. The Ld. CIT(A) has erred in confirming the order of the Ld.

AO who had disallowed the claim of depreciation on building for Rs.17,33,102/- by holding that the building was not put to use during the relevant assessment year 2007-

08. iii. The Ld. CIT(A) has erred in invoking the provisions of Section 14A and Rule 8D of the Act, towards the investment made in subsidiary companies for statistical reasons, when the Madras benches of the Tribunal has held otherwise (for the assessment years 2008-09 and 2010-11).

For the assessment years 2005-06 & 2007-08, the Ld. AO invoked the provisions of Section 14A and computed the disallowance of expenditure incurred for exempt income in the following manner: a) AY 2005-06 : 5% of the exempt income Rs.3,92,40,057/- was disallowed, which amounts to Rs.19,62,003/- b) AY2007-08 : the Ld.AO worked out the disallowance invoking Section 14A of the Act, in accordance with Rule 8D.

4.1 The Ld. AR submitted before us that for both the assessment years 2005-06 and 2007-08, Rule 8D cannot be invoked because it is applicable with effect from 24.03.2008 i.e., for the assessment year 2008-09 onwards. Further the Ld. AR argued by stating that on similar instance the Hon’ble Jurisdictional Madras High Court in the case India Nippon Electricals Limited vs. DCIT, Company Circle II(3) has held that 2% of exempts income can be estimated as the expenses that would have incurred for the purpose of earning exempt income. Therefore, it was pleaded that the same decision may be followed in the case of assessee for both the assessment years.

4.2 Though the Ld. DR vehemently argued in support of the orders of the Revenue, he could not successfully controvert to the submission of the Ld. AR.

4.3 We have heard the rival submissions and carefully perused the materials from record. We find merits in the submission of Ld. AR. As pointed out by him, Rule 8D has come into effect only from 24.03.2008. Therefore, in the case of the assessee for assessment year 2007-08, Rule 8D cannot be applied. Further in the case India Nippon Electricals Ltd cited by the Ld. AR, the Hon’ble Jurisdictional Madras High Court has held that 2% of the exempt income would suffice for disallowance under Section 14A of the Act. Therefore by respectfully following the decision of the Hon’ble Jurisdictional High Court supra, we hereby direct the Ld. AO to disallow 2% of the exempt income as the expenditure incurred for earning exempt income.

During the relevant assessment year, the assessee had purchased a building at Guindy for Rs.3,46,62,044/- on 31.03.2007. For the relevant assessment year the assessee claimed depreciation on the building at the rate of 5% which works out to Rs.17,33,102/-. On query the assessee’s representative though produced documents to prove that the assessee had purchased the property on 31.03.2007 could not establish that the possession was taken over on the very same day and the asset was put to use from that day. Therefore the Ld. AO disallowed the claim of depreciation on the ground that the assessee had not put to use the asset during the relevant assessment year. On appeal, the Ld. CIT(A) upheld the order of the Ld.AO because before him also the assessee could not establish that either the building was kept ready for occupation or put to use on 31.03.2007.

5.1 Before us the Ld. AR submitted that the matter may be remitted back to the file of Ld.AO for fresh consideration because the assessee was in possession of requisite documents to establish that it had utilized the building for its business purposes during the relevant assessment year.

5.2 The Ld. DR opposed to the submission of the Ld. AR and argued in support of the order of the Revenue authorities.

5.3. We have heard the rival submissions and carefully perused the materials on record. From the facts of the case it is apparent that the assessee had purchased the building on 31.03.2007. The property was registered on the very same day. Therefore, though the assessee might have taken possession of the property on 31.03.2007, there was no possibility for the building to be put to use on the same day. It is obvious that after purchase of the building some basic maintenance work would have been required before putting the asset to use. Therefore we do not find any merit in the arguments advanced by the Ld. AR. Accordingly this ground is decided against the assessee and the orders of the Revenue authorities are upheld on this issue.

For the assessment years 2008-09 and 2010-11, the Ld. AO invoked the provisions of Section 14A of the Act and computed the disallowance in accordance with Rule 8D of the Rules which was confirmed by the Ld. CIT(A).

6.1 The argument of the Ld. AR before us is that the assessee had made investments out of its interest free funds in equity shares of its subsidiary company for strategical purposes; therefore the provisions of Section 14A cannot be invoked. We find merit in the contention of the Ld. AR. On several earlier occasions for instance in the case of M/s. Data Software Research Company (International) Pvt. Ltd. v. ACIT, & 2170/Mds/2015 and ACIT v. M/s. Data Software Research Company (International)

Pvt. Ltd., 2172/Mds/2015 vide order dated 03.02.2016, this bench of the Tribunal has held as follows:

“7. We have heard both the parties and carefully perused the materials available on record. It is a normal practice to make investment in sister companies due to commercial exigencies. While doing so, no expense can be attributable other than interest expense for making such investments because all management costs will be absorbed for strategic decision making process which is allowable as business expenditure. In the case of the assessee it is submitted that no interest cost was incurred as the entire investments were made out of own funds. Further in the decision of the Tribunal in dated 06.01.2016, extracted herein below, it has been held that section 14A of the Act will not be applicable when investments are made in sister companies. “5. We have heard both the parties and carefully perused the materials available on record. On the identical issue as pointed out by the Ld. A.R. the Chennai bench of the Tribunal in vide order dated 20/08/13 for the assessment year 2009-10 has remitted back the matter to the Ld. Assessing Officer to decide the matter once again afresh based on the findings whether the assessee had actually incurred any expenditure in earning the dividend income. The relevant portion of the order is extracted herein below for reference:-

Further, on the identical issue various Benches of the Tribunal and the Hon’ble Bombay High Court have held as follows:- i) Garware wall Ropes Ltd., Vs. ACIT reported in (2014) 65 SOT 086 (Mum.) held as follows:-

“When assessee has prima facie brought out case that no expenditure has been incurred for earning income, which does not form part of total income, then in absence of any finding that expenditure has been incurred for earning exempt income provisions 14A cannot be applied..” ii) Integlobe Enterprieses Ltd., Vs. DCIT repoted in (2014) 40 CCH 0022(Del. Trib.) held as follows:-

“No disallowance of interest is required to be made under rule 8D(i) & 8D(ii) where no direct or indirect interest expenditure was incurred for making investments. Where the assessee had utilized interest free funds for making fresh investments and that too into its subsidiaries, which was not for the purpose of earning exempt income and which was for strategic purposes only, no disallowance of interest was required to be made under Rule 8D(i) & 8D(ii) and strategic investment has to be excluded for purpose of arriving at disallowance under Rule 8D(iii).” iii) M/s.JM Financial Ltd., Vs. ACIT reported in 2014-TIOL-202- ITAT-MUM held as follows: “…the department has not disputed this fact out of the total investment about 98% of the investment are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. The assessee has brought out a case to show that no expenditure has been incurred for maintaining the 98% of the investment made in the subsidiary companies, therefore, in the absence of any finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the Assessing Officer is not justified, accordingly the same is deleted.” (iv) CIT Vs. Bharti Televenture Ltd. reported in (2011) 331 ITR 0502.

“Where the assessee was found to be having adequate non- interest bearing fund by way of share capital and reserves and there was no nexus between the borrowals of assessee and the advances given, no disallowance for interest was called for.”

(v) CIT Vs. Reliance Utilities & Power Ltd., reported in (2009) 313 ITR 0340(Bom.) has held as follows:- “Tribunal having recorded a clear finding that the assessee possessed sufficient interest-free funds of its own which were generated in the course of the relevant financial year, apart from substantial shareholders fund, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and therefore no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds.”

(vi) EIH Associated Hotels Ltd Vs. DCIT reported in 2013-TIOL- 796-ITAT-MAD “…. The investments made by the assessee in the subsidiary company are not on account of investment for earning capital gains or dividend income. Such investments have been made by the assessee to promote subsidiary company into the hotel industry. The assessee is not into the business of investment and the investments made by the assessee are on account of business expediency. Any dividend earned by the assessee from investment in subsidiary company is purely incidental. Therefore the investment made by the assessee in its subsidiary is not to be reckoned for disallowance U/s.14A r.w.r.8D. The Assessing Officer is directed to re-compute the average value of investment under the provisions of Rule 8D after deleting investments made by the assessee in subsidiary company.”

Taking note of the above decisions and the decision of the Chennai bench of the Tribunal in cited supra, we hereby remit the matter back to the file of Ld. Assessing Officer to examine the issue involved in this case afresh and pass appropriate order as per law and merits and in the light of the decisions cited herein above. While doing so, we also direct the Ld. Assessing Officer to consider the decision of the Tribunal in the case M/s Agile Electric Sub Assembly Pvt. Ltd. cited supra wherein it was held as follows:-

‘”7.2 In regard to applicability of Section 14A of the Act read with Rule 8D also; the above view will be applicable. Moreover in the case EIH Associated Hotels Ltd v. DCIT reported in 2013 (9) TMI 604 in 1624/Mds/2012 dated 17th July, 2013, it has been held by the Chennai Bench of the Tribunal as follows:- “Disallowance U/s. 14A rw Rule 8D – CIT upheld disallowance – Held that – investments made by the assessee in the subsidiary company are not on account of investment for earning capital gains or dividend income. Such investments have been made by the assessee to promote subsidiary company into the hotel industry. A perusal of the order of the CIT(Appeals) shows that out of total investment of Rs.64,18,19,775/-, Rs.63,31,25,715/- is invested in wholly owned subsidiary. This fact supports the case of the assessee that the assessee is not into the business of investment and the investments made by the assessee are on account of business expediency. Any dividend earned by the assessee from investment in subsidiary company is purely incidental. Therefore, the investments made by the assessee in its subsidiary are not to be reckoned for disallowance U/s. 14A r.w.r. 8D. The Assessing Officer is directed to re-compute the average value of investment under the provisions of Rule 8D after deleting investments made by the assessee in subsidiary company – Decided in favour of assessee.” For the above said reasons, we hereby hold that in the case of the assessee the provisions of Section 14A read with Rule 8D will not be applicable in regard to investments made for acquiring the shares of the assessee’s sister concerns. Accordingly we restrain ourselves from interfering with the Order of the Ld.CIT(A) on this regard.”

6.2 Accordingly we hereby remit back the matter to the file of the Ld. AO to consider the issue afresh in the light of the above order of the Tribunal and pass appropriate order in accordance with merits and law. We also make it clear that for the investments made in mutual funds, provisions of Section 14A read with Rule 8D will be applicable since the assessee would incur some expenditure at least for the decision making process as to in which mutual fund the investment has to be made and at what point of time exit from such funds. It is ordered accordingly.

Order pronounced on 23rd March, 2017 at Chennai.