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Income Tax Appellate Tribunal, “D” BENCH : KOLKATA
Before: Hon’ble Sri A.T.Varkey, JM & Shri M.Balaganesh, AM ]
This appeal of the revenue arises out of the order of the Learned CIT(A)-Central- II, Kolkata in Appeal No. 05/CC-XXVII/CIT(A)C-II/13-14 dated 28.11.2013 against the order of assessment framed for the Asst Year 2010-11 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
The only issue to be decided in this appeal is as to whether the ld CITA was justified in restricting the disallowance made u/s 14A of the Act read with Rule 8D of the Rules, in the facts and circumstances of the case. 3. The brief facts of this issue is that the assessee is Non-Banking Finance Company (NBFC) which is engaged in the business of investment in shares and securities and other body corporates. It was submitted that the assessee company was a loan and investment company and dividend was the main source of income. The ld AO observed that the assessee had taken unsecured loan of Rs 22,37,00,000/- on which interest accrued was to the tune of Rs 24,87,014/- (including TDS of Rs 2,48,701/-) . Further, the balance on Escrow Account had increased from Rs Nil to Rs 23,01,90,302/-.
2 M/s. Forex Finance Pvt. Ltd. A.Yr.2010-11 Accordingly the ld AO observed that the assessee had arranged fund for investment purpose in future and incurred expenditure of Rs 24,87,014/- towards interest payment. The ld AO observed that the assessee had debited Rs 7,32,221/- in P&L Account under the head ‘bank and depository service charges’ , whereas that in financial year ending 31.3.2009, it was Rs 1,98,205/-. The assessee submitted that bank and depository charges were high in financial year 2009-10 mainly because of Rs 55,150/- paid to DSP Merill Lynch and Rs 3,07,649/- to Stock Holding Corporation of India Ltd for transfer of shares of Asian Hotels Limited and Rs 3,67,666/- for Escrow expenses.
The assessee was requested to furnish a written submission as to why the provisions of section 14A of the Act read with Rule 8D of the Rules cannot be invoked on it. In response to this, the assessee submitted that it had not received any dividend income during the year and accordingly no expenditure was incurred for earning exempt income. It was submitted that the assessee had earned interest on fixed deposits with Yes Bank amounting to Rs 58,78,113/- on the fixed deposits held with them in the sum of Rs 22.49 crores which has been offered to tax by the assessee. It was submitted that the assessee had incurred interest expenditure of Rs 24,87,014/- on short term borrowings of Rs 7.37 crores from Mr Arun Kumar Saraf and borrowing from him had been invested in fixed deposits with bank. Hence the interest expenditure and interest income were inextricably mixed and since interest income was much higher than interest paid, there is no question of invoking provisions of Rule 8D(2)(ii) of the Rules. It was also submitted that the borrowings from Mr Arun Kumar Saraf , on which interest was paid, were not utilized for purchase of shares . In fact the investment in Asian Hotels (East) Limited was made on 23.8.2010 which was after the refund of loan to Mr Arun Kumar Saraf. The ld AO ignored the submissions of the assessee and proceeded to make disallowance by applying all the three limbs of Rule 8D(2) of the Rules and disallowed a sum of Rs 47,38,231/- ( 1,42,353 + 20,00,663 + 25,95,215) in the assessment u/s 14A of the Act. 2
3 M/s. Forex Finance Pvt. Ltd. A.Yr.2010-11 5. The ld CITA deleted the disallowance made under the second limb of Rule 8D(2) of the Rules on the ground that the borrowed funds were not utilized for investment in shares by duly appreciating the evidences filed on record and also holding that the interest expenditure is directly attributable to the interest income which is taxable. Hence the interest expenditure cannot be made attributable to exempt income. Moreover, there is no exempt income derived by the assessee. The assessee raised an additional ground before the ld CITA by stating that the total disallowance made under the third limb of Rule 8D(2) cannot exceed the total expenses debited in the profit and loss account. It submitted as follows:-
Total expenses debited in P&L 38,77,219 Less: Interest expenditure 24,87,014 Depreciation 3,055 Demat charges already considered in Rule 8D(2)(i) 1,42,353 Miscellaneous expenditure written off Disallowed in return by assessee 2,50,000 --------------- 28,82,422 ----------------- Remaining expenses left over 9,94,797 ----------------
The ld CITA agreed to the contentions of the assessee and directed the ld AO to restrict the disallowance u/s 14A read with Rule 8D as under:- Under Rule 8D(2)(i) - Rs 1,42,353 Under Rule 8D(2)(iii) - Rs 9,94,797 ------------------ Rs 11,37,150
4 M/s. Forex Finance Pvt. Ltd. A.Yr.2010-11 7. Aggrieved, the revenue is in appeal before us on the following grounds:- “
1. That in the facts and circumstances of the case and in law, the Learned CIT (A) has erred in deleting the interest component of Rs 20,00,663/- determined under section 14A r. w. Rule 8D(2)(ii) of the Income Tax Act which was attributable for earning the income not forming part of the total income.
2. That in the facts and circumstances of the case and in law, the learned CIT (A) has failed to appreciate the fact that term deposit was made not out of the loan fund but out of the mixed pool of fund of the assessee maintained in the current account on that date.
3. That in the facts and circumstances of the case and in law, the learned CIT (A) has erred in holding that the total loan amount was invested in fixed deposit without considering the fact that a part repayment of loan was made to one of the creditors out of the remaining loan fund received subsequently from another loan creditor.
4. That in the facts and circumstances of the case and in law, the learned CIT (A) has erred in deleting the interest expenses of Rs 20,00,663/- u/s 14A r.w. Rule 8D(2)(ii) of the Income Tax Act and simultaneously restricting the disallowance u/s 14A read with rule 8D(2)(iii)of the Income Tax Act to Rs 9,94,797/-
5. That the Department craves leave to add, modify or alter any of the grounds of appeal and or adduce additional evidence at the time of hearing of the case.
We have heard the rival submissions and perused the materials available on record. It is not in dispute that there is no exempt income derived by the assessee. Hence in our considered opinion, no disallowance u/s 14A read with Rule 8D could be made as the provisions of section 14A of the Act could be invoked only if there is some exempt income derived and correspondingly some expenditure is debited in the profit and loss account which is claimed as deduction and thereby it would result in the said business expenditure being calimed as deduction for the purpose of earning exempt income. To curb this practice only, the provisions of section 14A of the Act has been introduced in the statute. This is very clear from the bare reading of the provisions of section 14A of the Act. Hence the issue of disallowance u/s 14A of the Act is addressed at the threshold level itself by holding that the same is inapplicable to the facts of the instant case. Reliance in this regard is placed on the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd vs CIT reported in (2015) 378 ITR 33 (Delhi) wherein it
5 M/s. Forex Finance Pvt. Ltd. A.Yr.2010-11 was held that no exempted income was earned by the assessee in the relevant assessment year and since the genuineness of the expenditure incurred by the assessee was not in doubt, no disallowance could be made under section 14A. But we find that in the instant case, though the ld CITA had sustained the disallowance u/s 14A of the Act to the tune of Rs 11,37,150/- , the assessee had not preferred any appeal before us against the same. Hence we direct the ld AO to adopt the disallowance sustained by ld CITA in the facts and circumstances of the case. 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 08.06.2017.