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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM]
ORDER Per N.V.Vasudevan, JM This is an appeal by the Assessee against the order dated 24.01.2014 of CIT(A)-IV, Kolkata, relating to AY 2009-10.
Grounds of appeal raised by the Assessee read as follows: “(1) That the Commissioner of Income Tax (Appeals)-IV has erred, both in law and on the facts and under the circumstances of the case, in not accepting assessee's contention the amount suo moto added to total income at Rs.10,062/- u/s. 14A of the Act and in giving direction to AO. that while AO. is right in taking the amount under Rule-80(2)(ii) is .correct and AO. should recalculate amount under Rule-80(2)(iii) by not considering those investment on which income is taxable in terms of decision of LTAT., Kolkata in REI Agro Ltd. vs. DCIT.
3. The assessee has filed an application for seeking permission to raise the following additional ground :- “That the Commissioner of Income Tax (Appeals)-IV has further erred in law and on fact in holding that as far as the additions of Rs.185,520/- mad by the A.O. which Rule 8D(2)(ii) is concerned, no interference is called for.”
4. The Assessee is a company engaged in the business of manufacturing of tea. It is not in dispute that the assessee earned dividend income of Rs.1,18,050/- which was claimed as exempt u/s 10(34) of the Income Tax Act, 1961 (Act). In the computation Agro Ltd. A.Y.2009-10 1 of total income filed for A.Y.2009-10 the assessee calculated a sum of Rs.10,062/- as expenses which was incurred for the purpose of earning income which is not chargeable to tax under the Act i.e. expenses disallowable u/s 14A of the Act. The AO was of the view that the method of computation of disallowance as done by the assessee was not proper. Applying the provision of Rule 8D of the Income Tax Rules, 1962 the AO computed the disallowance u/s 14A of the Act as follows :- “The disallowance u/s 14A as per Rule 8D is as under :- (i) Rule 8D (2)(ii) A X B/C
Here A = Amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year – Rs.1386020/- B = The average of value of investment, income from which does not or ‘shall not ‘ from part of the total income, as appearing to the balance sheet of the assessee, on the first day and last day of the previous year – Rs.30788590/-. C = The average of the total assets as appeared in the balance sheet of the assessee, on the first day and the last day of the previous year – Rs.263818357/- So, A X B/C = Rs.185520/-
(ii) Rule 8D(iii) – An amount = 0.5% of the average of value of investment, income from which ‘doesn’t ‘ or ‘shall not ‘ from part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. 0.5% of Rs.30788590/- = Rs.153943/- = Rs339463/- Therefore, total of Rs.26,61,293/- is considered and disallowed as expenditure related to earning of exempt income u/s 14A, as per method provided under Rule 8D. Penalty proceedings u/s 271(1)(c) of the I.T.Act, 1961 is initiated on this issue. [Addition : Rs.339463/- ]”
Before CIT(A) the assessee contended that the AO was not justified in computing the disallowance by considering investment of Rs.47,06,000/- in Government securities as part of the average value of investment held by the assessee because interest received on Government security was chargeable to tax and therefore provision of section 14A of the Act would not be applicable to income which is chargeable to tax. The CIT(A) agreed with the aforesaid submissions of the assessee and to this extent gave relief to the assessee but confirmed the order of AO on other Agro Ltd. A.Y.2009-10 2 aspects of disallowance u/.s 14A of the Act. The following were the relevant observations of CIT(A) :- “6.2. I am partly in agreement with the views of the A.R. of the appellant with respect to Rule 8D(2)(iii). The A.D. has taken the average value of investment at Rs.3,07,88,590/-. However, the average value of investment will need to be worked out once again, by the A.D. after reducing the amount which is invested in Govt. Securities on which the interest received is in any way taxable. This direction to the A.D. is in keeping with the ratio of the judgement of the Jurisdictional Tribunal at ITA No.1331/Ko1/2011 for A.Y.2008-09 dt.19.06.2013 in the case of REI Agro Ltd. vs DCIT. As far as the addition of Rs.l,85,520/- made by the A.D. u/r.8D(2)(ii) is concerned, no interference is called for because the appellant has incurred interest expenditure on interest bearing loan, the usage of which could not be established before me by the appellant to e exclusively for the purpose of business. This Ground of appeal is partly allowed.”
Aggrieved by the order of CIT(A) the assessee has raised the original and additional grounds of appeal before the Tribunal.
7. As far as the additional ground raised
by the assessee is concerned the said ground is a legal ground and can be adjudicated on the basis of material readily available on record and hence the additional ground is admitted for adjudication.
8. We have heard the rival submissions. First we shall take up for consideration the additional ground of appeal which deals with the disallowance of interest expenses under Rule 8D(2)(ii) of the Act. The ld. Counsel for the assessee brought to our notice that interest expenses incurred by the assessed during the relevant previous year was a sum of Rs.13,86,020/- paid by the assessee on secured loans availed from bank against the cash credit facility. It was his submission that in the light of this admitted position that the interest was paid for cash credit facility availed from the bank by hypothetication of stock the disallowance u/s 14A of the Act of interest expenses cannot be made. It was his submission that cash credit facility cannot be used for any other purpose except the business of the assessee and therefore presumption of the AO that borrowed funds on which interest was paid was used for making investments which are likely to yield tax free income is fallacious. The Ld. DR submitted that these facts need to be examined by the AO. -Sublime Agro Ltd. A.Y.2009-10 3
9. We have considered the rival submissions. We are of the view that the disallowance of interest expenses in terms of Rule 8D((2)(ii) of the Act as confirmed in the CIT(A) ‘s order should be set aside and the issue should be remanded to the AO with the direction to examine the claim of the assessee as stated in the earlier paragraph of this order and if the claim is found to be correct then the disallowance under Rule 8D(2)(ii) should be deleted.
10. As far as the disallowance u/r 8D(2)(iii) is concerned it would be just and appropriate to direct the AO to consider, while working out the average value of investments, to consider investments that are yielded tax free income only as laid down by ITAT, Kolkata Benches in the case of REI Agro Ltd. Vs DCIT in order dated 19.06.2013. We may also point out that this aspect has escaped the attention of CIT(A) though he has made reference to the aforesaid decision of the Tribunal in the case of REI Agro Ltd. (supra). The appeal of the assessee is accordingly allowed for statistical purposes. 11. In the result the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the Court on 19.05.2017.