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Income Tax Appellate Tribunal, BANGALORE BENCH ‘A’, BANGALORE
Before: SMT ASHA VIJAYARAGHAVAN & SHRI ABRAHAM P GEORGE
In this appeal filed by the revenue directed against an order dated 20-01-2015 of CIT(A)-I, Bangalore, it is aggrieved that the CIT(A) had directed the AO to re-compute disallowance made u/s 14A of the IT Act, 1961 r.w. Rule 8D(2)(ii) of the IT Rules.
Facts apropos are that the assessee a dealer in motor cars, and spares had filed its return of income for the impugned assessment year declaring an income of Rs.5,02,32,420/-. During the course of assessment proceedings, it was noted by the AO that assessee had earned dividend income of Rs.3,90,135/- which was claimed as exempt. As per the AO, the assessee had only offered Rs.56,55,867/- as expenses relating to exempt income. In the opinion of the AO, assessee had not admitted any amount for indirect expenditure attributable to the earning of the tax free income. Relying on Rule 8D(2), AO concluded that disallowance under clauses-(ii) (iii) were also required in addition to the suo-motu disallowance made by the assessee. He re-computed the disallowance u/s 14A of the IT Act, as under; (i) The amount of expenditure directly relating to Rs. 56,55,867 income which does not form part of total income Interest expenses not directly attributable to any Rs. 65,73,990 particular income or receipt then (ii) A XB C/* (iii) ½ % of the average of the value of investments, Income from which does not or shall not form part Rs. 5,06,541 of the total income (1/2 % of 72488906 + 130127472/2)=(½ % of 101308189)
Disallowance as per Rule 8D Rs.1,27,36,398 An addition for the difference was made.
Aggrieved, assessee moved in appeal before the CIT(A). Argument of the assessee was that the similar disallowances were made by the AO in assessment years 2009-10 and 2010-11 also. As per the assessee on its appeal for these years, the CIT(A) had deleted such disallowance.
Assessee also stated that the AO had erroneously reckoned interest expenditure of Rs.10,23,55,341/- directly attributable to its business, while working out disallowance u/s 14A of the IT Act, 1961.
Learned CIT(A) was appreciative of the above contentions.
According to him, in the preceding year also, there was a similar disallowance made It was held that there was no justification for making any disallowance under Rule 8D(2)(ii) of the Act. He directed the AO to consider for disallowance only the sum of Rs.18,90,931/- as indirect interest expenditure, for computing the disallowance under Rule 8D(2)(ii) of the IT Act.
Now before us, learned DR strongly assailing the order of the CIT(A) submitted that the assessee could not produce any evidence for having used the loans raised by it for its business. As per the learned DR the sum of Rs.18,90,931/- was only the net of out flow of interest.
Learned AR submitted that Rule 8D(2)(ii) of the Act, had to be applied, as such irrespective of the actual utilization of loans on which interest was paid.
Per contra, learned AR in support of the order of the CIT(A)
submitted that a similar issue had come up before the Tribunal in revenue’s appeal for the assessment years 2009-10 & 2010-11. According to him, copy of the Tribunal order was placed at paper book pages 19 to
Learned AR submitted that at para-7 of the order, it was clearly held that Sec.14A(2) could be applied only when the AO was not satisfied with the correctness of the claim of the assessee with regard to the expenditure incurred for earning the exempt income. Reliance was also placed on the balance sheet as on 31-03-2011 placed at paper book opage-17.
We have perused the orders and heard the rival contentions. A look at the balance sheet of the assesee placed at paper book at page-17 show that its share capital of Rs.21,19,01,000/- and reserves and surplus of Rs.17,81,28,688/- totaling to Rs.39,00,29,688/-. Its investments as on 31-03-2011 were only Rs.13,01,27,472/-. Obviously, assessee had more than enough own funds with it for justifying the investment. Further, it is not disputed that the assessee had made a suo-motu disallowance of Rs.56,55,867/- as the interest expenditure attributable to the loan fund utilized for the investment. At no place the AO expressed any dis- satisfaction with regard to the correctness of the claim of the assessee with regard to expenditure incurred for earning exempt income. Assessee had all along argued that the loans which were used were only for the purpose of its business. The break-up of such loans were also furnished by the assessee as under at paper book page-9.
Interest ING Term loan Rs. 81,51,938 Interest on Kotak Term loan Rs. 79,49,587 Interest on Benz Car loan Rs. 1,09,484 Interest others Rs. 9,04,851 Interest SBI FCNB loan Rs. 53,38,956 Interest on SBI OCC A/c Rs. 5,09,57,984 Interest on HDFC Bank Trade Adv. Rs. 1,21,97,267 Interest on ICICI Bank Trade Adv. Rs. 98,92,429 Interest on Kotak Mahindra Prime- Trade Advance Rs. 67,98,590 FCNR Charges -- -- Bank Charges -- ----------- Total Rs.10,23,55,341 The loans which were used for the purpose of placing investments resulting in tax free income were also furnished by the assessee and this totalled only to Rs.18,90,931/-. The CIT(A) directed the AO to confine the disallowance under Rule 8D(2)(ii) of the IT Act, 1961 to such amount.
This Tribunal almost in a similar situation in its order dated 22-01-2015 in & 1326(B)/2013 in assessee’s own case had held as under;
“7. We have perused the orders and heard the rival contentions. Assessee had share capital and reserves totaling to Rs.337.287.692 and Rs.355,450,356 as on 31-03- 2009 and 31-03-2010 respectively, as seen from the audited balance sheet placed at PB page-20 . As against this, its investment in listed shares were Rs.13,877,323 and Rs.48,740.155 as per schedule-F to its final accounts placed at PB page-22. Incremental investment were only 1.52 Crores for the year ended 31-0-2009 and Rs.3.15 Crores for the year ended 31.3.2010. This is clear from the working given at PB page-5. No doubt, assessee had loan funds of Rs.611.984.554 and Rs.858,514.862 as on 31.3.2009 and 31.3.2010 respectively. Nevertheless, the investment in shares were only about 13.71% of its share capital and reserves as on 31.3.2010 and even lesser for the year ended 31.3.2011. When assessee is having own funds substantially in excess of its investment, it can always claim that the latter was made out of the former. A one to –one relationship showing each sum as an essential criteria for evaluating the nature of interest outgo. In a business environment when assessee places all his money , whether from loans or from business operation in one kitty and makes investments there from, it can always argue that like any normal businessman, its endeavour and intention was to use business loans for business purposes and own funds for investments. In the given case, assessee had shown that loans raised were for the specific business purpose. It had suo motu made a disallowance for direct interest expenditure under Rule 8D(2)(i) for AY: 2010-11, while claiming that no such expenditure was there for AY: 2009-10. For application of Sec.14A(2), it is necessary for the AO to show that he is not satisfied with the correctness of the claim of the assessee with regard to the expenditure claimed to have been incurred for earning exempt income. That this condition applies even where the claim is one of no or nil expenditure has been held by the Hon’ble Delhi High Court in the case of Maxopp
Investments Ltd Vs COT (2012) 347 ITR 272 in para-30 of its judgment”.
In the circumstances, we are of the opinion. that the CIT(A) was justified in restricting the addition to the proportionate amount of Rs.18,90,931/- applying Rule 8D(2)(ii) of the I T Act, 1961. We do not find any reason to interfere.
In the result, the appeal filed by the revenue is dismissed.
Order pronounced in the open Court on the 30th October, 2015.