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आदेश/Order
PER ANNAPURNA GUPTA, A.M.
Both the appeals have been filed by the same assessee against the orders passed u/s 250 (6) of the Income Tax Act, 1961 ( hereinafter referred to as 'Act') by the Commissioner of Income Tax (Appeals) Chandigarh, [in short as CIT(A)]. While the appeal in ITA 59/CHD/2015 is in relation to the quantum proceedings and is against order passed by the CIT(A) dated 31.10.2014, the appeal in ITA 413/CHD/2018 is against the action of the Id. CIT(A) in affirming the levy of penalty u/s 271(l)(c) of the Act consequent to the additions made in quantum proceedings vide his order dated 27.02.2018. Since both the issues are inter-related, they were therefore taken up together for hearing.
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We shall first be dealing in the assessee's appeal in quantum proceedings in ITA 59/CHD/2015. he assessee has raised the following grounds of appeal :
1) The order of the CIT(Appeals), Chandigarh is bad in law & on facts. 2) The Ld. CIT(Appeals) has erred in confirming the order passed by AO in invoking the provisions of Sec 14A as there is no nexus between exempt income and interest expenditure. 3) The Ld. CIT(Appeals) has erred in confirming the order passed by AO regarding disallowance of proportionate interest as per the provisions of section 36(1) (in) as fund has been incurred for the purpose of business and there is no diversion of funds. 4) The appellant craves leave to add or amend any ground of appeal. 3. The ground Nos. 1 and 4 are general in nature and need
no adjudication.
Ground No. 2 deals with the issue of disallowance of
expenditure made in relation to earning of exempt income under the
provisions of Section 14A of the Act. Briefly stated the assessee had made
total investments of Rs. 24,56,448/- in shares of various companies.
The Assessing Officer (AO) noted that interest of Rs. 30,52,044/- had been
debited to the Profit & Loss Account on the unsecured loans taken by
the assessee and so he questioned the assessee about disallowance u/s
14A of the Act. The assessee claimed that he had not incurred any
expenditure for earning the exempt income but the AO was not satisfied
with the explanation of the assessee and accordingly, made disallowance of
Rs. 27,09,084/- u/s 14A read with Rule 8D of the Income Tax Rules, 1962. 5. The matter was carried in appeal before the CIT(A) who upheld the
disallowance so made. 6. Before us, Id. counsel for the assessee contended that it had been
pointed out to the CIT(A) that the assessee had sufficient own
funds for the purpose of making the investments calling for no
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disallowance of interest at all. Our attention was drawn to the fact
that the capital balance of the assessee as at the end of the
impugned year i.e. on 31.03.2011 was Rs. 27,39,16,007/- and the profits
earned during the year amounted to Rs. 13,71,78,938/-. Our
attention was drawn to the Balance Sheet of the assessee for the
impugned year placed at Paper Book page No. 91 to 111 reflecting the
above figures. It was further pointed out that even in earlier years, there
was sufficient funds available with the assessee. Our attention was drawn
to this fact as under :
F. Y. Capital as on Profit for the year 31st March 2007-08 Rs. 776.37 lacs Rs. 173.26 lacs (Page No. 42 of Paper Book) 2008-09 Rs. 683.21 lacs Rs. 0.50 lacs (Page No. 53 of Paper Book ) 2009-10 Rs. 1762.41 lacs Rs. 1019.06 lacs (Page No. 71 of Paper Book) 2010-11 Rs. 2739.16 lacs Rs. 1371.79 lacs (Page No. 92 of Paper Book)
The Id. counsel for the assessee contended that the Hon'ble Bombay
High Court in the case of CIT Vs HDFC Bank Ltd. ITA No. 330 of 2012 has held
that, "No disallowance u/s 14A can be made in respect of interest paid on
borrowing if the assessee has sufficient own interest free funds". Reliance
was also placed on the decision of the Hon'ble Bombay High Court in the
case of Reliance Utilities & Power Ltd. 313 ITR 340 and the Hon'ble Gujrat
High Court in the case of CIT Vs Suzlon Energy Ltd. Tax Appeal No. 223 of
2013 . The Id. counsel for the assessee further contended that out of the
total investments made in shares of Rs. 24.56 lacs, only investments of
Rs. 4.24 lacs were capable of earning dividend, while the rest were non-
dividend paying companies where the assessee was one of the promoter as
well as Director and not investor. Detail of the investments made was
filed before us as under:
a. TCS Rs. 1,23,250
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b. Rolta Rs. 341.65 c. DSQ Software Rs. 5180.79 d. Himachal Futuristic Rs. 2,95,246.32 e. Divine Distributors Pvt. Ltd. Rs. 5,93,430/- f. Horizon Fincap Ltd Rs. 14,39,000/-
It was pointed out that out of the above, only investment of Rs. 4.24
lacs in shares of listed companies were capable of earning dividend. It
was, therefore, contended that in any case, the disallowance of
expenses was to be worked out only in relation to those investments as
per Rule 8D(2)(ii). It was also contended that the assessee had in any
case earned dividend income of Rs. 30,000/- during the year and
the disallowance could not have exceeded the said amount. Reliance
was placed on the decision of the Chandigarh Bench of the Tribunal in the
case of ACIT Vs Punjab State Cooperative & Marketing Federation Ltd.
in ITA No. 548/CHD/2011 in support of this proposition.
The Id. DR on the other hand, relied on the order of the lower
authorities contending that the assessee's contention could not be
accepted in view of the explicit provisions of Section 14A of the Act
read with Rule 8D.
We have heard the rival contentions and carefully perused the
orders of the authorities below. We find merit in the contention of
the Id. counsel for the assessee that no disallowance u/s 14A was
warranted in the present case under Rule 8D(2)(ii) on account of
sufficiency of own interest free funds available with the assessee.
The fact that the own funds available with the assessee in the form
of profits made during the year were to the tune of Rs. 13.71 Cr and
in the form of share capital, to the tune of Rs. 27.39 Cr, while the
investment in shares of companies, amounted to a mere Rs. 24.56
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lacs, is not disputed. In the face of the said fact and considering the
position of law in this regard laid down by various Courts as relied
upon by the Id. counsel for the assessee in the case of HDFC Bank Ltd.
(supra) and Reliance Utilities (supra), no disallowance u/s 14A could be
made- of interest where sufficient own funds are available with the
assessee. In view of the same, we delete the disallowance of interest
made by applying Rule 8D(2)(ii) in the present case.
As for the disallowance of other expenses made as per Rule
8D(2)(iii) of the Act, we agree with the contention of the Id. Counsel for
the assessee that firstly the disallowance in any case cannot exceed
the quantum of exempt income earned by the assessee. The Hon'ble
Apex Court in the group of cases with the lead case being Maxopp
Investment Ltd. vs CIT in C. No. 104-109 of 2015 dt.12- 02-2018 dealt
with the case of State Bank of Patiala also wherein it upheld the order
of the Hon'ble Punjab 85 Haryana High Court restricting the
disallowance to the extent of exempt income earned. The relevant
findings of the Hon'ble Apex Court in the said case is as under : 8. " 40. We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT (A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the IT AT"
In view of the same, we held that the disallowance, in any
case, cannot exceed the exempt income which undisputedly is Rs.
30,000/- by way of dividend. Further, we also agree with the Id.
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counsel for the assessee that even while applying Rule 8D(2)(iii), only
those investments which have earned dividend income during the year
have to be taken into action while applying the stipulating affirmation. The
Hon'ble Delhi High Court in the case of ACB Ltd. vs ACIT in ITA
No.615/2014 dt.24-03-15, has categorically laid down this proposition
holding as under :
"The AO, instead of adopting the average value of investment of -which income is not part of the total income i.e. the value of tax exempt investment, chose to factor in the total investment itself. Even though the CIT(Appeals) noticed the exact value of the investment which yielded taxable income, he did not correct the error but chose to apply his own equity. Given the record that had to be done so to substitute the figure of ^38,61,09,287/- with the figure of^3,53,26,800/- and thereafter arrive at the exact disallowance of .05%. 5. In view of the above reasoning, the findings of the IT AT and the lower authorities are hereby set aside. The appeal is allowed"
In view of the above, we hold that the entire disallowance of interest
under Section 14A read with Section 8D(2)(ii) is to be deleted since
the assessee had sufficient own funds for the purpose of making the
impugned investments while the disallowance of other expenses under Rule
8D(2)(iii) is to be restricted to the extent of exempt income earned and is
to be worked out by considering only those investments which have
earned exempt income during the year. The ground of appeal No. 2 is,
therefore, partly allowed.
Ground of appeal No. 3 relates to the disallowance of interest
expenses u/s 36(l)(iii) of the Act Briefly stated the assessee had debited
interest of Rs. 30,52,044/- to the Profit & Loss Account. The AO
noticed that the assessee had invested an amount of Rs. 1,81,59,583/-
in purchase of land and its development in Zirakpur. The AO was
of the view that this investment was not for business
consideration or commercial expediency and accordingly, we
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disallow proportionate interest @ 12% on the investment so made which
was upheld by the CIT(A).
Before us, Id. counsel for the assessee contended that it had
sufficient own funds for the purpose of making the impugned
investment in the form of profits for the year being Rs. 13.171 Cr and
own capital to the tune of Rs. 27.39 Cr and therefore, no
disallowance u/s 36(l)(iii) of the Act was warranted. Reliance was placed
on the decision of the Hon'ble jurisdictional High Court in the case of CIT,
Ludhiana Vs Rakesh Gupta in ITA 37/2014 and on the decision of the
Hon'ble Apex Court in the case of Hero Cycles Pvt. Ltd. Vs CIT(Central)
Ludhiana in Civil Appeal No. 514 of 2008.
The Id. DR on the other hand, relied on the order of the
authorities stating that the disallowance had been rightly made since
the assessee had failed to demonstrate commercial expediency for making
the impugned investment.
We have heard the rival contentions. We are in agreement
with the contention of the Id. counsel for the assessee that no
disallowance of interest was warranted in the present case in view of the fact
that the assessee had sufficient funds which far exceeded the investment
made in land and the presumption in such case was that the own interest
free funds had been used for making the investment. The fact that the
assessee had earned profits to the tune of Rs. 13.71 Cr. during the year is
not disputed and also not in dispute is the fact that the investment in land
amounted to Rs. 1.81 Cr. Therefore, the availability of own interest free funds
with the assessee for making the impugned investment is established beyond
doubt. Further, we agree with the Id. counsel for the assessee that
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the judicial position in this regard as laid down by the jurisdictional High
Court in the case of Shri Rakesh Gupta (supra) and by the Hon'ble Apex
Court in the case of Hero Cycles (supra) is that where sufficient own funds
are available, it is to be presumed that the same have been utilized for
investment. In view of the same, there is no reason for making any
disallowance of interest u/s 36(l)(iii) of the Act and the entire disallowance
made is, therefore, deleted. The ground of appeal No. 3 is, therefore, allowed.
In a fact, appeal of the assessee is partly allowed.
In the result, appeal of the assessee is partly allowed. 19. We shall now take up the appeal of the assessee in ITA
413/CHD/2018. Penalty u/s 271(l)(c) of the Act was levied for
concealing/furnishing inaccurate particulars of income relating to the two
additions made u/s 14A and u/s 36(l)(iii) of the Act in the
quantum proceedings. Since we have deleted the addition made u/s
36(l)(iii) of the Act and also the disallowance made of interest u/s 14A
amounting to Rs. 17,78,886/-, no penalty survives in relation to the same.
As for the disallowance of expenses made under Rule 8(D)(2)(iii) of the Rules,
the same has been directed by us to be re- worked by taking into
consideration only those investments which have yielded dividend income
subject to restriction of the disallowance to the extent of dividend income
earned. The penalty, therefore, at most survives only on this disallowance
upheld. But even the same is not leviable since undisputedly all particulars
relating to the expenses were duly furnished by the assessee and it was only
on account of disallowing claim of the assessee by applying
Rule prescribed under law in this regard that the addition was
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made. The assessee cannot in such circumstances be charged with having concealed/furnished any inaccurate particulars of income so as to attract levy of penalty u/s 271(1)© of the Act. The penalty so levied is directed to be deleted. The appeal of the assessee therefore is allowed.
In the result, ITA 59/CHD/2015 is partly allowed and ITA 413/CHD/2018 is allowed. Order pronounced in the Open Court on 17.12.2018
Sd/- Sd/-
(संजय गग�) (अ�नपूणा� गु�ता) (SANJAY GARG) (ANNAPURNA GUPTA) �या�यक सद�य/ Judicial Member लेखा सद�य/ Accountant Member आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar