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Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri Waseem Ahmed & Shri K.Narasimha Chary
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
ITA No.1124/Kol/2010 (A.Y.2006-07): This appeal by the Revenue is against the order of Commissioner of Income Tax (Appeals)-VIII, Kolkata dated 29.03.2010. Assessment was framed by DCIT, Circle-8, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 28.11.2008 for assessment year 2006-07. The revenue has raised the following grounds of appeal :- “I. That Ld. CIT(A) erred on facts and in circumstance of the case and in law in holding that no disallowance under section 40(a)(ia) of the Income Tax Act, 1961 is called for if the assessee did not deduct tax at source in F.Y. 2005-06 on commission payment of Rs.30,00,000/- to its non- whole time director. 2. That Ld. CIT(A) erred on facts and in circumstance of the case and in law in holding that as per section 40(a)(ia)(A) of the Income Tax Act, 1961, no disallowance is called for when the assessee deduct tax at source after the end of
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 3 the financial year and deposit the same within the due date of filing of return of income. 3. The appellant craves leave to add, alter or abrogate any ground of appeal at the time of hearing.”
Shri R.P.Nag, Addl.CIT. Ld. Sr. Departmental Representative represented on behalf of Revenue and Shri Amit Patni and Sri Karan Sethia, ARs appeared on behalf of assessee. 2. The solitary issue raised by the revenue in this appeal is that the ld. CIT(A) erred in deleting the addition made by AO for Rs.30,00,000/- towards commission expense to its non-whole time director on account of non deduction of TDS u/s 40(a)(ia) of the Act.
The facts in brief are that the assessee in the present case is a limited company and is engaged in the business of manufacturing/processing of steel. The assessee for the year under consideration has filed its return of income on 22nd November, 2006 declaring the total income of Rs.40,45,89,730/- comprising the income from business, capital gain and other sources. Thereafter the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act were issued upon the assessee. The assessment was framed u/s 143(3) of the Act by the DCIT, Circle-8, Kolkata at a total income of Rs.40,76,81,162/- by making disallowance of Rs.30,91,432/-.
The assessee for the year under consideration has claimed expenses of Rs.30,00,000/- under the head “commission” to non whole time director. The AO during the assessment proceedings found that payment has been made without deducting the TDS and therefore it was liable to be disallowed by virtue of the provision of section 40(a)(ia) of the Act. Accordingly the AO disallowed the commission expenses of Rs.30,00,000/- and added to the total income of the assessee.
Aggrieved the assessee has preferred an appeal before the ld. CIT(A) and submitted that the commission amount was determined in the AGM and immediately thereafter the TDS was deducted and duly deposited in the government exchequer
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 4 before the due date of filing the income tax return. In this connection the assessee relied on the order of Hon’ble Mumbai Tribunal in the case of IDBI vs ITO 293 ITR 267 (Mum). The assessee also submitted that there is a recent amendment in the provision of section 40(a)(ia) of the Act by Finance Act 2008 w.e.f. 1.4.2008 which states that there will be no disallowance if the TDS has been deducted before the due date of filing the income tax return as specified u/s 139(1) of the Act. The ld. CIT(A) has accordingly deleted the addition made by the AO by observing as under :- “In this ground of appeal. the appellant is disputing the A.O.'s action in disallowing the commission paid to its non-whole time directors. The disallowance has been made under Sec. 40a (ia) on the ground that no TDS on the said amount has been made. The appellant's submission on this issue is a matter of record. It has relied on the decision of the Hon'ble Mumbai Tribunal in the case of IDBI [293 ITR 267 (T Mumbai)J. In my opinion. this liability of the appellant comes about only at the end of the previous year which is the financial year. In that event. the appellant's case would seem to have been covered by the Clause (A) of Section 40a(ia). The appellant would therefore be liable to deduct and pay taxes before the statutory date of filing the return of income. There is no dispute in the AO.' s order that TDS had been paid before such date. Under the circumstances, I hold that the appellant has not contravened the provision of section 40a(ia) of the Income Tax Act and accordingly the AO is directed to delete this disallowance.”
Being aggrieved by this order of CIT(A) the revenue is in appeal before us.
The ld. DR before us submitted that the amendment in the provision of section 40(a)(ia) of the Act came on a later date and therefore the benefit of the amended provision is not available to the assessee. The ld. DR relied on the order of the AO.
On the contrary the ld. AR for the assessee submitted that the commission to non- whole time director are not covered u/s 194H of the Act but covered u/s 194J of the Act under the clause (b)(a) of the Finance Act, 2012 and it was effective from 01.94.2012. As such the assessee was not liable to deduct tax on the commission amount paid to the non-whole time director in this present case. Alternatively the ld. AR submitted that as per the amended provision of section 40(a)(ia) of the Act if the assessee has paid TDS amount before the due date of filing of income tax return as
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 5 specified u/s 139(1) of the Act and therefore the disallowance on account of non deduction of TDS is not warranted. The ld. AR relied on the order of CIT(A).
We have heard the rival contentions of both the parties and perused the materials available on record. From the foregoing discussion we find that the assessee in the instant case has paid the commission to the non-whole time director without deducting TDS. The AO in consequence of non deduction of TDS has disallowed the commission expenses and added to the total income of the assessee. However, the ld. CIT(A) has allowed relief to the assessee by holding that the assessee has deducted and deposited the TDS amount before the due date of filing of the income tax return as specified u/s 139(1) of the Act. After hearing the parties we concur with the view of the ld. CIT(A) that the assessee has paid the tax at source before the statutory date of filing of income tax return. In this connection we rely on the case of CIT vs Virgin Creations in ITA NO.302 of 2011, GA No.3200/2011 dated 23rd November, 2011 where the Hon’ble Calcutta High Court has held as under :- "The learned Tribunal on fact found that the assessee had deducted tax at source from the paid charges between the period April I, 2005 and April 28, 2006 and the same were paid by the assessee in July and August 2006, i.e. well before the due date of filing of the return of income for the year under consideration. This factual position was undisputed. Moreover, the Supreme Court, as has been recorded by the learned Tribunal, in the case of Allied Motors Pvt. Ltd. and also in the case of Alom Extrusions Lid, has already decided that the aforesaid provision has retrospective application. Again, in the case reported in 82 ITR 570. the Supreme Court held that the provision, which has inserted the remedy to make the provision workable. requires to be treated with retrospective operation so that reasonable deduction can be given to the section as well. In view of the authoritative pronouncement of the Supreme Court. this court cannot decide otherwise. Hence we dismiss the appeal without any order as to costs. “
Besides the above we also find that there is an amendment in section 194J of the Act in terms of its clause (ba) which reads as under :- “194J (1)……………………………… (a)…………………. (b)……………………….
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 6 (ba) any remuneration or fees or commission by whatever name called other than those on which tax is deductible under section 192, to a director of a company, or]”
This amendment was brought under the statute by the Finance Act 2012 effective from 01.07.201`2 which makes the assessee liable to deduct TDS from the payment of commission to the non whole time director. In this connection we rely in the case of Bharat Forge Ltd vs ACIT 144 ITD 455 (Pune Trib.) “Reference is drawn to the decision of the Pune Tribunal in case of Bharat Forge Ltd. vs. ACIT [2013] 144 ITD 455 (Pune Trib.) (copy of the decision is enclosed as Annexure 3 - kindly refer page nos. 10 to 22 of the written submission) wherein similar issue was in dispute i.e. whether tax was required to be deducted under section 194J on payment made for sitting fees to non- executive directors for AY 2007-08 & 2008-09. The Hon'ble Tribunal considering the amendment brought in under section 194J vide Finance Act, 2012, held in favour of the assessee. The relevant extract of the order is reproduced here in below: "We, therefore, find force in the submission of the learned counsel for the assessee that sitting fees paid to the directors does not amount to fees paid for any professional services as has been mentioned in the explanation to section 1941(1). We further find from the memorandum explaining to provisions of the Finance Bill 2012 that as per clause No. 71 it was specifically mentioned that there was no specific provision for deduction of tax on the remuneration paid to a director which is not in the nature of salary. We find the provisions of section 1941(1)(ba) speaks of any remuneration or fees or commission by whatever name called other than those on which tax is deductible u/s. 192 to a director of a company on which tax has to be deducted at the applicable rate and the above provision has been inserted by the Finance Act, 2012 w.e f., 01-07-2012. We, therefore, find force in the submission of the learned counsel for the assessee that no tax is required to be deducted u/s. 1941 out of such director's sitting fees for the A.Y. 2007-08. In this view of the matter, the order of the CIT(A) is set-aside and the ground raised by the assessee on the issue of TDS on sitting fees paid to Directors is allowed."
Respectfully following the above position of law and the ratio of the case laws as discussed above we find no infirmity in the order of ld. CIT(A). Hence this ground of appeal of the revenue is dismissed. Now coming to the C.O.No.78/Kol/2010 8. The assessee has raised the following ground in its cross objection :- “1. That on the facts and circumstances of the case, the learned CIT(Appeals) erred in holding that the company is liable to deduct TDS on Rs.30 lacs being commission for non-whole time directors during the year under consideration.”
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 7
In the CO, the assessee has merely supported the impugned order of Ld. CIT(A), whereby he deleted the disallowance made by the Assessing Officer. Since, we have already uphold the order of Ld. CIT(A) giving relief to the assessee on the issue while dismissing the appeal of the Revenue, the CO filed by the assessee has become infructuous and the same is accordingly dismissed. Coming to ITA No.379/Kol/2012 (Revenue’s appeal) for A.Y.2008-09 9. This appeal by the Revenue is against the order of Commissioner of Income Tax (Appeals)-VIII, Kolkata dated 22.12.2011. Assessment was framed by DCIT, Circle-8, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 31.12.2010 for assessment year 2008-09. The revenue has raised the following grounds of appeal :- 1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing deduction of commission payment to non-whole time directors when it was clearly disallowable u/s 40(a)(ia) of IT Act, 1961. 2. That the appellant craves leave to add, to and/or amend, alter, modify any of the grounds before or at the time of hearing of the appeal.”
The issue raised in this appeal by the revenue is identical to the issue raised in ITA No.1124/Kol/2010 for A.Y.2006-07. As we have already decided the issue in favour of the assessee in ITA No.1124/Kol/2010 the same ratio applies to the issue raised in this appeal by the revenue. In the result this appeal of the revenue is dismissed. Coming to ITA No.303/Kol/2012 for A.Y.2008-09(Assessee’s appeal) 11. This appeal by the assessee is against the order of Commissioner of Income Tax (Appeals)-VIII, Kolkata dated 22.12.2011. Assessment was framed by DCIT, Circle-8, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 31.12.2010 for assessment year 2008-09. The assessee has raised the following grounds of appeal :- 1.That on the facts and circumstances of the case, the learned CIT (Appeals) erred in holding that the liability of the company to deduct TDS on commission for non- whole time directors arises at the end of the financial year.
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 8 2 (a) That on the facts and circumstances of the case, the learned CIT (Appeals) erred in holding that provision for leave encashment would come under the ambit of section 43B of the Act.
2(b) That on the facts and circumstances of the case, the learned CIT (Appeals) erred in confirming the action of the assessing officer in disallowing the leave encashment under section 43B of the Act. 3(a) That on the facts and circumstances of the case, the learned CIT (Appeals) erred in confirming the action of the assessing officer in disallowing the expenditure incurred for earning exempt income under section 14A of the Act read with Rule 8D. - 3(b) That the observation of the learned CIT(Appeals) is contrary to the facts of the case. 4. The appellant craves leave to add to and/or alter, amend, modify or rescind the grounds hereinabove before or at the hearing of the appeal.”
The first issue raised by the assessee in this appeal is that the ld. CIT(A) erred in confirming the order of the AO by disallowing the commission to non whole time directors. This issue is identical to the issue raised by the revenue in ITA NO.1124/Kol/2010. We have already decided this issue in favour of the assessee. Hence the issue raised by the assessee is infractuous.
Coming to the second issue raised by the assessee in this appeal is that the ld. CIT(A) erred in confirming the order of AO by disallowing the leave encashment u/s 43B of the Act Ld. Counsel for the assessee argued for provision for leave encashment that this issue is pending before Hon’ble Supreme Court in the case of Exide Industries Ltd. Vs. Union of India (2007) 292 ITR 470 (Cal) and fairly conceded that subsequently Hon'ble Supreme Court has stayed this judgment of Hon'ble jurisdictional High Court vide order 08-05-2009 by following observations:- “Pending hearing and final disposal of the Civil Appeals, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case Civil Appeal of the Department is allowed.
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 9 We further make it clear that the assessee would, during the pendency of this Civil Appeal, pay tax as if section 43B(f) is on the Statue Book but at the same time it would be entitled to make a claim in its returns.”
In view of the above, Ld. counsel for the assessee fairly stated that let Hon'ble Supreme Court decide the issue and by that time the matter can be remitted back to the file of AO for fresh adjudication in term of the decision of Hon'ble Supreme Court. On this, Ld. CIT DR has not objected to the same. Accordingly, we set aside this issue to the file of the AO to await the decision of Hon'ble Supreme Court and decide the issue accordingly. This issue of assessee’s appeals is remitted back to the file of AO and allowed for statistical purposes.
The third issue raised by the assessee in this appeal is that the ld. CIT(A) erred in confirming the order of the AO by disallowing the expenditure of rs.69,60,365/- by virtue of the provision of section 14A r.w.r.8D of the IT Rules. The assessee during the year has earned dividend income of Rs.106.99 lakhs which was claimed as exempt income u/s 10(34) of the Act. The AO during the assessment proceedings observed that no disallowance has been made by the assessee u/s 14A r.w.r. 8D of IT Rules, 1962. Therefore the AO has invoked the provision of section 14A vis-à-vis 8D of IT Rules and has made the following disallowances Sl. No. Particulars Amount 1. Rule 8D(i) NIL 2. Rule 8D(ii) Interest expenses Rs.61,02,750 3. Rule 8D(iii) Administrative expenses Rs.8,57,615/- The AO has made the above disallowance of Rs.69,60,365/- and added to the total income of the assessee.
Aggrieved the assessee preferred an appeal before the ld. CIT(A). The assessee before ld. CIT(A) submitted that no expenditure was incurred in connection with the dividend income. The action of the AO is based on surmises and conjectures. The investment in the shares/mutual funds was made out of own surplus funds. However, the ld. CIT(A) rejected the plea of the assessee by observing as under :-
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 10 “It is seen that the appellant has not maintained separate accounts for the investments. The funds are used from the common kitty. There is no immediate correlation between the funds taken for loan and investments made in the shares, however there is otherwise also no direct relation between the investment made and the capital being raised or surplus funds available out of which the money is invested. It is a mixed account out of which the funds are being taken out for business and investment. Every time the money is taken out from the bank only because there is a credit balance in the name of the appellant or there may be over draft facility used from the same or other banks and loans outstanding in the name of the appellant. .
Further the contention. of, the. appellant that loans taken have been used for purchase of assets/machineries if considered for argument's sake but out of the use of the acquired machineries/assets in the manufacturing process is carried out and the manufactures goods are sold' and the sale proceeds so received may be used for investment, therefore it cannot be said that there is no relation between the loans taken by the appellant and the investment made by the appellant and it cannot also be established that the loan funds never move out of business and in all forms are used exclusively for business purpose.
There is no presumption provided in the Act that if the assessee has interest free loan and interest bearing loan and is earning both exempt and taxable income then it should. be presumed that the exempt income is out of his or its own funds. -Rule 8D (2)(b) of IT Rules, 1962 provides any expenditure by way of interest which is not directly attributable to any particular income or receipt then the interest has to be calculated as per formula provided therein. Now the law has provided a specific method of calculation of interest expenditure on exempted income from the Assessment Year 2008-2009 and it is directly applicable in the instant case of the appellant. In this case it cannot be said that the loans have .been taken for specific purposes and that money is entirely being, used throughout the period for the said specific purpose only. Whenever there is any receipt out. of the said loan amount in the form of sales n it can be said that .the same is again utilized only for Manufacturing/business purposes of the business purpose out of which income earned is taxable. The appellant cannot also say that any sale of investment is to be routed only for investment and does not part- take character of business expenditure/payment. It is' a criss cross transaction between the capital, investments, loans and business, expenditure. In absence of any presumption in favour of the appellant and specific rule i.e. Rule 8D(2)(iii) being applicable from assessment year 2008-2009 the expenditure by way of interest has to be calculated as per the specific provision provided in Rule 8D.”
Being aggrieved by this order of CIT(A) the assessee came in second appeal before us.
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 11 16. The ld. AR before us filed a paper book which is running from pages 1 to 133 and submitted that the AO has invoked the provision of section 14A of the Act without recording the satisfaction and without having any defect in the accounts of the assessee. During the course of assessment proceedings, the company duly submitted that no expenditure was incurred to earn the dividend income and hence there cannot be any disallowance under section 14A of the Act [refer page no. 53 of the paper book] The AO however, applied Section 14A read with Rule 8D, and disallowed Rs 69,60,365/- without giving any justification and blindly applying the Rule 8D computation. The Ld CIT(A) vide order dated 22-12-2011 upheld the action of the AO in applying disallowance u/s 14A of the Act read with Rule 8D. However, CIT (Appeals) and directed the AO to re-compute the disallowance by computing correct average value of assets. 17. It is submitted that the disallowance inflicted by the AO, which has been upheld by the CIT (Appeals) is in defiance of provisions of section 14A read with Rule 8D, as explained herein below: AO has not recorded his satisfaction while rejecting the appellant's claim:
As mentioned above, during the course of assessment proceedings, the company duly submitted that there has been no expenditure incurred to earn the dividend income, hence there cannot be any disallowance under section 14A of the Act. The AO, without brining any material on record to reject said contention of the appellant and without recording satisfaction, has applied Rule 8D mechanically which is not permissible in the eye of law.
In this regard, the company relies on the decision of Hon'ble Calcutta High Court in the case of REI Agro Limited (GA 3022 of 2013) [copy enclosed as Annexure 5 - refer pages 35 to 36 of written submission]. In this case, the Hon'ble Calcutta High Court has confirmed the view of the Hon'ble Kolkata Tribunal which was in favour of the assessee. The Hon'ble Kolkata Tribunal observed that the AO had not examined the accounts of the assessee and had not recorded satisfaction about the
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 12 correctness of the claim of the assessee before invoking Rule 8D. It held that while rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO had to indicate cogent reasons for the same and was not entitled to disregard the assessee's claim and straightaway embark upon computing disallowance under Rule 8D. The above principle has also been affirmed in the following cases: a) Maxopp Investments Ltd v CIT [347 ITR 272 (Del)] b) Kolkata Tribunal in the case of DCIT vs. Ashish Jhunjhunwala ITA No 1809/Kol/2012
In view of above submission, the-AO should have given a categorical finding in the assessment order, rather than mechanically applying the provisions of Rule 8D which is impermissible as per the provisions of section 14A of the Act/ decisions of various courts, as referred above. Revised method of computing disallowance under Rule 8D It is humbly submitted that Rule 8D has been recently rationalized vide CBDT Notification No.43/2016 dated 02-06-2016 (copy enclosed as Annexure 6 - Refer page no.37 of 'written submission) which provides a revised method to amount of disallowance of expenditure on earning exempt income. This was done to give effect to Hon'ble Finance Minister's promise, while presenting speech 2016, of reducing the number of disputes in relation to disallowance as per section 14A read with Rule 8D (relevant extract is enclosed as Annexure 7- refer page no. 38 of the written submission). The relevant excerpt from his speech is reproduced below for your kind reference: Another issue which has led to considerable number of disputes is quantification of disallowance of expenditure relatable to exempt income in terms of Section 14A of the Income Tax Act. I propose to rationalize the formula in Rule 8D governing such quantification. The said Rule is being amended to provide that disallowance will be limited to 1% of the average monthly value of investments yielding exempt income, but 'lot exceeding the actual expenditure claimed. "
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 13 19. The revised Rule 8D has done away with the earlier Rule 8D(ii) which provided for apportionment of indirect interest expenditure. Further, the earlier Rule 8D(iii) which provided for disallowance on presumptive basis (0.5% of annual average value of investments yielding exempt income) has been amended to 1% of annual average of monthly averages of value of investments. In relation to the above change in Rule 8D, it is humbly submitted that this was aimed at removing difficulties and it is clarificatory and curative in nature. In the context of beneficial legislation intended to remove difficulties, the appellant relies on the decision of the Hon'ble Supreme Court in the case of Allied Motors vs CIT [1997] 224 ITR 677 (SC) The Hon'ble Apex Court, while deciding that first proviso to section 43B inserted with effect from 1-4-1998, is curative in nature and had to be read into section 43B from its inception, held that - “A proviso which is inserted to remedy unintended consequences and to make the provision workable a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole."
Further, in the case of Godrej & Boyce Mfg. Co. Ltd. vs DCIT [2010] 328 ITR 81, the Bombay High Court laid down the principles to determine whether an amendment is prospective or retrospective. The same is reproduced below: "The following principles guide in determining as to whether an amendment is prospective or retrospective:
(i) In determining as to whether an amendment is to take effect prospectively or with a retrospective effect, the date from which the amendment is made operative does not conclusively decide the question. The Court has to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether an amendment is clarificatory or substantive;
(ii) An amendment which is clarificatory is regarded as retrospective in nature and would date back to the original statutory provisions which it seeks to amend. A clarificatory amendment is an expression of intent which the Legislature has always intended to hold the field. A clarificatory amendment may be introduced in certain cases to set at rest divergent views expressed in decided cases on the true effect of a statutory provision . Where the Legislature
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 14 clarifies its intent, it is regarded as being declaratory of the law as it always stood and is, therefore, construed to be retrospective;
(iii)'Where on the other hand, an amendment seems to bring about a substantive change in legal rights and obligations, the Court would not readily accept an interpretation of the amendment that would render it retrospective in character. Clear words will be necessary in order to enable the Court to reach to such a conclusion;
(iv) Where the amendment is curative or where it is intended to remedy unintended consequences or to render a statutory provision workable, the amendment may be construed to relate back to the provision in respect oj which it supplies a remedial effect;
(v) Where an amendment essentially provides a rule of evidence such as a method for the valuation of the property by adopting one among a set of well known and well accepted methods of valuation with a view to achieve uniformity in valuation and avoiding disparate valuations resulting from the application of different methods in respect of properties of a similar nature and character, the Court would place a construction on the statutory provision, giving it a retrospective effect."
Disallowance under Rule 8D(2)(ii): Without prejudice to the above, the company humbly submits before Your Honours that out of the total interest charged of Rs. 12.2 crores in the profit and loss account, Rs. 2.02 crores pertain to term loans from State Bank of India taken for execution of various capital projects of the company. The balance amount of Rs. 10.l8 crores pertains to demand loans and unsecured loans taken from State Bank of India and other financial institutions from time to time based on normal requirement of working capital for day to day operations of the business. In this regard, kindly refer page no. 21 of the Paper book. The said loans were not utilised for making investments on which exempt income has been earned. Since the utilisation of such loans has resulted in earning taxable income, interest expenditure on such loans are not required to be considered for Rule 8D(2)(ii) purposes.
Further, it is also submitted that all investments out of which dividend has been earned were made out of owned funds. On perusal of the same, Your Honours will
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 15 observe that as against Capital + Reserve and Surplus of Rs. 219.75 crores, the amount of investment (out of which exempt income is earned) is only Rs 19.13 crores [kindly refer page no. 6 of Paperbook]. Hence, the AO grossly erred in presuming that the Company had applied loan funds in making investment. The AO has failed to provide any finding of any nexus between borrowed fund and investment in mutual fund units earning exempt income. Hence, no disallowance can be made as per Section 14A (1) and 14A(2) read with rule 8D. Reliance in this regard is placed on the decision of Hon'ble Kolkata Tribunal in the Company's own case for Y 2002-03 [kindly refer pages 127-133 of the paper book]. In this case, the AO had disallowed proportionate interest expenditure. The company contended that although it had a mixed fund, the company had sufficient own funds to make the investment. In arguing the aforesaid, the company relied on the decision of Hon'ble jurisdictional High Court in the case of Britannia Industries Limited 280 ITR 525 (Calcutta) wherein it was held that when there is a payment from mixed account and the assessee has sufficient own funds, it is to be presumed that the payment was made from assessee's own funds. Basis the decision of the Hon'ble jurisdictional High Court in Britannia Industries Ltd (mentioned supra), the Hon'ble Kolkata Tribunal deleted the disallowance made by the AO and allowed the ground in favour of the Company. Reliance is also placed on the decision of Kolkata Tribunal in the case of DCIT vs. Rasoi Limited [ITA No. 1989/Kol/2013 & 1010/Kol/2013] dated 14-08-2015. In this case, the AO had made a disallowance by invoking provisions of Rule 8D without recording a finding that there is any nexus between borrowed funds and investment in shares. The Hon'ble Kolkata Tribunal held that the revenue could not establish that the investments m de in shares giving exempted income is out of borrowed funds on which interest is paid by assessee and further, the assessee had made investments in shares out of its own funds only. Copy of the judgement is attached as Annexure 8 - kindly refer page nos. 39 to 44 of the written submission.
Further to the above, it is humbly submitted that the ITAT Kolkata Tribunal has in the case of ACIT vs Champion Commercial Co. Ltd. [2012] 139 ITD 108
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 16 (Kolkata) [copy enclosed as Annex re 9 - refer page nos. 45 to 54 of the written submission] held that correct application of formula set out in rule 8D(ii) would be that interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under Rule 8D(2)(ii). "It is found that notwithstanding the rigid words of rule BD(2)(ii), the stand taken by the revenue authorities about its application before the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010J 328 ITR 81/194 Taxman 203, when constitutional validity of rule 8D was in challenge, is that 'It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)'. Therefore, it is not only the interest directly attributable to tax exempt income, i.e. under rule BD(2)(i), but also interest directly relatable to taxable income, which is to be excluded from the definition of variable 'A' in formula as per rule 8D(2)(ii), and rightly so, because it is only then that common interest expenses, which are to be allocated as indirectly relatable to taxable income and tax exempt income, can be computed."
The Hon'ble Chennai Tribunal has also in the case of ACIT vs Best & Crompton Engineering Ltd [2013] 60 SOT 53 (Chennai Trib) relied on the decision of the Hon'ble Kolkata Tribunal in the case of Champion Commercial Co. Ltd (mentioned supra) and held that interest on loan sanctioned for business projects do not form part of calculation of disallowance under Rule 8D(2)(ii).
Reliance is further placed on the decision of the Hon'ble Kolkata Tribunal in the case of REI Agro Ltd. vs DCIT [2013] 144 ITD 141 (Kolkata Trib.) [copy enclosed as Annexure 10- refer page nos. 55 to 61 of the written submission]. In this assessee had incurred interest expenditure on loans taken for business Purposes. The AO invoked Rule 8D and made disallowance under 2nd and 3rd limbs. The Hon’ble Tribunal made the following observations: “Rule 8D(2) has three sub-parts. The first sub-part i.e. (i) deals with the amount of expenditure directly relating to the income which does not form part of the total income. That issue is not in dispute here. In second sub-part i.e. (ii), it is a computation provided in respect of expenditure incurred by the assessee by
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 17 way of interest during the previous year which is not directly attributable to any particular income or receipt. This clearly means that if there is any interest expenditure, which is directly relatable to any particular income or receipt, such interest expenditure is not to be considered under rule 8D(2)(ii). In the assessee's case here the interest has been paid by the assessee on the loans taken from the banks for its business purpose. There is no allegation from the banks nor the Assessing Officer that the loan funds have been diverted for making the investment in shares or for non- business purposes. Thus for bringing any interest expenditure, claimed by the assessee, under the ambit of rule 8D(2)(ii) it will have to be shown by the Assessing Officer that the said interest is not directly attributable to any particular income or receipt."
On the other hand, the ld. DR before us submitted that the AO has derived his satisfaction by holding that “On going through the computation of income filed by the assessee it is noted that the assessee has not computed the disallowance u/s 14A of the Act, 1961”. Further it was the duty of the assessee to show that the interest bearing loan has not been utilized in the investment which were generating non taxable income to the assessee. In the absence of any documentary evidence the AO has no option but to resort to rule 8D of the IT Rules. The ld. DR further submitted that the assessee has made huge investment in the shares of various companies and therefore it requires lot of application of mind, time and knowledge. Therefore it cannot be held that no expenditure has been incurred by the assessee in earning the dividend income. The ld DR vehemently supported the order of the lower authorities.
We have heard the rival contentions of both the parties and perused the materials available on record. From the foregoing discussions we find that the AO has made the disallowance u/s 14A of the Act r.w.r.8D (ii) and (iii) of the IT Rules. We find that the owned funds of the assessee are of Rs. 21974.68 lacs and investments are of Rs. 1912.89 lacs only at the end of the year. From the figures we find that the assessee has sufficient fund to make the investments. The lower authorities have not brought anything on record to prove that the borrowed funds have been invested in the investment made by the assessee. In this connection we rely in the judgment of Hon’ble Calcutta High Court in the case of Britannia Industries Limited. 280 ITR 525 where it was held as under :
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 18 “Out of the interest-free advance of Rs. 165 lakhs, MCAP supplied cashew nut kernels to the assessee-company between the period December, 1983 and June, 1984 amounting to Rs. 91.45 lakhs out of the total cashew nut export of the assessee of Rs. 120.75 lakhs for the period ended 30th June, 1984, which accounted for 70.45 per cent of the total cashew nut kernels exported by the assessee in that year. The CIT(A) found that the AO had misstated the facts in his order. This finding was affirmed by the Tribunal. Thus, the finding, which is a finding of fact, becomes a concurrent finding of fact concluded by the CIT(A) and the Tribunal. There is no material to contradict the finding of CIT(A) and those of the Tribunal. The Department has also not filed any cross-objection nor appeal against this particular finding before the Tribunal. Admittedly, the order of the AO merges in those of the CIT(A) and those of the Tribunal and it is the decision of the last Court that becomes the ultimate finding of facts and in this case the finding being a concurrent finding of fact, in the absence of any material to hold the finding as perverse, Court cannot interfere with such findings. As soon it appears that the advance was made for obtaining supply of raw materials and out of which certain portion of raw materials representing almost 70 per cent of the total advance is made, in that event, it cannot but be held that the advance was made for the purpose of business and the advance cannot be said to have been made for any other consideration extraneous or otherwise.—CIT vs. Gillanders Arbuthnot & Co. Ltd. (1981) 24 CTR (Cal) 339 : (1982) 138 ITR 763 (Cal) relied on; CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) applied; CIT vs. Orissa Cement Ltd. (2002) 177 CTR (Del) 361 : (2002) 258 ITR 365 (Del) and CIT vs. H.R. Sugar Factory (P) Ltd. (1990) 87 CTR (All) 132 : (1991) 187 ITR 363 (All) distinguished. From the accounts, it appears, as was found by the Tribunal, that the total sale proceeds of the relevant financial year was Rs. 114.08 crores and that the entire sale proceeds used to be deposited in the mixed account and the advance was also granted from the mixed account. Therefore, there were sufficient funds for making advance of Rs. 1.65 crores out of total transaction of Rs. 114.08 crores. If there are surplus and the advance is made out of the mixed fund, in that event, it cannot be said that the amount borrowed as capital from the bank was advanced, in order to deny the benefit of s. 36(1)(iii). If it is established that the payment was made from the mixed account and the assessee had sufficient funds then it is to be presumed that the payment was made out of the assessee’s own fund and that the borrowed capital was not siphoned out. It appears that there were sufficient funds and that the advance was made from mixed account and as such in this case the Tribunal and the CIT(A) both were right in presuming that the advance was made out of the assessee’s own funds.— Woolcombers of India Ltd. vs. CIT (1981) 23 CTR (Cal) 204 : (1982) 134 ITR 219 (Cal), CIT vs. Samuel Osborn (India) Ltd. (1982) 26 CTR (Cal) 294 : (1982) 135 ITR 699 (Cal), Indian Explosives Ltd. vs. CIT (1983) 35 CTR (Cal) 244 : (1984) 147 ITR 392 (Cal), Alkali & Chemical Corporation of India Ltd. vs. CIT (1986) 50 CTR (Cal) 139 : (1986) 161 ITR 820 (Cal) and Reckitt & Colman of India Ltd. vs. CIT (1982) 26 CTR (Cal) 24 : (1982) 135 ITR 698 (Cal) followed.
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 19 Assessee having made interest-free advance to a firm against supply of raw materials, the advance was made for the purpose of business; further, the advance was given from the mixed account where the entire sale proceeds were deposited and therefore it has to be presumed that the payment was made out of assessee’s own fund and, deduction under s. 36(1)(iii) in respect of interest on borrowed funds cannot be denied. 8. From the above discussion, we find in relation to each assessment years involved in this appeal that: the recipient of interest-free loan was not a firm of relatives; the advance was made for the purpose of business within the meaning of s. 36(1)(iii); that there was regular course of business between the assessee and the firm; and that the advances were made to MCAP in regular course of business; such advances were made in course of business for commercial expedience and for the purpose of business; the findings arrived at by the learned Tribunal were not perverse; the entire expenditure was made from the mixed account; therefore, there would be a presumption that the amount was made out of the own fund of the assessee and not from the borrowed capital; that there were sufficient fund and that the advances were made from the mixed account. Therefore, the CIT(A) and the learned Tribunal both were right in presuming that the advance was made out from the assessee’s own fund eligible for the benefit of s. 36(1)(iii).” Similarly we also rely in the case of CIT Vs. HDFC Bank Ltd. 366 ITR 505 where the Hon’ble Bombay High Court has held as under : “The finding of fact given by the ITAT in the present case is that the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. The ITAT therefore held that there was no basis for deeming that the Assessee had used the borrowed funds for investment in tax free securities. On this factual aspect, the ITAT did not find any merit in the contention raised by the Revenue and therefore, accordingly answered the question in favour of the Assessee. 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. It would have to be presumed that the investment made by the Assessee would be out of the interest-free funds available with the Assessee. The Tribunal was justified in dismissing the Appeal of the Revenue on ground. Commissioner of Income Tax v/s Reliance Utilities and Power Ltd., reported in (2009) 313 ITR 340 (Bom), applied. Where assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in tax- free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A.”
From the above, we find that the funds of the assessee were sufficient enough to make the investment. The lower authorities have also not brought anything on record which
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 20 proves that the investment was made out of the borrowed fund. In the absence of any specific information and clarity from the orders of lower authorities we are of the view that the investment was made out of the owned funds of the assessee. Accordingly the addition made by the lower authorities under section 14A r.w.r. 8D(2)(ii) deserves to be deleted.
Now coming to the issue of addition under rule 8D(2)(iii) we find that the assessee has not furnished any details of the expenses to justify that no administrative expenses has been incurred for the earning of dividend income. Therefore the AO was having no option but to calculate the disallowance under section 14A r.w.r. 8D of Income Tax Rules. Therefore we agree with the argument of the ld. DR that the assessee has derived the satisfaction by recording the fact “On going through the computation of income filed by the assessee”. In view of above, we find no reason to interfere in the order of ld. CIT(A). Accordingly the addition made by the lower authorities under section 14A r.w.r. 8D(2)(iii) deserves to be confirmed. Hence this ground of appeal of the assessee partly allowed.
In the result, both appeals of Revenue are dismissed and that of assessee’s appeal is partly allowed for statistical purpose and CO of assessee is dismissed as infructuous. Order pronounced in open court on 21/09/2016
Sd/- Sd/- (K.Narasimha Chary) (Waseem Ahmed) Judicial Member Accountant Member
*Dkp/PS �दनांकः- 21/09/2016 कोलकाता / Kolkata
ITA Nos.1124/Kol/2010 & C.O.No.78/Kol/2010 A.Y. 2006-07 DCIT. Cir-8, Kol. vs. M/s Tata Ryerson Ltd. ITA Nos.379&303/Kol/2012 A.Y.2008-09 Page 21
आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-DCIT, Circle82, Aayakar Bhawan, 7th Floor P-7, Chowringhee Square, Kolkata-700 069 2. ��यथ�/Respondent-M/s Tata Ryerson Limited (since merged with Tata Steel Processing & Distribution Ltd.), 43, J.L.Nehru Road, Kolkata-700071. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file.
By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता