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Income Tax Appellate Tribunal, KOLKATA BENCH ‘C’, KOLKATA
Before: Shri N. V. Vasudevan,J.M. & Shri M. Balaganesh, A.M.)
This is an appeal by the assessee against the order dated 25/11/2013 of CIT(A)- XII,Kolkata relating to assessment year 2006-07.
Ground No.1 & 2 raised by the Revenue read as under: “1. That is the facts and in law of the case the Ld. CIT(A) erred in deleting the additon made the AO u/s 14A read with Rule 8D amoungint to Rs.12082774/- for earning exempted income. 2. That is the facts and in law of the case the Ld. CIT(A) erred in restricting the disallowance u/s. 14A to Rs.8313550/- in violation of the calculation prescribed by Rule 8D of I. T. Act.”
The assessee is a company it is engaged in the business of making investments earning commission income and dealing in shares. In the course of assessment M/s. Neeraj Consultants Ltd. A.Y.2006-07 2 proceedings u/s.143(3)of the Act. The AO noticed that the assessee had earned exempt dividend income of Rs.83,13,550/- which is not chargeable to tax and is exempt.
In view of the provisions of Section 14A of the Income Tax Act, 1961 (Act), which lays down that any expenditure incurred in earning income which does not form part of the total income under the Act, shall not be allowed as deduction in computing total income of an Assessee, the AO had to disallow expenses that were incurred in earning exempt dividend income. The AO computed the disallowance u/s.14A of the Act read as follows: “In the above situation provision of Section 14A read with Rule 8D applied and after applying the same with reference to exempted income as claimed by the assesee for Rs.83,13,550/- . The disallowances work out to Rs.1,20,82,774/-. Rule 8D(2) (i) NIL Rule 8D((2)(ii) interest 1,29,16,413 X17,17,80,126+ 10,46,99,437/- 2 _____________________________________ 18,81,64,850+12,53,23,297 = 1,29,16,413+13,83,39,781 18,81,64,850+ 12,53,23,297 = 15,67,44,073 = 1,13,91,576 Rule 8D (2) (iii) ½ % of Rs.13,82,39,781 6,91,198 Total 1,20,82,774/- In view of the above provisions, necessary expenses pertaining to exempted income is calculated at Rs.1,20,82,774/- and the same is being disallowed and added to the total income”.
Aggrieved by the order of the AO, the assessee has preferred appeal before the CIT(A). The submission of the assessee before the CIT(A) was that the disallowance u/s.14A of the Act was computed by the AO at Rs.1,20,82,774/- whereas the exempt dividend income earned by the Assessee was only Rs.83,13,550/-. It was argued that the disallowance of expenses u/s.14A of the Act cannot exceed the exempt dividend income. On the above submission the CIT(A) held as follows: - M/s. Neeraj Consultants Ltd. A.Y.2006-07 3
“I have carefully considered the submission put forth on behalf of the appellant along with the supporting details / documents furnished & the judgments of the cases relied upon, perused the facts of the case including the findings of the AO in the impugned assessment order and other materials brought on record. I. T. Rules are not applicable in the relevant assessment year since the same are applicable from the AY 2008-09 and onwards in view of the legal pronouncements relied upon in this regard. At the same time, I agree with the contention of the AO that the provisions of section 14A of the Act are still applicable in the instant case as the appellant has earned dividend income amounting to Rs.83,13,550/- during the year under consideration and claimed exemption u/s.10(34) of the Act. Without prejudice to the appellant’s contention that provisions of section 14A are not applicable to the appellant company. It is submitted the disallowance u/s.14A cannot in case exceed the amount of dividend income earned during the year. Reliance is placed in this regard on the decision of Hon’ble ITAT, Chandigarh in case of ACIT vs. Punjab State Coop & Marketing wherein the Hon’ble Tribunal has held that disallowance u/s.14A cannot exceed the exempt income. Further, it is stated that in appellant’s own case for A. Y.2009-10, the AO has vide his order u/s 143(3) dated 17.11.2011 restricted the disallowance u/s14A to the extent of dividend income earned. In support of this contention a copy of assessment order for A.Y.2009-10 is furnished for ready reference. Thus, it is contended that the disallowance in the relevant year under appeal in case of the appellant, therefore, cannot exceed Rs.83,13,550/- being the dividend income earned during the year. After considering the submission of the appellant along with the case laws relied upon perusing the entire facts of the case and particularly taking into consideration that fact that the AO himself in the assessment order passed u/s143(3) dated 17.11.2011 in the appellant’s own case for AY 2009-10, has restricted the disallowance u/s.14A to the extent of dividend income earned, I am of the view that the AO was not justified in disallowing the expenses of Rs.1,20,82,774/- i.e. exceeding Rs.83,13,550/- being the dividend income earned during the year u/s.14A of the Act to the extent of Rs.83,13,550/- being the dividend income by the appellant company during the year under assessment. Thus, this ground of appeal is partly allowed.”
6. Aggrieved by the order of the CIT(A) the revenue has raised ground no. 1 and 2 before the Tribunal.
7. At the time of hearing it was brought to our notice that the Hon’ble Delhi High Court in the case of Joint investments Pvt. Ltd. Vs. CIT –Taxsutra.com, 372 ITR 694 (Del) has taken the view that the disallowance u/s 14A of the Act cannot exceed the exempt dividend income. In view of the aforesaid judicial pronouncement, we are of ITA No.316/Kol/2014- M/s. Neeraj Consultants Ltd. A.Y.2006-07 4 the view that there is no merit in ground nos.1 and 2 raised by the Revenue. Accordingly the same are dismissed.
8. Ground no.3 raised by the Revenue read as under: “2. That is the facts and in law of the case the Ld. CIT(A) erred in allowing the interest on loan amounting to Rs.862668/- which was not utilized for business purpose.”
9. The AO disallowed interest expenses claimed by the assessee for the following reasons: “DISALLOWANCE OF INTEREST
The assessee has debited Rs.1,29,16,413/- secured loan and unsecured loan for Rs.14,61,16,864/- and Rs.3,95,67,216. Examination of balance sheet also shows investment in unquoted share for Rs.57,51,120/- as per Sch. 5 and also loan and advance as per Sch,5 for Rs.88,35,187/-. The assessee was asked to explain vide order sheet dated 08.02.2008 why interest debited to P/L a/e should not be disallowed on pro rata basis considering that investment and loan and advances are not used for business purpose, as no benefit is derive. The assessee made a written submission on 25.03.2008 as under:- “The investment made by the assesee company in unquoted equity shares is detailed in schedule 4 of the audited annual accounts. The company has not derived any benefit from these investments during the year under assessment. It is the business of the assessee company to invest in shares and to earn profit on the same on account of appreciation in the value of shares and also to earn dividend income. The directors of the assessee company had taken the decision to invest in these unquoted shares with the expectation of appreciation of their value and also to earn income by way of dividend at some point of time. Though the assessee co. has not derived any benefit from these shares during the year under assessment, but it expects to make profit on the same in future. No disallowance out of interest paid is called for on this account.” The above explanation is not accepted as satisfactory, hence on pro rata basis i.e. Rs.8,62,668/- is being disallowed.”
On appeal by the assessee the CIT(A) deleted the disallowance made by the AO observing as follows: “I have carefully considered the submissions put forth on behalf of the appellant along with the supporting details/documents furnished and the judgments of the cases relied upon, perused the facts of the case including the findings of the AO in the impugned assessment order and other materials brought on record. The AO has made the M/s. Neeraj Consultants Ltd. A.Y.2006-07 5
disallowance of the interest paid towards the loan and advances on pro-rata basis on account of non use of the fund for the purpose of business of the appellant since no benefit derived the appellant during the year out of the said loan amount. However, in this regard, the AR of the appellant submitted that the main business of the appellant company is dealing in shares, leasing and finance in all kinds of goods and securities and making investments etc. During the year under assessment, the appellant company has purchased share of Apollo Tyres Ltd. sold shares of Sunlife Trade Links Pvt. Ltd. and secured loan taken from body corporate. It is further submitted that the expenditure incurred by the appellant company during the year under assessment is expenditure which is necessary to keep the company's business running. By referring to the schedules 8, 9 & 10 of the Annual Accounts, it is contended that the expenditure incurred is by way of salaries, administrative expenses and interest expenditure. Thus it is stated that these expenditures are necessarily required to be incurred to keep the company’s business running. In respect of interest expenditure incurred, it is contended that the same relates to loans availed by the assessee company during the year and the preceding years for business purposes and the appellant company is under obligation to pay interest on these loans. Further salaries are also necessarily required to be paid to staff who are required for day to day functioning of the company and to meet statutory compliances.
Therefore it is submitted that these expenses incurred by the appellant company are, allowable expenditure. The A/ R of the appellant placed reliance on the following decision in support of the appellant’s contention:
1.CIT Vs Rampur Timber & Turnery Co. Ltd (1981) 129 ITR 58 (AIL) 2. Nakodar Bus Service Pvt Ltd Vs Cll (1989) 179 ITR 506 (Punj. & Har.)
In view of the above, it is prayed that the disallowance made by the Assessing officer may deleted.
After considering the submission of the appellant and the findings of the AO and perusing the entire facts of the case and keeping in view the principle of the judgments of the cases relied upon. I am of the view that the AO was not justified in making the impugned disallowance of the interest paid towards loan and advances on pro-rata basis by holding that the funds were not used for the business purposes of 3 appellant. It is seen that one of the main business activities of the appellant has dealing in shares along with leasing and finance in all kinds of goods and securities and making investments. Therefore, I agree with the contention of the appellant that the appellant company has not derived any benefit from the investment of shares in the relevant year under appeal cannot be the sole reason for disallowance of interest expenditure Claimed towards the loan fund so long as the fund has been used for one of the main purposes of business of the appellant.
In the light of the above discussion and findings and perusing the facts and circumstances of the case and respectfully following the decisions of the cases relied upon, the AO is directed to delete the disallowance made at Rs. 8,62,668/-on pro rata- basis on account of interest paid towards loan fund. Thus, this ground of appeal is allowed.”
- M/s. Neeraj Consultants Ltd. A.Y.2006-07 6
Aggrieved by the order of the CIT(A), the Revenue has raised Ground No.3 before the Tribunal. We have heard the rival submissions. The learned DR relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A). After considering the rival submissions, we are of the view that there is no merit in Gr.No.3 raised by the Revenue. The AO has accepted that the investments made out of borrowed funds in quoted shares as use of borrowed funds for the purpose of business of the company. However to the extent borrowed funds were used in making investments in unlisted/unquoted companies, the AO has treated the same as not for the purpose of business of the Assessee. Such a distinction was rightly held by the CIT(A) to be not proper. We therefore do not find any merit in Gr.No.3 raised by the Revenue. The same is accordingly dismissed.
In the result, appeal by the revenue is dismissed. Order Pronounced in the Open Court on 19.10.2016