M/S. MEDIDENT INDIA PVT. LTD.,CHENNAI vs. ITO, CHENNAI

2.0 All the grounds of the appeal are related to the disallowance of Rs.6,50,852/- u/s.14A of the Income Tax Act (in short ‘the Act’) r.w. Rule 8D of Income Tax Rules. During the assessment proceedings, the Assessing Officer (hereinafter referred to as ‘AO’) found that the assessee had invested an amount of Rs.2,60,00,000/- as shares in M/s.Mahtani Clothing Company Pvt. Ltd. but not disallowed the expenditure relatable to investment made in shares. Since the investment in shares yields dividend income which is exempt u/s14A, the A.O invoked the provisions of Sec.14A r.w. Rule 8D(2)(ii) of Income Tax Rules and disallowed a sum of Rs.6,50,852/- relating to the interest.

3.0 Aggrieved by the order of the AO, the assessee went on appeal before the Learned Commissioner of Income Tax (Appeals) [hereinafter referred to as ‘Ld.CIT(A)’] and the Ld.CIT(A) confirmed the addition placing reliance on the decisions of the Hon’ble High Court of Bombay in ITA No.2819/Mds/2016 :- 3 -: the case of Godrej & Boyce Mfg. Co. Ltd (supra) and the jurisdictional Bench of the Hon’ble ITAT in the case of ACIT vs. Sun TV Networks Limited.

4.0 During the appeal the Learned Authorized Representative (hereinafter referred to as ‘Ld.AR’) argued that the AO disallowed a sum of Rs.6,50,852/- during period of investment there were no borrowed funds and the assessee has not invested the borrowed funds for the purpose of investments, she argued that since the investment was made out of assessee’s own funds no disallowance u/s.8D of Income Tax Rules is called for. On the other hand, the Learned Departmental Representative (hereinafter referred to as ‘Ld.DR’) relied on the orders of the lower authorities.

5.0 We heard the rival submissions and perused the material placed on record. The Ld. CIT(A) confirmed the addition as per the following observations.

“4.1 I have considered the submissions of the appellant. The Hon’ble High Court of Bombay in the case of Godrej and Boyce Mfg. Co. Ltd., (328 ITR 81)(Bom.) wherein while upholding the constitutional validity of section 14A read with Rule 8D also observed that the argument that investment yielding tax free dividend income has been made out of the own funds, so that no interest expenditure has been incurred in relation to the dividend income, was no longer dispositive of the matter, and that, even so, a disallowance in respect of interest would have to be made, and no presumption of investment of own funds, on ground of its sufficiency, could be drawn, distinguishing its own decision in the case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Born.) its re1evat observations (at placitum 5, pg. 135) reading as under: In all these decisions, the Tribunal held that no nexus had been established between borrowed funds and investments by the assessee in dividend-yielding shares/income-yielding mutual funds. Now assuming that this is so, the only

ITA No.2819/Mds/2016 :- 4 -: conclusion which emerges is that the assessee had utilized its own funds for the purpose of making the investments. The fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee had incurred expenditure in relation to the earning of such income. Even if the assessee has utilized its own funds for making investments which have resulted in income which does not form part of the total income under the Act, the expenditure which is incurred in the earning of that income would have to be disallowed. That is exactly a matter which the AO has to determine.

Secondly, as regards the argument that the investments have been made for strategic purposes in appellant’s group entities is concerned, it is pertinent to refer to the decision of the jurisdictional Bench of Hon’ble ITAT in the case of ACIT vs. Sun TV Networks Limited in to 1520/ Mds/2013 dated 31/10/2013.

The Chennai ‘A’ Bench in its decision observed as follows:

In the appeals there is another issue with respect to disallowance u/s. 14A read with Rule 8D. The Ld. Counsel for the assessee submitted that the investments were not made by the assessee for business purposes and therefore, are not being treated as trade investments. Moreover, the investments in subsidiary companies were made out of the funds raised through public issue and not out of borrowed funds. The id. DR has contended the assessee has made huge investment during the year under consideration; the assesee must have incurred certain expenditure towards administrative expenses, consulting charges and managerial expenses. The Assessing Officer has rightly invoked the provisions of Rule 8D(iii) of the Act.

We are of the considered opinion that whether the investments have been made for strategic purposes or otherwise, the assessee must have incurred some expenditure on managing the investment portfolio and the dividends earned from the same. Even, if the application of Rule 8D is not automatic but the expenditure incurred on the investments made has to be disallowed.

Respectfully following the decisions of the Hon’ble High Court of Bombay in the case of Godrej & Boyce Mfg. Co. Ltd (supra) and the jurisdictional Bench of the Hon’ble ITAT in the case of ACIT vs. Sun TV Networks Limited (supra), I have no hesitation in confirming the disallowance of Rs.6,50,852/- made by the Assessing Officer u/s.14A read with Rule 8D”.

6.0 According to the Ld.Counsel, the interest free funds were used for the purpose of making investments in shares and the borrowed funds were directly used for the purpose of purchase of vehicles and other fixed assets of the company and hence and no disallowance u/s.14A r/w Sec.8D of the Income Tax Rules was called for. Her second argument was that there was no exempted income earned during the year under consideration and no disallowance can be made u/s.14A r/w Sec.8D of the Income Tax Rules. On verification of the balance sheet, it is seen that there were outstanding amounts of unsecured loans in the balance sheet

ITA No.2819/Mds/2016 :- 5 -: and the assessee has incurred the Finance charges which the assessee explained that the loans and finance charges related to hire purchase of vehicles. On further verification of balance sheet the additions to the book value of motor cars and goods carrier was only Rs.17.87 lacs and the outstanding secured loans were at the Order of Rs.104.15 lacs. Therefore, it is clear that the entire unsecured loans were not used for purchase of vehicles and the borrowed funds were partly utilized for the purpose of investments.

7.0 The assessee’s contention was, as on the date of making investment in shares, there were no borrowed funds and the company has used it’s own funds. Even if the assessee has made investments in shares, According to the assessee, when the investments were made in shares there were no borrowed funds to attract the disallowance u/s.14A of Income Tax Act. This Tribunal has consistently followed a decision that if assessee purchased shares from common pool of funds consisting both borrowed and own funds, disallowance of interest under Rule 8D(2)(ii) attracts and the AO is bound to disallow the proportionate interest under Rule 8D(2). Even if the assessee has no exempted income still as per the provisions of Sec.14A, the disallowance u/R.8D(2) is attracted. The fact regarding whether the assessee has invested from common pool of funds or from the interest free funds has to be verified from the assessment records. Therefore, we remit the matter back to the file of the AO with a direction to verify whether the assessee has made investments from ITA No.2819/Mds/2016 :- 6 -: common pool of the funds or from the interest free funds and decide the issue afresh on merits. The AO should give opportunity to the assessee for submitting his explanation.

8.0 In the result, the appeal of the assessee is allowed for statistical purposes.