PR. COMMISSIONER OF INCOME TAX vs. M/S SUBRAMANYA CONSTRUCTIONS

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 7TH DAY OF APRIL 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE M.G.S. KAMAL I.T.A. NO.398 OF 2015 C/W I.T.A.NO.399 OF 2015 I.T.A. NO.398 OF 2015 BETWEEN: 1. PR. COMMISSIONER OF

INCOME TAX

C.R. BUILDING, QUEENS ROAD

BANGALORE-560001. 2. DEPUTY COMMISSIONER OF

INCOME TAX 12(3)

BENGALURU. ... APPELLANTS (BY SRI. T.N.C. SRIDHAR, ADV.,) AND: M/S. SUBRAMANYA CONSTRUCTIONS AND DEVELOPMENT CO. LTD. NO.4/1, TUMKUR ROAD YESHWANTHPUR BENGALURU-560022. ... RESPONDENT (BY SRI. A. SHANKAR, SR. COUNSEL A/W SRI. V. CHANDRASHEKAR, ADV., FOR SRI. M. LAVA, ADV.,) - - -

2 THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 20.02.2015 PASSED IN ITA NO.404/BANG/2013 FOR THE ASSESSMENT YEAR 2009-10, PRAYING TO: (i) DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT. (ii) SET ASIDE THE APPELLATE ORDER DATED 20.02.2015 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'B' BENCH, BENGALURU, IN APPEAL PROCEEDINGS NO.ITA NO.404/BANG/2013 FOR THE ASSESSMENT YEAR 2009-10 AS SOUGHT FOR IN THIS APPEAL AND TO GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE. I.T.A. NO.399 OF 2015 BETWEEN: 1. PR. COMMISSIONER OF

INCOME TAX

C.R. BUILDING, QUEENS ROAD

BANGALORE-560001. 2. DEPUTY COMMISSIONER OF

INCOME TAX 12(3)

BENGALURU. ... APPELLANTS (BY SRI. T.N.C. SRIDHAR, ADV.,) AND: M/S. SUBRAMANYA CONSTRUCTIONS AND DEVELOPMENT CO. LTD. NO.4/1, TUMKUR ROAD YESHWANTHPUR BENGALURU-560022. ... RESPONDENT (BY SRI. A. SHANKAR, SR. COUNSEL A/W SRI. V. CHANDRASHEKAR, ADV., FOR SRI. M. LAVA, ADV.,) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 20.02.2015 PASSED IN APPEAL PROCEEDINGS C.O.89/BANG/2013 IN ITA

3 NO.404/BANG/2013 FOR THE ASSESSMENT YEAR 2009-10, PRAYING TO: (i) DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT. (ii) SET ASIDE THE APPELLATE ORDER DATED 20.02.2015 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'B' BENCH, BENGALURU, IN APPEAL PROCEEDINGS C.O.89/BANG/2013 IN ITA NO.404/BANG/2013 FOR THE ASSESSMENT YEAR 2009-10 AS SOUGHT FOR IN THIS APPEAL AND TO GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE. THESE I.T.As. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT These appeals under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) have been preferred by the revenue against common order dated 20.02.2015 passed by the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). I.T.A.No.398/2015 arises from the order of the tribunal by which appeal preferred by the revenue has been dismissed whereas, I.T.A.No.399/2015 has been preferred against the order of the tribunal by which the tribunal has allowed the cross objection preferred by the assessee. The subject matter of the appeals pertain to the Assessment year

4 2009-10. The appeals were admitted on the following substantial question of law: Whether on the facts and in the circumstances of the case, the tribunal is justified in law in deleting the disallowances made under Section 14A r.w.r 8D(2)(ii) and 8D(2)(iii) of the Act, without appreciating the Board's Circular No.5/2014 dated 11.02.2014 , which emphasizes that the only expenditure allowable is which is relatable to earning of income and therefore, the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not? 2. Facts leading to filing of these appeals briefly stated are that the assessee is a company registered under the provisions of the Companies Act, 1956. The assessee is a builder as well as a developer. The assessee filed the return of income on 11.12.2009 for Assessment Year 2009-10 and declared a total income of Rs.4,06,68,720/-. The aforesaid return was processed

5 under Section 143(1) of the Act. The case of the assessee was selected for scrutiny and the Assessing Officer concluded the assessment by an order dated 07.12.2012 and determined the total income of the assessee at Rs.9,02,58,727/- instead of Rs.4,06,68,720/- by making disallowance under Section 14A of the Act read with Rule 8D of the Rules for an amount of Rs.4,95,90,007/-. 3. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 21.12.2012 inter alia deleted the disallowance under Rule 8D(2)(ii) of the Rules of Rs.4,64,15,708/- and sustained the disallowance made by the Assessing Officer under Rule 8D(2)(iii) of the Rules made by the Assessing Officer of Rs.31,74,299/-. The appeal preferred by the assessee was partly allowed. The revenue filed an appeal, whereas, the assessee filed a cross objection against the order of the Commissioner of Income Tax (Appeals) before the

6 tribunal. The tribunal by its common order dated 20.02.2015 dismissed the appeal preferred by the revenue and allowed the cross objection preferred by the assessee. In the aforesaid factual background, these appeals have been filed. 4. Learned counsel for the revenue submitted that the Assessing Officer has rightly added the exempted dividend income by applying Rule 8D(2)(ii) and held that the assessee had made investment and claimed the entire dividend income to be exempt from tax. It is also argued that the tribunal erred in deleting the disallowance under Section 14A read with Rule 8D(2)(iii) of the Rules on the ground that once the assessee takes a stand that it had not incurred any expenditure under Section 14A, then the Assessing Officer is not justified in invoking the Rule 8D(2)(iii) for disallowances of indirect expenses unless the Assessing Officer records dissatisfaction of the claim. It is also submitted that interest free deposits cannot be treated

7 to be non performing assets and they do not benefit the receiver of such deposit by way of notional income. It is also pointed out that Central Board of Direct Taxes (CBDT) Circular No.5/2014 dated 11.02.2014 clarifies and emphasizes that only expenditure allowable is that which are relatable to earning exempt income have to be considered for disallowance irrespective of whether such income has been earned during financial year or not. 5. On the other hand, learned Senior counsel for the assessee submitted that Assessing Officer without recording any satisfaction or expressing dissatisfaction with regard to claim of the assessee that no expenditure has been incurred by the assessee for earning any portion of exempt income has mechanically applied the formula prescribed in Section 14A read with Rule 8D of the Rules. It is further submitted that the Commissioner of Income Tax (Appeals) as well as the tribunal has rightly deleted the disallowance made under Rule

8 8D(2)(ii) of the Rules. It is further submitted that since the capital and reserves of the company are far in excess of the investments made as held by the tribunal as well as the Commissioner of Income Tax (Appeals) the income therefrom, if any, is exempt under the provisions of the Act and the presumption arises that such investments have been made from capital and reserves of the company and also from other non interest bearing funds. It is also submitted that the Circular No.5/2014 dated 11.02.2014 does not apply to the fact situation of the case as the subject matter of the appeal pertains to Assessment Year 2009-10. In support of aforesaid submissions, reliance has been placed on 'CIT VS. RELIANCE UTILITIES & POWER LTD.', (2009) 313 ITR 340 (BOM.), 'CIT VS. MICROLABS LTD', (2016) 383 ITR 490 (KAR.), 'CIT VS. LALSONS ENTERPRISES', (2010) 324 ITR 426 (DEL), 'KODAGU DISTRICT CO-OP BANK LTD. VS. ACIT IN ITA NO.318 OF 2016 AND 'DCIT VS. M/S

9 QUEST GLOBAL ENG. SERVICES PVT. LTD. IN ITA NO.33/2015. 6. We have considered the submissions made by learned counsel for the parties and have perused the record. The solitary issue involved in the appeals filed by the revenue is whether the tribunal was justified in law in deleting the disallowance made under Section 14A read with Rule 8D(2)(ii) amounting to Rs.4,64,15,708/- and under 8D(2)(iii) being 0.5% of Rs.31,74,299/- totaling to Rs.4,95,90,007/-. The tribunal has quoted the balance sheet of the assessee, which shows the share capital and reserves of the assessee on 31.03.2008 and 31.03.2009, which read as under: Share holders fund As at 31.03.2009 As at 31.03.2008 (a)Share capital

174,001,100 1,74,001,100 (b)Reserves & Surplus 352,451,754 346,701,344 7. Thus, it is evident that the capital and reserves of the company are far in excess of the

10 investment made. Therefore, the presumption arises that such investments have been made from capital and reserves of the company and from non interest bearing funds and not out of borrowed funds to warrant any disallowance while computing the income. [See: Reliance Utilities and Power Ltd. supra and Lalsons enterprises supra]. It is also pertinent to mention here that the Assessing Officer has not recorded the satisfaction that assessee had incurred expenditure to earn exempt income as envisaged under Rule 8D(1) of the Rules. There is no positive material to show that the assessee had incurred such expenditure to earn exempt income. The Commissioner of Income Tax (Appeals) and the tribunal therefore, have rightly deleted the disallowance under Section 14A read with Rule 8D of the Rules. The Circular No.5/2014 dated 11.02.2014 has no application to the facts of the case as the Assessment Year in question is 2009-10. In view of preceding analysis, the substantial

11 question of law framed by a bench of this court is answered against the revenue and in favour of the assessee. In the result, we do not find any merit in these appeals, the same fails and are hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss