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Income Tax Appellate Tribunal, “A”, BENCH KOLKATA
Before: SHRI WASEEM AHMED, AM & SHRI K. NARASIMHA CHARY, JM
आदेश / O R D E R
PER SHRI NARASIMHA CHARY, J.M.: This is an appeal by assessee challenging the order dated 31.12.2013, in Appeal No.38/CC-XX/CIT(A)C-III/2011-12/Kolkata, passed by the ld. Commissioner of Income Tax (Appeals)-Central-III, Kolkata [hereinafter called as ‘CIT(A)’].
Brief facts of the case are that the assessee is a limited company engaged in manufacturing and trading of writing products and stationery items. For the assessment year 2009-2010, the assessee filed the return of income on 29.09.2009 disclosing a loss ./2014 Assessment year: 2009-2010 Page 2 of 5 of Rs.27,55,08,775/-. The case was taken up for scrutiny and during scrutiny the Assessing Officer, among other things, found that in the accounts, the assessee indicated investment of Rs.4,15,26,000/- and share application money of Rs.8,76,00,000/-, and the assessee furnished the break up figures of the interest paid during the year. The AO further found that the total payment of interest during the year was to a tune of Rs.19,94,72,326/-. Taking this figures, the AO estimated the disallowance of expenses to a tune of Rs.59,32,660/- and added it back to the total income of the assessee. Aggrieved by this finding the assessee preferred appeal before the ld. CIT(A) and the ld. CIT(A) by way of impugned order modified the amount of disallowance and found that the total amount to be disallowed was only Rs.11,08,690/-.
Challenging the said finding of the ld. CIT(A), the revenue came in this appeal on the following grounds :-
1. In the facts and circumstances of the case, the CIT(A) erred in accepting the net interest as expenditure of interest instead of total interest paid for the purpose of calculation of disallowance u/s.14A of the I.T. Act.
2. In the facts and circumstances of the case, the CIT(A) erred in accepting the calculation of disallowance u/s.14A read with Rule 8D of the assessee without getting it verified or examined by the AO. 4. It is the argument of the ld. DR that in accepting the net interest as expenditure of interest instead of total interest paid for the purpose of calculation of the disallowance u/s.14A of the Act, the ld. CIT(A) committed an error. He further submitted that in all fairness before accepting the calculation of disallowance as submitted by AR, the ld. CIT(A) should have got it verified or examined by AO. Ld. DR further submitted that for this reason, the order of the ld. CIT(A) needs to be quashed and order of AO has to be restored. ./2014 Assessment year: 2009-2010 Page 3 of 5
5. The argument of ld. AR is that while calculating the disallowance the AO committed an error in taking share application money of Rs.8,76,00,000/- also take into consideration as investment and thereby reached to a wrong figure of Rs.6,56,88,500/- as the average investment to work out the disallowance ended up with the addition of Rs.59,32,660/-. Ld. AR submits that share application money does not yield any income and, therefore, it shall not be considered as an investment for the purpose of Section 14 A of the Act read with Rules 8D of the I.T. Rules.
6. The next contention of the ld. AR is that while computing the interest paid by the assessee on borrowed funds the AO should have deducted the interest recovered from the subsidiary companies to a tune of Rs.6,04,18,894/- and net interest alone should have been taken for determining the disallowance. Ld. AR supports the impugned order on these two grounds and pressed to dismiss the appeal.
7. Grounds No.1 & 2.
7.1 On a careful perusal of the orders of authorities below, we found that while calculating the amount of disallowance the AO has taken the sum total of the investment and share application money which comes to Rs.12,91,26,000/- as the closing balance of the investment, whereas opening balance of investment was Rs.22,51,000/-, thereby he reached average investments at Rs.6,56,88,500/-. On this amount only he calculated disallowable portion under Rule 8D(2)(ii)&(iii) of the I.T. Rules and it was Rs.59,32,660/-.
7.2 Ld. CIT(A) considered this aspect in the light of the submissions made by ld. AR, the decisions of coordinate bench of the Mumbai Tribunal in the case of Rainy Investments (P) Ltd. [2013] 30 taxmann.com 169, Morgan Stanley India Securities (P)
Ltd., (2011) 55 DTR 177 for the principle that the share application money is incapable ./2014 Assessment year: 2009-2010 Page 4 of 5 of yielding any tax free income and it has to be excluded in working out disallowance under Rule 8D, and took the view that share application money cannot be treated as investment. When this exclusion of the share application money from the reckoning the investment is based on sound principle of law holding the field as on the date, we find it difficult to say that such exclusion of share application money by the ld. CIT(A) while calculating the total investment, is bad either under law or on facts.
Now, turning to the next contention of ld. DR that the ld. CIT(A) erred in considering the net interest debited to the P&L account for the purpose of Rule 8D(2)(ii) and (iii), the order of the ld CIT(A) shows that on verification of the record he found that the assessee has recovered an amount of Rs.6,04,18,894/- towards interest from its subsidiary company and interest which was capitalized was Rs.1,58,78,221/-, the interest received was Rs.87,56,255/-, and the net interest paid by the assessee was only Rs.11,44,18,956/- but not Rs.19,94,72,326/-. While computing the disallowable portion under Rule 8D2(ii) and (iii) of the Rules, the ld. CIT(A) considered only the net interest paid by the assessee. This act of ld CIT is based on the ratio of the following decisions
i) Morgan Stanley India Securities (P) Ltd., (2011) 55 DTR 177; ii) M/s Trade Apartment Ltd., order dated 30.03.2012; iii) Karnavati Petrochem (P) Ltd., ITA No.2228/Ahd/2012, order dated 05.07.2013; and iv) Shah Bhagwandas K. Choksi, ITA No.777/Ahd/2011, order dated 19.09.2014. In all these decisions, it is consistently held that since the amount of interest is debited to the profit and loss account is on net basis, the disallowance of interest should also be made only with reference to the net interest. Therefore, we find that the act of ld. CIT(A) ./2014 Assessment year: 2009-2010 Page 5 of 5 in considering the net interest of Rs.11,44,18,956/- paid by the assessee is based on established principle of law.
Since the calculation of the disallowable portion by the ld. CIT(A) is based on the principle of law laid down by the various coordinate benches of the Tribunal, we do not see any illegality or irregularity in the order of ld. CIT(A). We accordingly, uphold the same and dismiss both the grounds of Revenue.