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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI AMARJIT SINGH
सुनवाई की तायीख / Date of Hearing : 05.10.2016 घोषणा की तायीख /Date of Pronouncement : 05.10.2016 आदेश / O R D E R PER D. KARUNAKARA RAO, AM: There are two appeals under consideration. Both the appeals are filed by the Revenue involving the assessment years 2008-09 and 2009-2010. Since, the issues raised in both the appeals are identical , therefore, for the sake of convenience, they are clubbed, heard combinedly and disposed of in this consolidated order. Appeal wise adjudication is given in the following paras of this order.
Since, the grounds raised
in both the appeals are identical, for the sake of reference and adjudication purpose, we shall take up the grounds raised in appeal (AY 2008-09) and they read as under:-
1. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in applying section 14A r.w. Rule 8D when issue at hand is whether there is diversion of borrowed funds to subsidiary company or not and if yes, whether assessee has been able to prove „commercial expediency‟ or not.
2. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in applying section 14A r.w. Rule 8D when disallowance out of expenditure on account of exempt income was not the issue at hand. The CIT (A) misdirected herself in applying section 14A r.w. Rule 8D to facts of the case.”
Briefly stated relevant facts of the case are that the assessee is engaged in the business of „real estate and infrastructure development‟. Assessee filed the return of income for the AY 2008-09 declaring the total loss of Rs. 2,50,79,391/- which is subsequently revised declaring the total loss of Rs. 2,60,10,533/-. Assessment was completed u/s 143(3) of the Act and the assessed income was determined at Rs. NIL. In the assessment, AO disallowed interest expenditure of Rs. 2,50,74,000/- claimed by the assessee u/s 36(1)(iii) of the Act. Aggrieved, assessee carried the matter in appeal before the first appellate authority.
During the proceedings before the CIT (A) after considering the submissions of the assessee, CIT (A) applied the provisions of section 14A read with Rule 8D for the purpose of working out of the disallowance of expenditure. He further held that this is the case where the borrowed funds are used for other than the business purposes of the assessee, in which case, the interest on such borrowed funds is not deductible. Para 3.3 of the CIT (A)‟s order is relevant in this regard. CIT (A) also relied on the decision of the AO in the earlier AYs and partly allowed the appeal. Aggrieved, assessee is in appeal before the Tribunal by raising the above mentioned grounds.
During the proceedings before us, at the outset, Ld Counsel for the assessee bringing our attention to the order of the Tribunal in assessee‟s own case for the AY 2005-06 in dated 7.4.2016 and mentioned that an identical issue came up for adjudication before the ITAT and the Tribunal granted relief vide paras 5 and 6 of the said Tribunal‟s order (supra). It is prayed before us that considering the commonality of the issues raised by the Revenue in the present appeals as well as in the said appeal decided by the Tribunal for the AY 2005-06, the ratio laid down in the said Tribunal‟s order is required to be followed.
On the other hand, Ld DR for the Revenue relied on the order of the AO.
We have heard both the parties and perused the orders of the Revenue Authorities as well as the cited decision of the Tribunal (supra) in assessee‟s own case for the AY 2005-06. The only issue involved in these appeals relate to if the provisions of section 14A read with Rule 8D and of section 36(1)(iii) of the Act are mutually exclusive or not? In this regard, on perusal of the said decision of the Tribunal (supra), we find, vide paras 5 and 6 the Tribunal granted relief on identical issue. Considering the commonality of the issues raised in the appeals, we find it relevant to extract the said paras for the sake of completeness of this order and the same read as under:-
5. We have further noticed that while deleting the addition / disallowance u/s 14A, Ld CIT (A) on relying the order of CIT (A) in assessee‟s own case for the AY 2003-2004, 2004-05 and 2006-07, relied on the following observation: “I have considered the submissions. The issue of disallowance u/s 36(1)(iii) has become irrelevant after introduction of section 14A and a notification of Rule 8D u/s 14A expenditure incurred in relation to exempt income is not allowable. It cannot be said that no expenditure is attributable in relation to income or potential income by way of dividends. Even if, there is some business purpose behind the investment made in M/s. Corbel Estate, the fact remains that income generated out of investment is in the form of dividends which is not taxable. The issue then is whether any expenditure has been incurred in relation to such exempt income. Rule 8D has been notified u/s 14A. This Rule applies either when the assessee claims that no expenditure has been incurred or when the AO and the assessee disagree on the amount of expenditure. This Rule provides a uniform and standard method for determining the amount of expenditure incurred in relation to exempt income. The operation of this rule has been declared as retrospective by the Special Bench of the ITAT in Daga Capital Management (117 ITD 169). It has also been held in the same case that expenditure has to be disallowed even if no income by way of dividend is earned during the year. In view of the above, Rule 8D has to be applied in the case of the appellant and the proportionate expenditure in relation to exempt income determined. The AO has followed a method which is not fully consonant with the method provided in Rule 8D. The AO is directed to determine amount of expenditure incurred in relation to exempt income by applying the method prescribed in Rule 8D. The disallowance of proportionate expenditure determined in each year according to the above Rule would be the amount of disallowance that is confirmed. Any amount of disallowance which is higher than the amount computed as per Rule 8D should be treated as deleted.
6. Ld CIT (A) (sic) perused the order, on the basis of principle of consistency and directed to the AO determine the amount of expenditure incurred in relation to the exempt income. Hence, we do not find any illegality or infirmity in the order of the CIT (A). Hence, the appeal filed by the Revenue is dismissed.”
From the above, it is evident, when there is a claim of interest expenditure, the disallowance of the same is required to be done as per the provisions of section 14A read with Rule 8D and disallowance should not be done u/s 36(1)(iii) of the Act.