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Income Tax Appellate Tribunal, DELHI BENCH: [E]: NEW DELHI
Before: SMT. DIVA SINGH & SH. O.P. KANT
ORDER PER O.P. KANT, A.M.: This appeal of the assessee is directed against order dated 13/07/2011 of the Commissioner of income tax (Appeals)-XVI, New Delhi for assessment year 2008-09 raising following grounds:
1. That the CIT appeals has erred in determining the total income at Rs. 1,63,91,923/-.
2. That the Ld. CIT appeals of income tax has erred in making disallowance of Rs. 13,91,082/- under section 14A of the Act, which is bad in law and against facts and circumstances of the case.
3. The appellant craves leave to add, alter, amend, amplify or delete any or all of the grounds of appeal before or at the time of hearing.
Overseas Carpets Ltd 2. The facts in brief are that the assessee was engaged in business of manufacturing and export of carpets during relevant period. The assessee filed its return of income on 29/09/2008 declaring income of Rs. 1,50,70,386/-, which was further revised to Rs. 1,50,00,841/- on 17/12/2008. The case was selected for scrutiny and the assessment under section 143(3) of the Income-tax Act,1961( in short the ‘Act’) was completed on 27/12/2010 making disallowance of Rs. 13,91,082 under section 14A of the Act. Aggrieved, the assessee filed appeal before the Ld. Commissioner of Income-tax(Appeals). Before the Ld. Commissioner of Income-tax(Appeals), the assessee submitted that the disallowance under section 14A should not be made with respect to the dividend income as the dividend income was incidental to purchase of shares and amount of expenditure incurred for generating dividend income was nil. Further the assessee submitted that it had not incurred expenditure by way of interest during the previous year which was directly attributable to the dividend income. In support of its claim, the assessee cited number of cases before the Ld. Commissioner of Income-tax (Appeal). The Ld. Commissioner of Income-tax(Appeals), however, relying on the decision of the Tribunal, Mumbai bench in the case of M/s Daga Capital Management Private Limited 312 ITR 1 and judgment of the Hon’ble High Court of Calcutta in the case of M/s Dhanuka and sons v/s CIT Central-1 in of 2004, confirmed the disallowance made by the AO under section 14A of the Act. Aggrieved, the assessee in appeal before the Tribunal.
The only effective ground of appeal is in respect of disallowance of Rs. 13,91,082/-under section 14A of the Act.
Overseas Carpets Ltd 4.1 Before us, the Ld. Authorized Representative of the assessee filed a paper book containing pages 1 to 117 and submitted as under: That the investment held as on 31st March, 2008 was consisted of (i) dividend yielding investment and non-dividend yielding investment. The dividend yielding investment was made in ‘India Exposition Mart’, ‘New link overseas finance Ltd’ and Indian overseas bank. The investment in dividend yielding companies was made in previous years out of interest free funds. The non-dividend yielding investment was made in business ventures, which the assessee company started with other entities and failed to take off. The investment in shares of such companies was a purely strategic business move and not an investment decision. The AO cannot disallow expenditure relating to investment which has not yielded any exempt income during the previous year relevant to the assessment year under dispute. (ii) No disallowance could be made if there is no exempt income during the year. Reliance was placed on the judgment of Hon’ble Allahabad High Court in the case of CIT v/s M/s Shivam motors Private Limited in of 2014 wherein it is held that “in the absence of any tax-free income, the corresponding expenditure could not be worked out for disallowance.” (iii) The assessee company is 100% manufacturer and exporter and the company procured secured loans and paid interest on the same. The copy of Ledger account of the interest paid shows that every interest amount debited was linked to a particular invoice or Overseas Carpets Ltd bill, in such a scenario to assume that interest expenditure must have been incurred to raise funds for investment is unfair. (iv) The assessee company is a profit-making entity and had sufficient reserve and surplus during the years in which investment was made. Therefore to conclude that same were done out of interest- bearing funds is unfair. That the assessee company had a reserve and surplus to the tune of Rs. 18,60,41,748/- as on 31/03/2008 whereas total investments were of the value of Rs. 3,65,32,450/-. (v) Relied on the judgment dated 04/02/2014 of the Hon’ble Gujarat High Court in the case of CIT versus Torrent Power Ltd in appeal No. 603 of 2013 wherein it is held that no disallowance under section 14A could be made where assessee have sufficient own funds for making investment. (vi) Further relied on judgment of the Bombay High Court in the case of CIT versus HDFC bank Ltd in of 2012. 4.2 In support of the arguments, he also filed written submission. The Ld. Senior Departmental Representative, on the other hand, relied on the order of the lower authorities and submitted that the disallowance has been made by the Assessing Officer in accordance with law as the rule 8D of the Rules is held to be effective from the assessment year 2008-09 i.e. the year under consideration. 5.1 We have heard the rival submissions and perused the material on record. The Assessing Officer invoked rule 8D of the Income-tax Rules and computed the disallowance as under: 8D(2)(i) Direct expenses Nil Interest which is not directly attributable to any Rs. 4 Overseas Carpets Ltd 8D(2)(ii) particular income or receipt (AXB/C) 12,27,050/- A = interest expenses Rs. 2, 23, 72, 208/- B= average investment Rs. 3, 28, 06, 430/- C = average total assets Rs. 59,81,43, 878/- 8D(2)(iii) 0.5% of average investment income from which Rs. 1,64,032/- does not or shall not form part of total income Rs. 3,28,06,430*0.5% Total Rs. 13,91,082/- 5.2 The assessee has placed reliance on the judgment of Hon’ble Allahabad High Court in the case of CIT v/s M/s Shivam motors Private Limited (supra), wherein it is held that in the absence of any tax-free income, the corresponding expenditure could not be worked out for disallowance. But the assessee has shown tax-free income of Rs. 9,03,478/- during the year under consideration, and therefore the ratio of the cited case is not applicable over the facts of the assessee.
5.3 We have observed that the Assessing Officer has made disallowance under rule 8D(2)(ii) and 8D(2)(iii) only. Under rule 8D(2)(ii) of the Rules, the disallowance is in respect of interest corresponding to the investment in exempt income earning assets. As the interest which cannot be attributed to particular income or receipt, the legislature has devised a formula for computing proportionate interest out of the total interest paid. But in the facts of the case on perusal of the interest paid Ledger account submitted during the course of hearing and a copy of which was provided to the Sr DR also, it is seen that interest has been paid in respect of secured loans for the purpose of specific export orders of manufacturing. We find that Overseas Carpets Ltd once the interest is identifiable towards particular income and which is not exempt income, the interest paid cannot be held disallowable under the rule 8D(2)(ii) of the rules. The Hon’ble High Court of Allahabad in the case of Additional Commissioner of Income- tax versus Dhampur sugar Mills private limited reported in 370 ITR 194 has also given similar finding. The relevant part of the judgment is as under:
In the appeal, the Tribunal has confirmed the finding. The Tribunal has observed that the findings of the Commissioner (Appeals) were not controverted on behalf of the revenue. Once it was duly established that no borrowed funds on which interest was paid had been invested for earning tax free income, no disallowance was permissible under Section 14A. The Tribunal has observed that under Rule 8D(2)(ii), a proportionate disallowance out of interest expenditure would be made in respect of interest expenditure which is not directly attributable to any particular income or receipt. Since the entire interest expenditure, in the present case, was attributable to business in which the resultant income was assessable to tax, a disallowance could not be made. The Tribunal, consequently, deleted a disallowance to the extent of Rs 66.79 lacs out of a total disallowance of Rs 67.75 lacs made by the Assessing Officer under Section 14A, sustaining the balance of Rs 0.96 lacs on account of other expenditure to the extent of 0.5 percent of the average value of investment. The order of the Tribunal in regard to the disallowance of Rs 0.96 lacs has been confirmed by this Court by a judgment dated 1 September 2014 in an appeal (Income Tax Appeal No 131 of 2014 (Dhampur Sugar Mills Ltd, Bijnor Vs Commissioner of Income Tax, Bareilly)-) filed by the assessee. We have no reason to differ with the view which has been taken by the Commissioner (Appeals) and which has now been affirmed by the Tribunal. Under sub-section (1) of Section 14A, no deduction can be allowed in respect of expenditure incurred by the assessee in relation to income which does not form a part of total income under the Act. Sub- section (2) of Section 14A enables the Assessing Officer to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act in 6 Overseas Carpets Ltd accordance with the method as prescribed under the Rules, if the Assessing Officer is not satisfied with the correctness of the claim of the assessee. In the present case, the specific finding of the Tribunal is that as regards the disallowance of Rs 67.75 lacs which was made under Section 14A by the Assessing Officer, the interest expenditure was attributable to the business of which the income was assessable to tax. Once this be the position, the view of the Tribunal is consistent with the provisions of Section 14A and does not warrant any interference.
5.4 Further we find that Hon’ble Bombay High Court in the case of CIT versus HDFC bank Ltd (supra) has held that: “5. We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd (supra). The finding of the fact given by the ITAT in the present case is that the assessee’s own funds and other interest-bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the Assessee’s capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this court in the case of Reliance Utilities and Power Ltd (supra), it would have to be presumed that the investment made by the assessee would be out of interest free funds available with the assessee. We therefore, are unable to agree with the submission of Mr Suresh Kumar that the Tribunal had erred in dismissing the Appeal of the Revenue on this ground. We don’t find that question (A) gives rise to any substantial question of law and is therefore rejected.” 5.5 When the advert to the facts of the case of the assessee and examine in the light of the above judgment of the Hon’ble Bombay High Court, we find that the investment as on 31stMarch 2008 was Rs. 3,65,32,450/- whereas the reserve and surplus of the company as on 31st March 2008 was of Rs. 18,60,41,748/-which is much higher than the investment in exempt income earning assets. The assessee demonstrated 7 Overseas Carpets Ltd the similar situation in the earlier years when the investment was made. Thus the facts of the case of the assessee are identical to the facts of the case of HDFC Bank Ltd (supra) and, therefore, the issue in dispute is squarely covered by the judgment in the case HDFC Bank Ltd (supra). Thus respectfully following the judgment in the case of HDFC bank Ltd (supra), we hold that no addition can be made for interest of Rs. 12,27,050/- apportioned towards exempt income, out of the interest paid, under rule 8D(2)(ii) of the Rules. However, so far as the AO’s computation of expenditure to be disallowed under rule 8D(2)(iii) is concerned, the same in our view is in conformity with the rules, hence, the same do not call for any interference. Accordingly, the ground of the assessee is partly allowed.
In the result, the appeal of the assessee is partly allowed.
(Order Pronounced in the Court on 22/03/2016).