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Income Tax Appellate Tribunal, “C”, BENCH KOLKATA
Before: SHRI A.T.VARKEY, JM & DR. A.L.SAINI, AM
O R D E R
Per Dr. Arjun Lal Saini, AM:
The captioned appeal filed by the assessee, pertaining to Assessment Year 2009-2010, is directed against the order passed by ld. Commissioner of Income Tax (Appeals)-XII, Kolkata, in Appeal No.212/XII/12/11-12, dated 23.09.2013, which in turn arises out of an order passed by the Assessing Officer (AO) Under Section 143(3) of the Income Tax Act 1961, (in short the ‘Act’), dated 16.11.2011.
Brief facts of the case qua the assessee are that the assessee is a non-banking financial company, filed its original return of income on 21.09.2009 declaring total income of Rs.1,46,66,807/- and revised return of income on 19.10.2009 declaring total income of Rs.1,98,36,700/-. Thereafter the case of the assessee was selected for scrutiny and the AO framed the assessment u/s.143(3) by making various disallowances.
Aggrieved from the order of ld. Assessing Officer, the assessee filed an appeal before the ld. CIT(A), who has also confirmed the additions made by the AO, by observing the followings :-
5.2.3 DECISION: I have carefully considered the submission put forth on behalf of the appellant along with the supporting details/documents furnished & case laws relied upon, perused the facts of the case including the AO's observation in this regard and other materials brought on record. It is contended that the appellant has made investments out of the interest free fund available with it which could be found from the Balance Sheet and contended that apparently, the investment of 'Rs.20,54,54,104/- is well covered by appellant's own fund of Rs. 47.78 Crore and without asserting a word on nexus between borrowed fund and the investment in shares & securities, the AO disallowed a sum of Rs.48, 16,672/-fn a mechanical manner. By placing reliance to the decision of the jurisdictional ITAT, Kolkata in the case of DClT vs. Trade Apartment (supra), it is submitted that the appellant during the year has received interest amounting to Rs. 4,39,06,406/- and paid interest of Rs.1,13,63,372/- and as such, the appellant credited net interest income of Rs.3,25,43,034 to its P&L Account and argued that when the interest income credited to P&L account exceeded the interest expenditure incurred by the appellant, no interest expenditure was left which could be disallowed u/s 14A of the Act. It is also brought to my notice that the order passed in the case of DCIT vs. Trade Apartment has also been followed by the Hon'ble ITAT, Kolkata in the case of Bishwanath Pasari Vs. ACIT in ITA No. 1682/Kol/2011. Further by referring to the order of the Hon'ble High Court of Calcutta in the case of CIT Vs Britannia Industries Ltd. (supra) the A/R contended that when assessee has sufficient interest free own fund, it has to be presumed that the payment was made out of assessee's own fund and no portion of the interest can be disallowed for the same. It is further submitted that the AO himself allowed the expenditure incurred by the appellant by way of interest in the subsequent Assessment Year 2010-11. It is, thus, contended by the A/R that the appellant has credited net interest of Rs.3,25,43,034/- to its P&L Account during the relevant year and thus, no disallowance of the interest can be made in view of the orders of the Hon'ble ITAT, Kolkata in the cases of Trade Apartment (Supra) & Bishwanath Pasari (Supra) referred above under Rule-8D(2) (ii)of the I. T. Rules,1962. I agree with the contention of the A/R as it has been observed that there is no net interest expenditure, in the instant case of the appellant, upon setting off of the interest credited to profit and loss account and therefore, I am of the view that no part of interest debited can be disallowed as attributable to earning tax free dividend. Hence, the AO is directed to delete the disallowance of interest amounting to Rs. 37,51,334/- made by him in the assessment order on this account. As regards to the disallowance made under Rule 8D(2)(iii) of the I.T. Rules,1962 of RS.10,01,928/- being 0.5% of the average investment, it is submitted that the Hon'ble ITAT, Kolkata in the case of REI Agro Ltd. -Vs- DCIT(supra) has held that for making disallowance u/s 14A read with rule 8D in respect of the income which is exempted & does not form part of the total income, the only investment which has given rise to the exempted income should be taken into consideration and not the entire investment made by the assessee. Thus, in view of the above order of the Hon'ble ITAT, Kolkata, it is contended that during the Assessment Year under consideration, out of the total Investment in shares of Rs.20,54,54,104/-, only certain shares have yielded dividends of Rs.2,75,347/- and therefore, as such, in the case of the appellant, the average value of investment would be computed after taking into account the investment which has given rise to the exempted income only. In support of this contention, the appellant furnished a copy of the ITAT's order for perusal and furnished a detailed computation of average investment to be considered for working out the disallowable expenses to be made u/s 14A of the Act taking into account only those value of the investments which have given rise to the exempted income only during the relevant previous year.
On perusal of the details of working made and furnished on the above basis, it is found that in the instant case of the appellant, the average value of investment worked out at Rs.3,40,92,838/- (instead of Rs.14,59,65,365/- as per the AO) which need to be taken into account for the purpose of computing disallowance under Rule 8D(2) (iii) and thus, 0.5% of the average value of such investment of Rs.3,40,92,838/- comes to Rs.1,70,464/-. Thus, the disallowance u/s 14A of the Act under Rule 8D(2) (iii) stated to be restricted to Rs.l,70,464/-. However, the details of the working furnished to arrive at this figure by the appellant in this respect requires verification from the records.
In the light of the above discussion & findings, perusing the entire facts of the case and the judicial pronouncements as above, the AO is directed to delete the disallowance of interest of Rs.37,51,334/- made under Rule 8D(2)(ii) in full since no borrowed fund was utilized for the purpose of investment and the appellant has credited net interest of Rs.3,25,43,034/- into its profit & loss as discussed above. The AO is further directed to restrict the disallowance made of Rs.10,01,928/- under Rule 8D(2) (iii) to Rs.1,70,464/- as per the above working furnished by the appellant after due verification of the same. Thus, this ground of appeal is partly allowed.”
Not being satisfied with the order of ld. CIT(A), the Revenue is in appeal before us and has taken the following grounds of appeal :-
1. “That on the facts and in the circumstances of the case and as per law Ld. CIT(A) erred in allowing the / expenditure for raising the additional shares from market amount to Rs.1,10,64,309/- as Revenue Expenditure." 2. "That is the facts and in law of the case the Ld. CIT(A) erred in deleting the addition made the AO u/s 14A read with rule 8D amounting Rs.10,01,928/- expenditure attributable for earning exempted income." 3. "That in the facts and in law the Ld. CIT(A) erred in restricting the disallowance amount to Rs. 1,70,127/- by bringing down the average value of investment which is not in accordance with Sec. 14A read with Rule BD." 4. "That on the facts and in the circumstances of the case and as per law Ld. CIT(A) erred in allowing the interest expenditure amounting to Rs. 37,51,334/- which was incurred in relation to the exempted income. The Ld. CIT(A) also erred in contradicting the observation made by the AO that the assessee did not offer any expenses related to exempted income and as such expenses has been determined by the AO as prescribed in Rule 8D."
5. Ground No.1 Expenditure for raising the additional shares from market amount to Rs.1,10,64,309/- as Revenue Expenditure 5.1 Ld. AR for the assessee has submitted before us that the management of the company had planned to raise funds for the business of the company through Initial Public Offering (IPO) as per board resolution dated 03.09.2007. Accordingly it had appointed merchant banker and legal advisor and submitted a draft Red Herring Prospectus (DRHP) with SEBI, the company received the approval from the SEBI.
The condition was that the company should open the issue within three months from the date of issue of letter. However, the company did not bring out the IPO due to bad market conditions/environment. It stated that since the IPO did not materialized and therefore the expenses was not towards IPO and the company did not get any benefit of enduring nature.
Since there was no benefit of enduring nature the expenses were debited as revenue expenses in the profit and loss account. The ld.AR for the assessee has also relied on the following judgments:
(i) The CIT-II, Mumbai Vs. M/s Nimbus Communications Limited, of 2010, dated 08-12-2011 ( Bom.H.C):
“2. The finding of fact recorded by the Income Tax Appellate Tribunal is that there is dispute that the assessee has in fact incurred the expenditure and that on account of the aborted public issue offer, no new asset has come into existence and consequently there is no question of the assessee getting any enduring benefit. With the approval of SEBI, the assessee was to increase the share capital and thereby promote its business activity. However, the same got aborted due to reasons beyond its control. In these circumstances, in view of the decision of this court in the case of Commissioner of Income Tax V/s. M/s Essar oil Limited, Income Tax Appeal (L) No. 921 of 2006 decided on 16th October 2008, in our opinion, no fault can be found with the decision of the Income Tax Appellate Tribunal in allowing the aborted share issue expenditure under section 37 of the Income Tax Act,1961.”
(ii) Binani Cement Ltd.[2015] 60 Taxmann.com 384 (Calcutta):
“11Following the judgment in the case of A.Gajapathi Naidu (supra) the question to be asked is when did the expenditure claimed by way of deduction arise? There would have been no occasion to claim the deduction if the work-in- progress had completed its course. Because the project was abandoned the work-in-progress did not proceed any further. The decision to abandon the project was the cause for claiming the deduction. The decision was taken in the relevant year. It can therefore safely concluded that the expenditure arose in the relevant year.”
5.2 On the other hand, the ld DR for the Revenue has primarily relied on the stand taken by the ld. Assessing Officer. In the assessment order, the Assessing Officer held that the expenses incurred for bringing out an IPO is a capital expenses as per judgment of Hon`ble Supreme Court of India in the case of Brooke Bond India Ltd.Vs. CIT reported in 225 ITR 798.
5.3 Heaving heard the rival submissions, perused the material available on record, we are of the view that there is merit in the submissions of the assessee, as the proposition canvassed by the ld AR for the assessee are supported by the judgments of various High Courts and facts narrated by him above. As ld AR pointed out that the company did not bring out the IPO due to bad market conditions/environment, therefore, the IPO did not materialize and therefore the expenses was not towards IPO and the company did not get any benefit of enduring nature. Therefore, the expenditure is revenue in nature. Hence, this ground of appeal of the Revenue is dismissed.
5.4 In the result, the appeal filed by the Revenue on this ground is dismissed.
Ground No. 2, 3 and 4 relate to addition made by Assessing officer Under Section 14A read with Rule 8D (2) (ii) and Rule 8D (2) (iii). The Ld. CIT (A) deleted addition/Partly deleted.
The ground No.2, 3 and 4 raised by the Revenue relate to section 14A read with Rule 8D, Therefore, these are being adjudicated together.
6.1 The facts of the case qua the issue are that the appellant is a NBFC Company. As on 31.03.2009, it has investment in shares & securities amounting to Rs. 20,54,54,104/-. The Appellant , during the year, earned dividend of Rs.2,75,347/- from certain investments. The AO disallowed a sum of Rs. 48,16,672/- u/s 14A of the Act by applying Rule 8D for earning such exempted income of Rs.2,75,347/-. The computation of disallowance provided in the order of assessment was as follows:
Rs. (Amount)
1.Under Rule 8D (2) (i): Demat Charges 375 2.Under Rule 8D (2) (ii) Proportionate Interest 37,51,334 3.Under Rule 8D (2) (iii) 0.5% of Average Investment 10,01,928 Total 48,16,672 6.2 Ld. AR for the assessee has vehemently submitted that the assessee has made investments out of the interest free fund available with them.
From the Balance Sheet it may be observed that the own fund position as on 31.03.2009 was at Rs.47.78 Crores whereas investment in Shares was at Rs.20.55 Crores, therefore the investments are well covered by assessee`s own fund of Rs. 47.78 Crores. The ld AR explained us that assessee during the year has received interest amounting to Rs. 4,39,06,406/- and paid interest of Rs.1,13,63,372/-. As such, the assessee credited net interest income of Rs.3,25,43,034 to its profit and loss account, therefore ld AR submitted that when the interest income credited to Profit and loss account exceeded the interest expenditure incurred by the assessee, no interest expenditure was left which could be disallowed under section 14A of the Act. The ld. AR for the assessee has also relied on the following judgments:
(i).DCIT Vs.M.S. Trade Apartment Ltd, (ITA No.1277/Kol/2011) A.Y. 2008- 09, dated March 30,2012.
“4.As learned CIT(A) has rightly observed, once there is no net interest expenditure, as is the case before us-upon setting off interest credited to profit and loss account, no part of interest debited can be disallowed as attributable to earning tax free dividend. The CIT(A) was thus quite justified in deleting the interest disallowance. We have also noted that entire expenditure incurred by the assessee have been offered for disallowance, and once that happen, nothing remains for disallowance u/s 14A. The disallowance u/s14A can come into play only out of expenses claimed for deduction and expenses have been claimed for deduction, there can not be any disallowance either. The conclusions arrived at by the CIT(A) are, therefore, correct and admit no interference by us. We, approve and confirm the order of the CIT(A).”
(ii).DCIT Vs. M/s Machino Finance Pvt ltd ( A.Y.2009-10, dated 09-09-2016:
“10. We have heard the rival contentions of both the parties and perused the material available on record. At the out set we find that the assessee was having no loan in the previous year and the investment made was of Rs.18.31 crores. So it is clear that the investment was made out of owned fund in the previous year. The investment and loan in the year under consideration has increased by Rs. 2.98 crores and 12.25 crores respectively. So at the most the interest pertaining to the increased investment of Rs.2.98 crores can proportionately be disallowed. Besides, the above we also find that the AO has failed to establish whether the borrowed fund was utilized for the investment in shares. It is also important to note that the assessee is having both interest income and interest expenses in this connection various courts have decided to take the net of interest amount while making the disallowance under section 14A read with Rule 8D of the Income Tax Rules 1962. Therefore, we are relying in the order of the jurisdictional Tribunal in the case of DCIT Vs. Trade Apartment Limited ITA No. 1277/Kol/2011.”
6.3 On the other hand ld.DR for the Revenue has primarily relied on the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.