BINANI INDUSTRIES LIMITED,KOLKATA vs. DCIT-CC-XXVIII, KOLKATA, KOLKATA

आदेश /O R D E R PER Waseem Ahmed, Accountant Member:- The cross-appeals by the assessee and Revenue are against the order of Commissioner of Income Tax (Appeals)-Central-I, Kolkata dated 28.06.2013. Assessment was framed by DCIT, Central Circle-XXVIII, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 06.03.2013 for assessment year 2010-11.

2. On the fact and circumstances of the case and in law, the CIT(A) erred in confirming addition of Rs1,37,20,788/- u/s 14A r.w.r 8D(iii) to the book profit computed u/s. 115JB of the Act.

3. Your appellant craves leave to alter, modify, amend or delete any of the above grounds of appeals, or to add one or more additional ground(s), at or before the hearing of the appeal, as may be necessary.”

4. First issue raised by assessee in its appeal is that Ld. CIT(A) erred in confirming the action of Assessing Officer by sustaining the disallowance u/s. 14A r.w.s Rule 8D(iii) of the IT Rules, 1962 (‘the Rule’ for short) for ₹1,37,20,788/-.

5. Briefly stated facts in the present case are that assessee is a Limited Company and engaged in the business of consultancy and financial services. The assessee for the year under consideration, filed its return of income at loss of ₹10,21,13,088/-. Thereafter the case was selected for scrutiny assessment. Subsequently notice u/s 143(2) of the Act was issued. The assessee, for the year, under consideration has derived dividend income for an amount of ₹27,78,32,126/- which was claimed exempted from tax u/s. 10(34) of the Act. During the course of assessment proceedings, AO observed that no expenditure in connection with dividend income has been disallowed as per the provision of Sec. 14A of the Act. Accordingly, AO sought clarification from assessee by issuing notice. In compliance to said notice, assessee submitted that major dividend income was received from M/s Binani Cement Ltd. (BCL for short), subsidiary company of assessee, through ECS. The investment was not made in BCL by way of cash / bank but this investment is the result of hive off the business of cement division towards separate company. All the investments & 2199/Kol/2013 A.Y.2010-11 Binani Inds. Ltd. vs. DCIT CC-XXVIII, Kol. Page 3 were made in the subsidiary company out of share capital, reserve & surplus and internal accruals and promoter’s contribution. In none of the case, borrowed fund was used in making such investment. These are very old investment of assessee and no managerial services were involved to maintain such investment. However, the AO disregarded the claim of assessee and invoked the provision of Sec. 14A r.w.s. Rule 8D of the IT Rule, 1962. Accordingly, the following disallowances were made by Assessing Officer:- i) Direct expenditure NIL ii) Disallowance of interest of ₹4,08,49,271/- iii) .5% of average investment of ₹1,37,20,788/-

6. Aggrieved, assessee preferred an appeal before Ld. CIT(A) who deleted the addition made under Rule 8D(ii) for an amount of ₹4,08,49,271/-. However, Ld. CIT(A) confirmed the addition made by AO under Rule 8D(iii) of the IT Rule for an amount of ₹1,37,20,788/-. Now, against the order of Ld. CIT(A) for deleting the addition for the disallowance of interest under Rule 8D(ii) of the IT Rule, Revenue is in appeal before us. Similarly, for the addition made by AO under Rule 8D(iii) of the IT Rule, assessee is in appeal before us.

7. Aggrieved, both Revenue and assessee came in appeal before us. First we take the Assessee’s appeal ITA 2176/kol/2013

8. Before us Ld. AR has submitted paper book which is running from pages 1 to 7 and prayed for deletion of the disallowance made under Rule 8D(iii) of the IT Rule for ₹1,37,20,788/-. Ld. AR before us submitted that investment has been made by assessee in its subsidiary company which is nothing but the strategic investment therefore no disallowance should be made. On the other hand, Ld. DR submitted that similar disallowance was made in the earlier year under Rule 8D(iii) of the IT Rule by assessee in its own case. However, no such disallowance was made for the year under consideration. Therefore, Ld. DR submitted that the consistency should be maintained for disallowing the aforesaid expenses and he prayed before the Bench to confirm the action of AO.

ITA No.2176 & 2199/Kol/2013 A.Y.2010-11 Binani Inds. Ltd. vs. DCIT CC-XXVIII, Kol. Page 4 9. We have heard rival contentions and perused the materials available on record. At the outset we find that this issue is squarely covered in favour of assessee in its own case for A.Y 2009-10 in ITA No.144/Kol/2013. The relevant operative portion of the said order is reproduced below:- “However, we find that the calculation of disallowance under Rule 8D(iii) made by the Assessing Officer and upheld by Ld CIT(A) is not correct In view of the fact that Assessing Officer had included the value of total investments for calculation of disallowance whereas in our opinion the value of those investments should have been included which were made for the purpose of earning exempt income. The assessee had made significant investments in the shares of subsidiary companies which are definitely not for the purpose of earning exempt income. The Hon 'ble Tribunal in in the case of Promain Ltd., after relying upon a Kolkata judgment of Tribunal in I.T.A No.1331 has held that strategic investment has to be excluded for the purpose of arriving at disallowance under Rule 8D(iii). The Tribunal had relied upon the findings of Kolkata Tribunal in the case of Rei Agro Ltd. v. DCIT in I.T.A No.1331/Del/2011 dated 29.7.2011. The relevant portion of Tribunal findings as contained in the Kolkata Tribunal are reproduced below:- “(iii) Further in Rule BD(2)(ii), the words used in numerator B are "the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance sheet as on the first day and in the last day of the previous year". The Assessing Officer was wrong in taking into consideration the investment of Rs.I03 crores made during the year which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. Thus; It is not the total investment at all beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. The term "average of the value of investment" is used to take care of cases where there is the issue of dividend striping. iv) Under Rule 8D(2)(iii), what is disallowable is an amount equal to ½ percentage of the average value of investment the income from which does not or shall not form part of the total income/. Thus, under sub clause (iii), what is disallowed is ½ percentage of the numerator B in Rule 8D(2)(ii). This has to be calculated on the same lines as mentioned earlier in respect of Numerator B in the Rule 8D(2)(ii). Thus, not all investments become the subject matter of consideration when computing disallowance U/S 14A read with Rule 8D. The disallowance U/S 14A read with Rule BD is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. (AY.) (I.T.A No.1331/Kol/2011 dated 29.7.2011." & 2199/Kol/2013 A.Y.2010-11 Binani Inds. Ltd. vs. DCIT CC-XXVIII, Kol. Page 5 In view of the aforesaid facts and respectfully following the various judicial precedents relied upon hereinabove, we find no infirmity in the order passed by Ld. CIT(A) in this regard and accordingly, the ground raised by assessee is allowed and that of Revenue is dismissed. Now coming to the appeal of Revenue in ITA 2199/Kol/2013

10. The grounds of appeal, raised by the Revenue are reproduced as under:- “1. That the Ld. CIT(A) has failed to appreciate: (a) That the shares were acquired in lieu of assets of the assessee- company transferred to its subsidiary company, (b) That the assessee had loan as on the date of transfer of assets, (c) That therefore, the possibility of interest-bearing loan having been utilized in acquisition of the said assets cannot be ruled out, (d) That as per the ratio laid down by the jurisdictional High Court in the case of Dhanuka & Sons v. Commissioner of Income-tax, (Central) 1[2011] [12 taxmann.com 227 (Cal.) it is for the assessee to sow the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands o the assessee at the relevant point of time without taking benefit of any loan.

The common issue raised by Revenue in this ground of appeal is that ld. CIT(A) erred in deleting the addition made by the AO under section 14A r.w.r. 8D(2)(ii) for Rs. 4,08,49,271.00 on account of interest. The facts as emerging from the order of the lower authorities have already been explained in Para 5 & 6 of this order. & 2199/Kol/2013 A.Y.2010-11 Binani Inds. Ltd. vs. DCIT CC-XXVIII, Kol. Page 6 Being aggrieved by the order of the ld. CIT(A), Revenue is in appeal before us. The ld. DR before us vehemently supported the order of the AO and the ld. AR relied on the order of ld. CIT(A).

11. We have heard the rival submissions and perused the materials available on record. We find that the entire investments were made long back by the assessee. We hold that the assessee was having sufficient own funds to make those investments in the earlier years. We hold that the Learned AO had not brought on record any nexus between the borrowed funds and the investment in shares of various companies. We find that the following case laws relied upon by the Learned CIT(A) in his order are well placed and are squarely applicable to the facts of the instant case :- • CIT vs Reliance Utilities & Power Ltd (313 ITR 340 ) (Bom) Interest on borrowed capital - investments by assessee - finding that investments were from interest free funds available with assessee - borrowed capital used for purposes of business - interest deductible under Income Tax Act, s. 36(1)(iii).

• G.D.Metsteel Pvt Ltd vs ACIT reported in 142 IT] 641 (Mum ITAT) Held that the investments are made by the assessee's own funds and have been made in the earlier years, no disallowance u/s 14A is required to be made. The Head Note reads as under:- "Business expenditure - Disallowance under section 14A - Apportionment of expenditure - When investments are made from own funds, merely because the assessee had to subsequently borrow the funds for business use, it cannot be said that the borrowed funds have been used for the purposes of investments."

In view of the above facts, we hold that no disallowance of interest is required to be made under rule 8D(i) & 8D (ii) as no direct or indirect interest expenditure has incurred for making investments. Hence this ground of appeal of the Revenue is dismissed.

13. The 2nd issue raised by the assessee in this appeal is that ld. CIT(A) erred in confirming addition of Rs. 1,37,20,788.00 under section 14A r.w.r. 8D(iii) to the book profit computed under section 115JB of the Act. The AO while computing the book profit under section 115JB of the Act has added the amount disallowed under section 14A r.w.r. 8D of Income Tax Rules and accordingly charged MAT on the book profit. The act of the AO was also confirmed by the ld. CIT(A).

However, on perusing the Explanation-1(f) of Section-115JB(2) of the Act, we do not find merit in the contention of the Ld. CIT (A). The relevant provision of the Act is extracted herein below for reference:—

"Section. 115JB & 2199/Kol/2013 A.Y.2010-11 Binani Inds. Ltd. vs. DCIT CC-XXVIII, Kol. Page 8 Explanation-[1] - For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section(2), as increased by —

(a) To (e) . . . . . . . . . . . . . . . . . . . . . . . .

(f) the amount or amounts of expenditure relatable to any income to which [Section-10 (other than the provisions contained in clause (38) thereof] or section 11 or section 12 apply;

(g) To (j) . . . . . . . . . . . . . . . . . . . . . . . ."

From the above it is apparent that the aforesaid provision of the Act does not refer to any disallowance made U/s. 14A of the Act while arriving at the Book Profit for the purpose of Section-115JB(2) of the Act. Further Section 14A of the Act is a provision with fiction disallowing the deemed expenditure attributable to exempt income viz., dividend income U/s. 10 of the Act and Section 115JB of the Act is also a provision with fiction for payment of tax in respect of deemed income. Therefore while computing the profit for the purpose of Section 115JB of the Act another provision with fiction cannot be superimposed. Hence the question of increasing the 'Book Profit' due to the disallowance U/s. 14A of the Act will not arise. However, in the instant case of the assessee, since we have already deleted the addition made U/s. 14A, the question of increasing the book profit will not arise. Further the decision of Hon'ble Apex Court cited by the assessee in the case Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 is also squarely applicable to the case of the assessee. The gist of the same is reproduced herein below for reference:—

"The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J . The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a & 2199/Kol/2013 A.Y.2010-11 Binani Inds. Ltd. vs. DCIT CC-XXVIII, Kol. Page 9 manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub- section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company."

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