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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order dt.29.08.2014 of the CIT(A)-2,Mumbai,Assessing Officer (AO) and the assessee have filed cross appeals for the year under consideration.Assessee-company, engaged in the business of manufacturing and export of textile and other goods,filed its return of income on 14.10.2010,declaring total income of Rs.7.18 crores.The AO finalised the assessment,u/s.143(3)of the Act,on 26.03.2013,determining the income of the assessee at Rs. 16.97 crores. ITA/7102/Mum/2014 : 2.Effective ground of appeal,raised by the assessee is about addition made by the AO,u/s.14 A of the Act,r.w.r.8D of the Rules,(Rules).During the assessment proceedings,the AO found that the assessee itself had made a disallowance of Rs.1.25 Crores[Rs.99.65 lakhs indirect expenses under Rule 8D(2)(ii)and Rs.25.62 lakhs as per rule 8D(iii)] as per the provisions of section 14A.He made a further disallowance of Rs.2.59 Crores.
3.Aggrieved by the order of the AO, assessee preferred an appeal before the First Appellate Authority (FAA).Before him,it was argued that suo motu disallowance made by it was suffering from legal infirmity,that it had disallowed indirect expenses of Rs.99.65 lakhs when interest free funds were available to it,that the disallowance on account of interest expendi - ture should be restricted to Rs.25.62 lakhs.It relied upon number of orders of the Tribunal in 1
7102-Weizmann Ltd. its support.After considering the submissions of the assessee,the FAA held that it has raised the issue of restricting the interest expenditure to Rs.25.62 lakhs before him for the first time,that same could not be entertained.He further held that the Tribunal had,while deciding the appeal for the earlier years,held that the assessee had adequate interest free funds for making investments, that total suo motu disallowance of Rs.1.25 Crores complies with the provisions of section 14A of the Act,that a further disallowance of Rs.2.59 crores was not justified.Thus,he partly allowed the appeal filed by the assessee.
4.Before us,the Authorised Representative (AR)argued that the Tribunal had held that the assessee had sufficient own funds for making investment,that the Hon’ble High Court had also endorsed the above view of the Tribunal,that there was no justification for not admitting the additional claim by the FAA especially after the judgment of the Hon’ble Bombay High Court delivered in the case of Pruthvi Brokers and Shareholders P.Ltd.(349ITR336),that in the earlier years the then FAA had allowed the appeal filed by the assessee holding that it had sufficient own fund for making investment and the Tribunal had dismissed the appeal filed by the AO in that regard. Therefore,in our opinion,there was no justification on part of the FAA not to accepting the plea raised by it for the first time before him.We would like to reproduce the relevant portion of the order of the order of the Tribunal (/ITA No.6008/Mum/2012,AY.- 2008-09,dt.12.02.14), wherein the Tribunal has referred to the order for the AY 2006-07 and 2007-08 and same reads as under :- 2.During the assessment proceedings,AO found the assessee had received dividend income of Rs. 12,17,147/- which was exempt u/s 10(34) of the Act,that in its computation of total income, assessee had disallowed expenditure of Rs.7,89,633/- for earning this exempt income.He directed the assessee to explain as to why the expenditure relating to exempt income should not be calculated as per rule 8D.After considering the submissions of the assessee.AO worked out disallowance u/s.14A r.w.Rule 8D of the Inocme-tax Rules,1962(Rules) at Rs.2,29,72,633/-. Thereafter,he reduced the amount already disallowed by the assessee in its computation of income amounting to Rs.7,89,633/- .Finally,he made an addition of Rs.2,21,83,000/- in the total income of the assessee. 2.1.Assessee preferred an appeal before the First Appellate Auhtority(FAA).After considering the submissions of the assessee and the assessment order,he held that assessee was having its own interest free funds to the extent of Rs.7962.05 Lacs,that the investment made by it was of Rs.6774.33 Lacs.Following the decision of the Hon’ble Bombay High Court in the case of Reliance Utilities (313ITR340),he held that it could not be said that the interest expenditure was incurred by assessee on the borrowed funds which were used for earning of exempt dividend income when the sufficient interest free funds are available with the company.Referring to the orders of the Tribunal delivered in assessee’s own case for A.Yrs.2006-07 & 2007-08,he directed the AO to delete the addition made. 2.2.Before us,Departmental Representative(DR)supported the order of the AO.Authorised Representative(AR)submitted that expenditure was incurred by the assessee for earning tax free income,that in its computation of income, a sum of Rs.7,89,633/- was already disallowed by the assessee-company,that the investments were made by the assessee entirely out of its own interest free funds,that no further disallowance out of the interest expenses was called for,that as per the balance sheet of the assessee as on 31.03.2008 the shareholder’s fund,in the form of share capital, was 2
7102-Weizmann Ltd.
Rs.1286.11 lacs, that the Reserve and Surplus amounting to Rs.6,675.94 lacs were also available with the assessee during the year,that the investment made by the assessee in shares and securities was only Rs.6774.33 lacs,that the company had enough own funds to cover up the investments made by it that no disallowance should have been made with respect to the finance cost as provided in rule 8D(2)(ii).He relied upon the decision of Mumbai ITAT delivered in the cases of Shoppers Stop [ITA Nos.1448&4475/Mum/2010],Reliance Utilities & Power Ltd. (supra).He further submitted that in the appellant’s own case for A.Yrs. 2006-07 & 2007-08 (ITA No.4751/M/2010 dated 21.10.2011&7697/M/2010 dated 27.06.2012),ITAT had held that since the assessee was holding sufficient own funds to make the investments in shares and securities, no disallowance u/s 14A read with Rule 8D was called for.As regards, the disallowance of Rs.30.58 lacs out of administrative expenses,he contended that the same was quite unreasonable, that the dividend income earned by the assessee was only Rs.12,17, 147/-,that in the earlier years Tribunal had restricted the disallowance to the 5% of dividend income earned. 2.3.We have heard the rival submissions and perused the material before us.We find that in the AY.2006-07 FAA had upheld the disallowance made by the AO u/s.14A r.w.8D of the Income-tax Rules,1962(Rules).Deciding the matter in favour of the assessee,Tribunal vide its order 21. 11.2011( ITA/4751/M/2010)has held as under : “7.We have considered the rival submissions and perused the relevant material on record.As demonstrated by the learned counsel for the assessee from the balance sheet of the assessee company on 31st,March,2006,shareholders’fund in the form of share capital and reserve and surplus aggregating to Rs.71.16 crores were available with the assessee company as on 31st, March,2006.Out of the reserves and surplus, revaluation reserves was to the extent of Rs10.41 crores whereas remaining reserves available to the assessee to the extent of Rs.47.89 crores were free reserves.Thus own funds to the extent of Rs.60.75 crores were available with the assessee company at the relevant time which were more than the investment of Rs,57.64 crores made in the shares and securities in the corresponding period. It is no doubt true that no separate account was maintained by the assessee in respect of investment made in shares and securities and it was a case of mixed funds available in the form of own funds and borrowed funds which were utilized for making investments in shares as well as for the purpose of its main business of manufacturing and export of textiles and other products.However,as held by the Hon’ble Bombay High Court in this context in the case of Reliance Utilities and Power Ltd. (supra), if there are funds available,both interest free and interest borrowing,then a presumption would arise that investment would be out of interest free funds generated or available with the company. Relying on the said decision of Hon’ble jurisdictional High court,we hold that the assessee having sufficient own funds to make investment in shares and securities,it cannot be said that interest expenditure incurred by it on borrowed funds which were utilized for the purpose of business was in relation to earning of exempt dividend income,so as to warrant any disallowance on account of interest expenditure u/s.14A.The decision of the Tribunal in the case of Shoppers Stop Ltd. (supra) cited by the 1earned counsel for the assessee fully supports our view wherein it was held that the assessee having sufficient own funds to cover up investments made in shares and securities,no disallowance u/s.14A on account of interest expenditure was warranted.It is also observed that the AO himself did not make disallowance u/s l4A on account of interest expenditure in assessee’s own case for assessment year 2005-06 in the assessment completed u/s 143(3) vide an order dated 20-12-2007 holding that the assessee having sufficient shareholders’ fund including internal accruals to make investments in shares and securities,no disallowance u/s 14A was called for.We, therefore, hold that the disallowance made by the AO and confirmed by the learned CIT(Appeals) on account of interest expenditure u/s.14A is not sustainable and delete the same. 8.As regards the disallowance of Rs.27,93,160/- made by the AO and confirmed by the learned CIT(Appeals)on account of administrative expenses u/s.14A, we find ourselves in agreement with the learned counsel for the assessee that the same is highly excessive and unreasonable consider -ing the amount of dividend income earned by the assessee to the extent of Rs.l,06,50,514/-.In one of the decisions rendered in the case of ACIT vs. Vinod Chopra Films P. Ltd. vide its order dated 29th July,2011 passed in the Tribunal has found it fair and reasonable to sustain a similar disallowance to the extent of 5% of the total dividend earnings.Respectfully following the said decision of the coordinate bench of this Tribunal,we sustain the disallowance made by the AO and confirmed by the learned CIT(Appeals)on account of administrative expenses u/s.14A to the extent of 5% of dividend income.Ground Nos.1 to 5 of the assessee’s appeal are thus partly allowed.” Similar issue was decided in favour of the assessee by the Tribunal for the AY.2007-08 also (ITA/7697/ Mum/2010-dated 27.06.2012).
7102-Weizmann Ltd.
We find that facts of the case under appeal are similar to the facts of earlier two AYs.From the order of the FAA,it is clear that the assessee had more funds at its disposal,in form of share capital and reserves,than the investment made during the year.Therefore, respectfully,following the orders of the Tribuanl,for the earlier years,we confirm the order of the FAA for the interest expenses.As far as administrative expenses are concerned;following the order of the Tribunal for the earlier years;we direct the AO to restrict the same to 5% of dividend income.Grounds of appeal taken by the AO are allowed,in part. Respectfully following the above orders we are reversing the order of the FAA with regard to interest expenditure. 5.The assessee argued that while deciding the appeal for AY 2008-09(supra),the Tribunal had restricted the disallowance,under the head administrative expenses to 5% of dividend income.We are reproducing the last para of order of the Tribunal for AY 2008
09. (supra). We find that facts of the case under appeal are similar to the facts of earlier two AYs.From the order of the FAA,it is clear that the assessee had more funds at its disposal,in form of share capital and reserves,than the investment made during the year.Therefore,respectfully,following the orders of the Tribuanl,for the earlier years,we confirm the order of the FAA for the interest expenses.As far as administrative expenses are concerned;following the order of the Tribunal for the earlier years;we direct the AO to restrict the same to 5% of dividend income.Grounds of appeal taken by the AO are allowed,in part. Respectfully following the above, the AO is directed to restrict the administrative disallowance to 5% of the dividend income. Effective ground of appeal is decided in favour of the assessee in part. ITA/7447/Mum/2014 : The solitary Ground of appeal,raised by the AO,is about deleting the addition by the FAA and restricting it to Rs.1.25 crores only.While deciding the appeal of the assessee,we have held that assessee had sufficient own funds to make investments and therefore, there was no justification for disallowance under the head interest expenditure.Following the order of the Tribunal for the earlier years,we decide the effective ground of appeal against the AO.
As a result appeal filed by the assessee stands partly allowed and appeal of the AO is dismissed. फलतः िनधा�रती �ारा दािखल क� गई अपील अंशतः मंजूर क� जाती है और िनधा�रती अिधकारी �ारा दािखल क� गई अपील नामंजूर क� जाती है. Order pronounced in the open court on 4th August,2016. आदेश क� घोषणा खुले �यायालय म� �दनांक 4 अग�त, 2016 को क� गई । Sd/- Sd/- (राम लाल नेगी / R.L.Negi ) (राजे�� / Rajendra) �याियक सद�य / JUDICIAL MEMBER लेखा लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य मुंबई Mumbai; �दनांकDated : 04 .08.2016. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�े िषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�े अ�ेिषत अ�े िषत िषत 1.Appellant /अपीलाथ� 2. Respondent /��यथ� 4
7102-Weizmann Ltd.