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Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE
Before: SHRI VIJAYPAL RAO & SHRI INTURI RAMA RAO
O R D E R Per INTURI RAMA RAO, AM : These cross appeals by the revenue as well as the assessee are directed against the order of the ld.CIT(A)-I, Bangalore, dated 25/8/2014 for the assessment year 2010-11.
The assessee raised the following grounds of appeal in its appeal bearing ITA No.1429/Bang/2014: & 1565/Bang/2014 Page 2 of 10 1) The Learned Commissioner of Income Tax erred in confirming the addition of 0.5% of tax-exempted investment under the provisions of section 14A r.w.s. 8D of the Income Tax rules amounting to Rs. 5,25,381/- 2) The Learned CIT (Appeals) ought to have observed that total exempted income is only Rs. 29,000/- and therefore was wrong in disallowing Rs. 5,25,381/- as expenditure incurred to earn Rs. 29,000/- of income. 3) The Learned Commissioner of Income Tax failed to understand that the income is derived only out of investment of Rs. 92,800/- comprising of 5,800 equity shares of Union Bank of India which was held by the Assessee for the past several years. 4) The Learned Commissioner of Income Tax failed to note that as there was no investment made during the year, the dividend is received without incurring any expenditure and no expenditure should have been disallowed. 5) However, without conceding, the disallowance should have been restricted to only the dividend received based on the decision of Hon'able ITAT, Chandigarh Bench in the case of ACIT v/s. Punjab State Co- operative Marketing Federation Ltd. (25 Taxman.com 434) and Sahara (India) Finance Corporation Ltd. v/s. DCIT (41 taxman.com 251) ITAT, Delhi. 6) For the above and any other ground at the time of hearing of the appeal, the Appellant prays that the Appeal be allowed.
The revenue raised the following grounds of appeal its appeal bearing ITA No.1565/Bang/2015:
1) The order of the Ld.C1T (A) is opposed to law and the facts of the case. 2) On the facts of the case and on law, the Ld.CIT(A) erred in restricting the disallowance of expenses considering the investments being made out of interest free funds, when the nexus between the interest expenditure incurred for earning the exempt income was not established during the & 1565/Bang/2014 Page 3 of 10 assessment proceedings, which attracted the applicability of provision of Sec. 14A read with Rule 81D. 3) For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 4) The appellant craves for permission to add, modify or delete the grounds of appeal mentioned above at the time of hearing the case with a prayer to restore the order of AO.
4. Briefly the facts of the assessee are as under: The assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture and sale of Indian made foreign liquor. Return of income for the assessment year 2010-11 was filed on 9/10/2010. The said return of income was revised on 17/11/2010 and revised for the second time on 31/03/2011 declaring total income of Rs.2,17,07,860/-. Against the said return of income, assessment was completed u/s 143(3) by the DCIT, Circle 11(4) vide order dated 25/03/2013 on a total income of Rs.3,03,12,532/-. While doing so, AO made a disallowance of Rs.80,93,286/- under the provisions of sec.14A of the Income-tax Act,1961 [‘the Act’ for short] with which we are concerned in the present appeals.
During the course of assessment proceedings, the AO observed that the assessee-company had earned dividend income of Rs.29,000/- during the previous year relevant to assessment year under consideration. The said dividend income was claimed & 1565/Bang/2014 Page 4 of 10 as exempt under the provisions of the Act. The AO, further noticed that the assessee-company incurred total interest expenditure of Rs.22.08 crores, details of which are as under:
Term Loan 6,27,95,734 Interest on working capital 13,51,61,358 Interest others 2,33,94,759 Interest subject to disallowance 16,830 Total 22,13,68,681 ========== The AO inferred that the amount of Rs.15,85,72,947/- interest incurred on working capital and other...should be treated as interest and subjected to disallowance u/s 14A read with rule 8D(2)(ii) apart from disallowance of Rs.5,25,381/- and thus made a total disallowance of Rs.80,93,286/-.
Being aggrieved by the assessment order, an appeal was preferred before the CIT(A) who, vide impugned order dated25/08/2014 deleted the addition made under the provisions of sec.14A read with rule 8D(2) in respect of Rs.75,67,905/- by holding as follows: “3.4 I have considered the appellant's submission as put forth above. The AO disallowed expenditure u/S 14A r.w. rule 8D of IT Rules of Rs. 80,93,286 as against the exempt income of Rs. 29,000. The appellant's contentions is that disallowance to be restricted to Rs. 29,000 which is the income derived out of exempt investment. In support placed reliance on the following case laws:- (i) ACIT vs. Punjab State Co-operative Marketing Federation Ltd. (25 Taxmann.com 434) (ITAT-Chandigarh) & 1565/Bang/2014 Page 5 of 10 (ii) Sahara (India) Finance Corporation Ltd. vs. DCIT (41 Taxmann.com 251)(ITAT Delhi). 3.5 A perusal of the annual statement of Account for year ending 31.03.2009 and 31.03.2010 following facts emerged. As on As on Particulars 31.03.2010 31.03.2009 Share capital 22,81,28,330 19,00,80,000 Reserves & Surplus 23,60,18,057 24,48,24,713 Total 46,41,38,387 43,49,04,713 Loan Funds Secured loan 93,48,17,250 100,80,76,041 Unsecured loan 74,92,70,818 75,11,41,404 Total 168,40,88,068 1,75,92,17,445 Investments 28,76,32,516 28,76,32,516
3.6 From the chart given above, the appellant having non- interest bearing fund of Rs. 46,41,38,387 as on 31.03.2010 and Rs. 43,49,04,713 as on 31.03.2009 thus it could be presumed that investment of Rs. 28,76,32,516 was made out of the interest free funds. Therefore, no interest attributable in making exempt investment hence not disallowable. Further, it was observed that investment appears as on 31.03.2009 for Rs. 28,76,32,516 and the same investments appears as on 31.03.2010 it shows that no new investments were made during the previous year relevant to A.Y. under consideration. 3.7 Further, the appellant pleaded that disallowance should be restricted to Rs. 29,000 being earned dividend income during the previous year relevant to A.Y. under consideration by relying on the decision in the case of ACIT vs. Punjab State Co- operative Marketing Federation Ltd. (supra) and Sahara (India) Finance Corporation Ltd. vs. DCIT (supra). The conclusion of the decision of the aforesaid case laws is that disallowance of expenditure u/s 14A cannot exceed the exempt income earned. However, a plain reading of sub-section (3) of section 14A of the Act states that the provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act and accordingly method of working out of such expenditure has been formulated under rule & 1565/Bang/2014 Page 6 of 10 8D of I.T. rules. However section does not envisage restriction of disallowance except as applicable under rule 8D of I.T. Rules. In Chennai invest Ltd. vs. ITO (2809) 121 ITD 318/124 TTJ (Delhi-Trib) 577 (SB) held that disallowance under section 14A can be made even in a year in which, no exempt income has been earned or received by the assessee, thus proportionate interest pertaining to investment for earning of dividend was disallowable even though exempt income (dividend) was not earned during the year. ”
However, the ld.CIT(A) confirmed the disallowance made under rule 8D(2)(ii) of Rs.5,25,381/- holding that the contention of the assessee-company that no expenditure was incurred to earn dividend income cannot be accepted. Aggrieved by the deletion of addition of Rs.75,67,905/- u/s 14A r.w.rule 8D(2)(ii), revenue is in appeal before us in CIT(A) confirming the addition of Rs.5,25,381/- under the provisions of rule 8D(2)(iii).
Before us, learned AR of the assessee submitted that during the previous year relevant to assessment year under consideration, no fresh investments were made. All the investments are carried forward from the earlier years. He had filed a chart, from perusal of which clearly shows that no fresh investments were made during the year under consideration. He further submitted that the assessee-company earned dividend income of Rs.29,000/- on the equity shares of Union Bank of India which was invested during the previous year relevant to assessment year 1989-90 and the balance of investments are & 1565/Bang/2014 Page 7 of 10 made of Rs.28,75,39,716/- in the equity shares of Chitalia Distilleries which is an 100 percent subsidiary of the assessee- company. Investments are made only to promote business interest of the assessee-company. He has drawn our attention to the chart filed during the course of hearing wherein it was shown during previous year ended 31/3/2009 paid up capital and reserve and surplus stood at Rs.43,49,04,713/- and as on 31/3/2010 it was Rs.46,41,38,387/- wherein value of investments made in subsidiary company i.e. Chitalia Distilleries is Rs.28,75,39,716/-. Therefore, he submitted that the investments were made out of free reserves of the company and not out of borrowed funds. Hence, no disallowance of interest under any sub-rule of 8D(2) can be made. In respect of disallowance under sub-rule 2(iii) of rule 8D, contention of the assessee is that no expenditure was incurred to earn dividend income of Rs.29,000/-. He placed reliance on the following decisions:
i. DCIT vs. Tejas Networks Ltd.(55 Taxman 55)(ITAT, Bang.) and ii. DCIT vs. Subramanya Contracts & Development Co.Ltd. (58 Taxman 219)(ITAT, Bang.)
On the other hand, learned Departmental Representative vehemently opposed the submissions of the learned AR and pleaded that unless nexus is established between investments and pre-reserve, disallowance has to be confirmed. As regards applicability of rule 8D(2)(iii), the contention of the learned & 1565/Bang/2014 Page 8 of 10 Departmental Representative is that no dividend income was earned without incurring any expenditure and therefore, he submitted that the working adopted by the AO should be adopted.
We have heard rival submissions and perused material on record. The only issue in the appeal filed by the revenue is that whether the ld.CIT(A) was justified in deleting addition of Rs.75,67,905/- under the provisions of rule 8D(2)(ii) of the Act. The ld. CIT(A) deleted the addition after considering the fact that reserves and surplus are more than investments in the year in which investments are made i.e. 2009-10. Therefore, he concluded that a presumption should be drawn that only free funds are utilised for making investments and therefore, held that no disallowance should made under the said provision. The reasoning of the ld.CIT(A) is supported by the following decisions: i. CIT vs. Hero Cycles Ltd. (323 ITR 518) ii. CIT vs. Gujarat Industries Ltd. (218 Taxman 142); and iii. CIT vs. Kribhco (349 ITR 618) and iv. Reliance Utility and Power Ltd. (313 ITR 340)
In the abovementioned cases, it has been held that it should be presumed that the assessee used own funds for making investments where assessee had both own funds as well as borrowed funds. The ld.CIT(A), on the same parity of reasoning, directed the AO to delete the addition of Rs.75,67,905/- under & 1565/Bang/2014 Page 9 of 10 rule 8D(2)(ii). Therefore, we do not find any reason to interfere with the order of the ld.CIT(A). Hence, the appeal filed by the revenue is dismissed.
Assessee’s appeal: 10. The only issue is whether any disallowance is called for under rule 8D(2)(iii) or not. The contention of the assessee that no expenditure was incurred to earn dividend income of Rs.29,000/- was not accepted by the AO. As held by the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. Vs. CIT (347 ITR 272) it is not the purpose of the expenditure which is relevant. Once exempt income is earned, it means that some expenditure being incurred in relation to the exempt income which should be disallowed by applying formula laid down in rule 8D(2)(iii). Therefore, action of the AO is correct in applying rule 8D(2)(iii) but the amount of disallowance should be restricted to the dividend income.
In the result, appeal of the assessee is partly allowed for statistical purposes.