ACIT, CHENNAI vs. EIH ASSOCIATED HOTELS LTD., CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER

During the course of assessment, it was noted by the Assessing Officer that assessee had disclosed dividend income of �72,403/- from investment in mutual funds and had claimed it exempt u/s.10(35) of the Act. Upon above income, assessee had calculated a sum of �10,101/- as expenditure incurred and made a suo-motu disallowance.

However, as per Assessing Officer CBDT’s Circular No.5/2004, dated 11.02.2014 did not make any differentiation between investments yielding dividend income and investments not yielding dividend

ITA Nos.622 & 662/2016. :- 3 -: income. According to him all investments of the assessee had to be considered for working out the expenditure incurred for earning exempt income, as prescribed under Rule 8D. Disallowance was worked out by the Assessing Officer by applying Rule 8D(2)(ii) for interest and Rule 8D(2) (iii) for indirect expenditure. While applying these rules, he worked out the average investments including investments made in the subsidiaries. Disallowance under Rule 8D(2)(ii) came to �5,40,30,988/- and that Rule 8D(2)(iii) came to �42,80,300/- Average investments considered while calculating these disallowance came to �85,60,60,000/-.

Aggrieved, the assessee moved in appeal before ld. 4.

Commissioner of Income Tax (Appeals). Contention of the assessee before ld. Commissioner of Income Tax (Appeals) as under:-

‘’During the concerned assessment year the appellant invested Rs.8,39,90,OOO/- in lass making 100% subsidiary company namely Island Hotel Maharaj Ltd. (IHML)

The investments made by the assessee in. the 100% subsidiary company were not on account of investment for earning capital gains/dividend income. Such investments were made by the assessee to promote subsidiary company into the hotel industry and were on account of Business expediency and the dividend thereform is purely incidental.

IHML is a . loss making company and there can be no dividend from investments. The financial results of IHML show that the company has been making huge losses in. pas: at: well as subsequent years. Details of losses (Profit Before Tax) incurred by the company are as under: (page no.194-203 of Paper Book).

ITA Nos.622 & 662/2016. :- 4 -:

Assessment Year Profit/(Loss) before Tax (Rs.) 2006-07 (Rs.4,02,86,623) 2007"08 (Rs.3,84,70,069) 2008-09 (Rs.2,32,55,177) 2009-10 (Rs.2,94,S9,949 ) 2010-11 (Rs.32,645,134) 2011-12 (Rs.29,728,690) I

From the perusal of the above table indicating the financial results IHML, it is clear that the company would not be delivering profits in the near future. Further, the Companies Act, 2013, clearly states that a company cannot declare dividend if it has carried forward losses during the relevant assessment years for which it wishes to declare any dividend. Hence, the investment was not made for earning any exempt dividend income. In subsequent year i.e: A. Y.2012-13 the said loss making subsidiary was merged with the appellant company. This indicates that the investment made in the above mentioned company was 110t for t-he purpose of earning dividend’’.

Ld. Commissioner of Income Tax (Appeals) after considering 5. the above contention noted that this Tribunal in assessee’s own case for assessment year 2008-09 in and 1624/Mds/2012 dated 17.07.2013 had directed exclusion of investments in subsidiaries while working out disallowance u/s.14A r.w.r. 8D. As per the ld. Commissioner of Income Tax (Appeals), for impugned assessment year also investments in subsidiaries had to be excluded from value of investments while applying Rule 8D of the Act. Ld. Commissioner of Income Tax (Appeals) also directed the Assessing Officer to consider

ITA Nos.622 & 662/2016. :- 5 -: the reworked disallowance alone, while arriving at the Minimum Alternative Tax u/s.115JB of the Act.

Now before us, Revenue is in appeal against the direction of 6. ld. Commissioner of Income Tax (Appeals) to exclude investments in subsidiaries while computing disallowance under Rule 8D. As against this, assessee in its appeal is aggrieved on part sustenance of disallowance under Rule 8D. Assessee has also raised a grievance that investment in one particular company called M/s. Mercury Travels Limited was not directed to be excluded. One other ground also appears in assessee’s appeal which assails invocation of Rule 8D without expressing dissatisfaction over the suo-motu disallowance of �10,101/- made by the assessee.

Ld. Departmental Representative submitted that law did not 7. allow exclusion of investments in subsidiary companies while applying Rule 8D. Reliance was placed once again on the CBDT Circular No.5/2004 (supra). Further, as per ld. Authorised Representative, ld.CIT(A) erred in directing such exclusion even while working out profits for levying MAT u/s.115JB of the Act. However, as per ld. Departmental Representative, ld. Commissioner of Income Tax (Appeals) was justified in holding that disallowance was required both under Rule 8D(2)(ii) and Rule 8D(2)(iii).

ITA Nos.622 & 662/2016. :- 6 -:

Per contra, and in support of its own appeal, ld. Authorised 8.

Representative submitted that issue whether investments in subsidiary companies were to be excluded or not, had come up before this Tribunal in assessee’s own case for assessment year 2008-09. As per ld. Authorised Representative, the Tribunal had confirmed the order of the ld. Commissioner of Income Tax (Appeals) holding that investments in subsidiary companies were to be excluded while working out the disallowance under Rule 8D. As per ld. Authorised Representative dividend earned from investments in subsidiaries was purely incidental to such investments. However, as per ld. Authorised Representative, ld. Commissioner of Income Tax (Appeals) erred in not directing exclusion of investments in one particular subsidiary called M/s. Mercury Travels Limited. In any case as per the ld. Authorised Representative, without expressing dissatisfaction, over the suo motu disallowance made by the assessee, ld. Assessing Officer could not had invoked Section 14A. Reliance was placed on the judgment of Hon’ble Delhi High Court in the case of M/s.Joint Investments Pvt. Ltd vs. CIT 372 ITR 694. Further as per ld. Authorised Representative disallowance of any thing more than the exempt income was against law.

working out disallowance under Rule 8D had come up before this Tribunal in assessee’s own case for assessment year 2008-2009 wherein the Tribunal held has under:-

‘’We are of the considered opinion that the investments made by the assessee in the subsidiary company are not on account of investments for' earning capital gains or dividend income. Such investments have been made by the assessee to promote subsidiary company into the hotel industry. A perusal of the order of the CIT(Appeals) shows that out of total investment of Rs.64,18,19,7751-, Rs.63,31,25,715/- is invested in wholly owned subsidiary. The fact supports the case of the assessee that the assessee it; not into the business of investment and the investments made by the assessee are on account of business expediency. Any dividend earned by the assessee from investment in subsidiary company is purely incidental. Therefore, the investment made by the assessee in its subsidiary an: 1"£01" to be reckoned for dis-allowance uls. 14. r.w.r 8D. The Assessing officer is directed to re-compute the average value of investment- under the provision of Rule BD after deleting investments made by the assessee in subsidiary company. Accordingly, this ground of appeal of the assessee is partly allowed and that of the Revenue is dismissed. The findings of the CIT(Appeals) on the issue are accordingly modified’’ Now the question that remains is whether a disallowance under Rule 8D(2)(ii) could have been made. Rule 8D(2)(ii) is reproduced hereunder:-

(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :- (i) ……………………… ; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year is not directly attributable to any particular incomeor receipt, an amount computed in accordance with the following formula, namely :- B

ITA Nos.622 & 662/2016. :- 8 -:

A X--- C Where A =amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ; B =the average of value of investment, income from which does not or shall not form 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 ; C =the average of total assets as appearing in the balance- sheet of the assessee, on the first day and the last day of the previous year ; (iii)………………… For applying rule 8D(2)(ii), it is necessary that assessee should have incurred expenditure by way of interest which is not directly attributable to any particular income or receipts. Ld. Assessing Officer had applied this rule mechanically without verifying whether any part of the total interest expenditure incurred by the assessee was directly attributable to any particular receipts or income. Only that expenditure which was not so attributable could be subject to disallowance under Rule 8D(2)(ii). No doubt ld. Authorised Representative has made a submission that ld. Assessing Officer had not expressed his dissatisfaction on the claim that expenditure earned for claiming exempt dividend of �72,403/- was �10,101/- only. However, this claim has to be considered after working out the actual investments made

ITA Nos.622 & 662/2016. :- 9 -: by the assessee during the relevant assessment previous year, after excluding the investments made by it in its subsidiaries. This aspect was also not verified by the lower authorities.

opinion that the quantum of disallowance u/s.14A has to be re-worked by the ld. Assessing Officer. Needless to say, what can be considered for working out the profit on which Sec. 115JB of the Act is only the actual disallowance made under Rule 8D and nothing more. We therefore remit the matter back to the file of the ld. Assessing Officer for correct quantification of the disallowance under Rule 8D.

Order pronounced on Friday, the 28th day of October, 2016, at Chennai.