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Income Tax Appellate Tribunal, MUMBAI BENCHES “D”,
Before: SHRI R.C. SHARMA & SHRI AMIT SHUKLA
PER R.C. SHARMA, ACCOUNTANT MEMBER :
These are the cross appeal filed by the Revenue and Assessee against the order of the Ld. CIT for the AY 2008-09.
Rival contentions have been heard and record perused.
Facts in brief are that assessee is engaged in rendering services for setting up of industrial infrastructure, project related activities, internet services etc. During the course of scrutiny assessment under section 143 (3) the AO made addition by disallowing expenditure under section 14A. AO also made addition on account of provision for wealth tax by adding in book profit computed under section 115JB. Disallowance made under rule 8D(2)(ii) read with section 14A was reduced by CIT(A) from Rs.16.05 crores to Rs.26.64 lacs. Disallowance made under rule 8D(2)(iii) was substantially reduced by CIT(A) after observing that investment which are not capable of generating exempt income should be executed i.e., investment in Reliance Engineering (Middle East) DMCC of Rs.3.81 crores and mutual funds of Rs.34.38 crores. The CIT(A) also deleted the addition made on account of provision for wealth tax. Against this order of CIT(A) both the Assessee and Revenue are in appeal before us.
We have considered the rival contention and carefully going through the order of authorities below and found from record that addition made on account of provision for wealth tax amounting to Rs. 10,40,101/- was deleted by CIT(A) after having following observation: “4.3 I have considered the A.O.’s order as well as appellant AR’s submission. Having considered both, I find that similar issue has been decided in appellant’s own case in earlier assessment years and in the immediately preceding assessment year i.e. A.Y. 2007-08 vide Order No. CIT(A)-7/Addl. CIT. Rg. 3(3)/IT-921/09-10 dated 09/11/2010 whereby the addition made on this account is deleted. Accordingly, following the rule of consistency and also after taking note of jurisdictional High Court’s decision in the case of CIT vs. Echjay Forgings Pvt. Ltd. reported in 251 ITR 0015, the addition on account of provision for wealth tax while computing book profits u/s. 115JB of the Act is deleted even for the year under consideration. Thus, appellant’s this ground of appeal is decided in favour of the appellant. Ld. CIT(A) has also deleted the disallowance made under section 14A after having the following observation:
“ 5.4. I have considered the A.O.’s order as well as appellant AR’s submission. Having considered both, I find that the A.O. has not given his detailed reasons for making the disallowance u/s. 14 A r.w. Rule 8D of the Income Tax Rules. Further, I find that the Hon'ble Bombay High Court in the case of Godrej & Boyc Manufacturing Co. Ltd. Vs. DCIT reported in 328 ITR page 81, has held that the provisions of Rule 8D are applicable from A.Y. 2008-09 onwards and that the disallowance u/s 14A has to be computed as per the prescribed Rule 8D having regard to the accounts of the appellant and if the A.O. is not justified about the correctness of the appellant’s claim of expenses. Respectfully, following the decision of the Hon'ble Jurisdictional High Court, I consider it proper and appropriate to hold that the provisions of Rule 8D are applicable for the impugned year in appeal. However, it is seen that during the course of assessment proceedings, the appellant’s AR has submitted that the company has not incurred any part of its interest towards earning of exempt income which is incidental to the investments made out of surplus funds of the appellant company. It was further stated that out of the total interest paid of Rs. 45.32 crores, an amount of Rs. 45.09 crores has been paid on the term loans from banks of Rs. 500 crores which has been used for purchase of capital assets. According to the appellant the interest of Rs .45.09 crores is directly related to the business activity of the appellant, and hence no disallowance out of such expenditure is called for. Interest expenditure is allowable as deduction u/s 36(1)(iii) of the Act since the funds have been borrowed and used for the purpose of business. Thus, it can be concluded that the term loans on which interest of Rs. 45.09 crores has been paid has not been utilized for the purpose of investment in shares and securities. The appellant during the course of appellate proceedings has submitted a without prejudice working of disallowance u/s. 14A out of interest expenditure. The appellant has submitted that if at all the disallowance is to be considered the same should not exceed Rs. 26,64,777/- worked out on scientific basis considering proximate relation of available funds and investment in securities giving rise to exempt income. Hence I find force in the appellant’s submission that substantial interest of Rs. 45.09 crores were incurred by the appellant company on account of term loan, which was utilized for the purposes of business and hence the same cannot be held for the purpose of investments. I find force in the appellant’s contention that the remaining expenditure can be taken under rule 8D(2)(ii)r.w.s 14A of the Act. Accordingly I direct the A.O to modify the computation under rule 8D(2)(ii) r.w.s 14A on the basis of aforesaid observation of the appellant’s case. Accordingly the disallowance under rule 8D(2)(ii) is restricted to Rs. 26,64,777/- based on the aforesaid observations. The A.O. is directed to modify the same in accordance with section 14A r.w. rule 8D(ii) of I.T. Rules. 5.5 During the course of appellate proceedings, the appellant’s AR has also submitted that while working out the disallowance u/s. 14A r.w. Rule 8D(2)(iii) of the I.T. Rules has considered the investment, the income from which is not exempt. On perusal of the investment schedule, it is seen that investments in Equity Shares of Reliance Engineering(Middle East) DMCC of Rs. 3.81 crores and Mutual Fund Units- Unquoted of Rs. 34.38 crores as on 31.03.2008 and Rs. 37.79 crores as on 31.03.2007 are not capable of earning exempt income. On the basis of aforesaid discussion of the facts and taking note of the investment of the legislation as stipulated in Rule 8D(iii) of the IT rules and also after taking note of the decision of Hn’ble Jurisdictional High Court. I consider it proper and appropriate to hold that the term investments as per Rule 8D(2)(iii) would include laying out of moneys in shares, securities and mutual funds. Accordingly, the action of the A.O. in making the disallowance under Rule 8D(2)(iii) is held to be correct and justified. However, while computing the above disallowance, the A.O. is directed to exclude the investments in Equity Shares of Reliance Engineering (Middle East) DMCC of Rs. 3.81 crores and Mutal Fund Units – Unquoted of Rs. 34.38 crores as on 31.03.2008 and Rs. 37.79 crors as on 31.03.2007 which are not capable of earning the exempt income. Thus, the A.O. is directed to restrict the disallowance u/s. 14A r.w.r. 8D to R.s 26,64,777/- out of interest expenditure and re-compute the disallowance out of administrative expenses @ 0.5% of average value of investments excluding investments in equity shares of Reliance Engineering (Middle East) DMCC of Rs. 3.81 crores an Mutual Fund Units – Unquoted of Rs. 34.38 crores as on 31.03.2008 and Rs. 37.79 crores as on 31.03.2007. Thus, the AO should make the verification of the claim of the appellant that these investments are not capable in generating exempt income. After ascertaining the same, the AO should modify disallowance under rule 8D(2)(iii) r.w.s 14A of the Act accordingly. However, addition made by the AO under Rule 8D(2)(iii) is confirmed in toto subject to aforesaid modification in view of appellant’s claim of investment which are not capable in generating exempt income, as illustrated above. With these observations, appellant’s ground of appeal is partly allowed.”
5. Against the above order of CIT(A) both revenue and assessee are in appeal before us.
6. With regard to disallowance of interest under section 14A, Ld. AR invited our attention to the balance sheet, Schedule C indicating secured loan, wherein assessee has taken a term loan from bank amounting to Rs. 500/- crores. As per Ld. AR interest was attributable to the term loan taken from bank and was not invested in securities income from which is exempt from tax. Our attention was also invited to Schedule M indicating interest and finance charges incurred by the assessee during the year amounting to Rs. 45.32 crores out of which interest of Rs. 45.09 crores was on fixed loans. In view of these factual matrix it was contented by the Ld. AR that no disallowance on account of interest is warranted.
7. In addition to Ld. AR also invited our attention to profit of Rs. 143.92 crores earned by the assessee during the year after claim of depreciation of Rs. 86.45 crores, it means there was cash accrual of income to the tune of Rs. 230.37 crores which was available to the assessee for investment in tax free securities. However increase in investment in shares and securities during the year was only Rs. 10.38 crores. As per learned A.R in case of availability of interest free funds in the form of capital and reserve more than the investment made for earning exempt income, no disallowance is warranted in view of the decision of Jurisdictional High Court in case of CIT Vs. Reliance Utilities [313 ITR 340 (Bom)] and in case of HDFC Bank Ltd. [366 ITR 505(Bom)] . Similar view has been taken by coordinate bench in case of Alchemic Financial Services Vs. Addl. CIT(ITA No. 6349/Mum/2011) and in case of Paresh K. Shah Vs. Dy. CIT (I.T. Act No. 8214/Mum/2011). 8. It was also argued by the Ld. AR that strategic investment is required to be reduced from the investment for working out disallowance in respect of other expenditure under Rule 8D(2)(iii). For this purpose reliance was placed on the following judicial pronouncement. - Garware Wall Ropes Limited Vs. Addl. CIT(ITA No. 5408/Mum/2012) - CIT Vs. Oriental Structural Engineers Pvt. Ltd. (Delhi High Court) - M/s JM Financial Limited Vs. Addl. CIT(ITA No. 4521/Mum/2012)
9. In support of the proposition that only those investments are to be considered for disallowance u/s.14A on which dividend is received during the year, reliance was placed on the following judicial pronouncements. ACB India Ltd., v Asst. CIT (374 ITR 108 (Del) Asst. CIT vs. M. Baskaran (ITA No.1717/Mds/2013) CIT vs. Corrtech Energy (P) Ltd., (272 CTR 262 Guj) CIT vs. Holcim India (P) Ltd., (272 CTR 282 (Del) CIT vs. Lakhani Marketing Incl. (272 CTR 265 (P&H) 10. On the other hand Ld. DR relied on the order of the lower authorities. 11. We have considered rival contentions and carefully gone through the orders of authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us. We had also verified the audited balance-sheet, P & L account and its annexure wherein we found that assessee had taken loan of Rs.500 crores from its banks. The terms and condition of utilization of loans / facility taken from the bank clearly stipulated as under:
The Loan/ the Facility shall not be utilized for any of the following purposes: (a) subscription to or purchase of shares / debentures and investment in real estate; (b) repayment of dues of promoters / associate concerns / inter-corporate deposits; (c) for extending loans/ facilities to subsidiary or associate companies or for making any inter-corporate deposits, and (d) for any speculative purposes.
We had also carefully gone through the sanction letter issued by IDBI Bank dt. 08/02/2007 indicating the purpose for which loans was sanctioned and the purpose for which loans could be utilized.
From the record, we found that total interest debited by assessee in its P&L account is Rs.45.32 crores, out of which interest attributable to the term loan of Rs.500 crores taken from the banks works out to be Rs.45.09 crores. Disallowance u/s.14A can be made only with respect to the interest which is attributable to earning of exempt income. In the instant case before us, interest amount other than interest on term loans works to be Rs.23 lakhs i.e., (45.32 crores – 45.09 crores). However, the interest incurred on the loan taken from bank is to be considered u/s.36(1)(iii) and since it is not incurred for earning exempt income, the same cannot be disallowed u/s.14A read with Rule 8D(2)(ii). As per the working of CIT(A), such disallowance of interest works out to be Rs.26,64,777/-. However, nothing was brought on record to controvert the findings of CIT(A). Accordingly, we confirm the action of CIT(A) for restricting the disallowance of interest under Rule 8D(2)(ii) to the extent of Rs.26,64,777/-.
Now, coming to the disallowance warranted under Rule 8D(2)(iii) under which we have to disallow 0.5% of the average investment. However, while working out the disallowance of such expenses, strategic investment and investments not yielding dividend income is required to be reduced from the total investment.
As per the records, such investment works out as under:-
Particulars (Rs.In crores) 31-03-2008 31-03-2007
(i) Total Investments (As per Page 22) 1180.23 1179.85
Less: A. Long Term Strategic Investments (i) Reliance Engineering (Middle East) DMCC 3.81 0.02 (ii) RAL Investment Private Limited 0.02 0.02 (iii) LPG Infrastructure (India) Private Limited 0.02 0.02 (iv) Reliance Exploration Private Limited 500.00 500.00 (v) Anadha Mercantile Private Limited 321.00 321.00 (vi) Anumati Enterprise Private Limited 321.00 1145.85 321.00 1142.06
B. Investments not yeilding Dividend (i) Biral Cash Plus Institutional Premium Growth 0.00 3.86 (ii) ICICI Prudential Institutional Liquid Plan Super 28.88 0.00 Institutional Growth (iii) SBI Magnum Insta Cash Fund - Cash Option - Growth 5.50 0.00 (iv) Templeton India Treasurey Management Account 0.00 34.38 33.93 37.79 Super Institutional Growth Investments earning exempt income 0.00 0.00
It is clear from the above working that after excluding the long term strategic investment and investment not yielding dividend income there remains to be ‘nil’ investment on which disallowance under Rule 8D(2)(iii) can be applied. Applying the proposition of law as cited by Ld. A.R. and referred by us in para 8 to the facts of instance case, we found that no disallowance is warranted under Rule 8D(2)(iii), in so far as after excluding such investment there remains to be nil investment. However, keeping in view the working given by the assessee, we restrict the disallowance to the extent of Rs.14,79,411/-. We direct accordingly.
So far as deletion of disallowance of provision of wealth tax of Rs. 10,40,101/- is concerned we found that issue is squarely covered by the decision of Jurisdictional High Court in case of Echjay Forgings Pvt. Ltd., 351 ITR 15. Respectfully following the same, we do not find any infirmity in the order of CIT(A) for deleting the addition made on account of provision of wealth tax while computing book profit u/s.115JB of the IT Act. 17. In the result, appeal of the Revenue is dismissed whereas appeal of the assessee is allowed in terms indicate hereinabove.
Order pronounced in the open court on 23/11/2016 .