TRACTORS AND FARM EQUIPMENTS LTD.,CHENNAI vs. ACIT, CHENNAI

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.

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.

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.

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.