TRACTORS AND FARM EQUIPMENTS LTD.,CHENNAI vs. ACIT, CHENNAI
What did the Tribunal hold?
The Tribunal held that when borrowed funds are mixed with own funds and interest expenditure is not relatable to any particular income, the second limb of Rule 8D(2) is applicable. Therefore, the disallowance computed by the Assessing Officer and confirmed by the CIT(Appeals) was upheld.
What were the facts?
The assessee earned substantial dividend income which was exempt from tax. The Assessing Officer disallowed a significant portion of expenditure under Section 14A, applying Rule 8D, on the grounds that the assessee had incurred indirect expenditure for earning exempt income.
What were the issues?
Whether disallowance under Section 14A read with Rule 8D is applicable when borrowed funds are mixed with own funds and interest expenditure is not directly attributable to exempt income.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI ABRAHAM P. GEORGE
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals) – 11, Chennai, dated 30.03.2016 and pertains to assessment year 2011-12.
The only issue arises for consideration is with regard to disallowance made by the Assessing Officer to the extent of `4,87,77,924/- under Section 14A of the Income-tax Act, 1961 (in short "the Act").
Shri R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that the assessee earned dividend income of `27,02,66,864/- and claimed the same as exempt under Section 10(34) of the Act. The Assessing Officer found that the assessee has not incurred any expenditure for earning the exempt income.
According to the Ld. counsel, the investments were made out of the assessee’s own funds. The assessee had its own funds as on 31.03.2010 at `130,342.43 lakhs and as on 31.03.2011, the available funds with the assessee was `170,654.87 lakhs. The assessee has also generated cash surplus to the extent of `39,633.28 lakhs and a portion of this amount was invested in the mutual funds. According to the Ld. counsel, no borrowed funds were used for investment for earning the exempt income.
The Ld. counsel for the assessee further submitted that the investments in the subsidiary company were made long back. The disallowance under Section 14A of the Act can be made only if the Assessing Officer is not satisfied with the correctness of the claim made by the assessee. In this case, according to the Ld. counsel, the assessee has not made any claim at all, there is no question of any non-satisfaction by the Assessing Officer. The assessee itself found that a sum of `29 lakhs can be disallowed as expenditure for earning the exempt income. The Assessing Officer proceeded to disallow a sum of `8,66,34,772/- by applying Rule 8D of Income-tax Rules, 1962. Placing reliance on the order of this Tribunal in Tamilnadu Power Finance & Infrastructure Development Corporation Ltd. v. ACIT in dated 19.02.2016, the Ld. counsel submitted that only 0.5% of the average value of the investment, income from which does not or shall not form part of total income as appearing in the balance sheet of the assessee on the first day and the last day of the previous year, has to be taken into consideration.
On the contrary, Shri Shiva Srinivas, the Ld. Departmental Representative, submitted that admittedly, the assessee invested funds in mutual funds and shares and earned exempt income to the extent of `27,02,66,864/-. According to the Ld. D.R., the Assessing Officer found that the assessee has not claimed any expenditure for earning of exempt income. By considering the volume of portfolio of investment, the Assessing Officer found that the assessee should have incurred expenditure in the form of managerial, administrative and monitoring purpose. According to the Ld. D.R., the Assessing Officer categorically recorded a finding that he is not satisfied with the explanation of the assessee that no expenditure was incurred.
Accordingly, he computed the disallowance under Section 14A of the Act read with Rule 8D of Income-tax Rules, 1962. According to the Ld. D.R., the Assessing Officer found that there was no direct expenditure incurred by the assessee for making the investments.
However, the Assessing Officer found that there was indirect expenditure. In other words, the interest paid by the assessee is not relatable to any particular income earned by the assessee.
Therefore, according to the Ld. D.R., the second limb of Rule 8D(2) is squarely applicable. Moreover, the Assessing Officer has also taken the average value of investment on the first day and last day of previous year as appearing in the balance sheet of the assessee and income from which does not form part of total income. The Assessing Officer has taken 0.5%. Ultimately, the Assessing Officer has taken the aggregate of second and third limb of Rule 8D(2) and computed the disallowance of `8,95,34,771/-. After deducting the expenditure claimed by the assessee to the extent of `29 lakhs, according to the Ld. D.R., the Assessing Officer determined the disallowance at `8,66,34,771/-. This disallowance was rightly confirmed by the CIT(Appeals).
We have considered the rival submissions on either side and perused the relevant material available on record. The first submission of the Ld. counsel for the assessee is that when the assessee invested its own funds, Rule 8D2(ii) of the Income-tax Rules, 1962 is not applicable at all. In the case before us, admittedly, the assessee borrowed loan for the purpose of business. The assessee also paid interest on the borrowed loan.
The interest expenditure incurred by the assessee does not relate to any particular income. In other words, when the borrowed funds mixed with the assessee’s own funds, it cannot be identified from which part of funds the investment was made. In other words, when the interest paid by the assessee on the funds borrowed for business is not relatable to any particular item of income, this Tribunal is of the considered opinion that the second limb of Rule 8D(2) would come into operation. In other words, the disallowance has to be computed under Rule 8D(2)(ii) of Income-tax Rules, 1962.
We have carefully gone through the decision of this Tribunal in Tamilnadu Power Finance & Infrastructure Development Corporation Ltd. (supra). In the case before this Tribunal in Tamilnadu Power Finance & Infrastructure Development Corporation Ltd. (supra), there was a specific finding by this Tribunal that the assessee has not incurred any expenditure for making investment. Therefore, this Tribunal found that the disallowance has to be computed only under third limb of Rule 8D(2). Accordingly, this Tribunal found that the computation has to be made with regard to average value of investment, income from which does not form part of total income of the assessee. In the case before us, the facts are entirely different. The assessee admittedly borrowed funds for the purpose of business and paid interest. The interest paid by the assessee is not relatable to any particular income. Therefore, the second limb of Rule 8D(2) is squarely applicable.
We have carefully gone through the order of the Assessing Officer. The Assessing Officer has found that there was no direct expenditure relating to income which does not form part of total income. Therefore, he computed the disallowance under the second limb of Rule 8D(2) and also computed the average amount / expenditure to the extent of `8,66,34,771/-. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly confirmed the order of the Assessing Officer. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
In the result, the appeal filed by the assessee is dismissed.
Order pronounced on 30th September, 2016 at Chennai.
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