KIRTIKUMAR NAGINDAS SHAH,SURAT vs. INCOME TAX OFFICER, WARD 2(3)(6), SURAT

The grounds of appeal

raised by the assessee are as follows: “1. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in confirming the action of assessing officer of making the addition without rejecting books of account u/s 145 of the I.T. Act.

In this regard, the assessee has furnished his reply vide letter dated 17.11.2016, stating that interest, expense is completely the interest of various banks and financial institutions. The said loans from banks and financial institutions were used purely in the business activity and it is not covered u/s 14A of the I.T. Act.

However, the assessing officer rejected the reply of the assessee and observed that the assessee has shown secured loan of Rs.4,01,749/- and unsecured loan of Rs.1,98,48,805/-. Further, it was noticed that the assessee has made investment of Rs.2,30,62,334/- to earn exempt income and shown exempt income from partnership firm, income from dividend and income from agricultural activity. Thus, assessing officer noted that assessee’s claim for interest expenses of Rs.18,08,065/- is relatable to exempt income. The assessee has not furnished any separate account for expenses incurred to earn exempt income. Therefore, assessing officer noted that section 14A of the I.T. Act applies in the assessee’s case and claim of interest expenses is required to be disallowed u/s 14A of the I.T. Act, as per rule 8D of the Rules. Therefore, interest expenses of Rs.7,56,965/- was disallowed under section 14A of the I.T. Act and added to the total income of the assessee.

Further, it was also noticed by the assessing officer that assessee has not deducted tax at source on interest expenses of Rs.17,30,151/- u/s 194A of the I.T. Act. Therefore, assessee’s claim

In response to the above show cause notice, neither the assessee has attended nor furnished any written reply. Further, verification of details furnished by the assessee, it was noticed by the assessing officer that assessee has paid/credited interest to the account of the following party:

The observations of the ld. CIT(A) in respect of disallowance under section 14A of the Act, are as follows: “4. The first issue is disallowance u/s 14A. During the year under consideration, the assessee declared exempt income from partnership firm, income from dividend and income from agricultural activity. The AO noted that the assessee had incurred expenditure relatable to the exempt income earned and therefore invoked the provisions of section 14A rw rule 8D resulting in addition of Rs.7,65,965. 4.1 In the appellate proceedings, the assessee submitted that the interest and banking charges aggregating to Rs.18,08,065 paid to various banks and financial institutions was purely used for business activity. It was also contended that the investment in partnership firm were strategic investments and therefore to be excluded for the purpose of average investments u/s 14A r.w.r 8D. Accordingly, assessee made a plea to delete the disallowance u/s 14A. 4.2 I have perused the order and the submission of the assessee. To begin with, there was no dispute that assessee did not earn any exempt income during the year. The assessee had investment in firm, the share of profit from which was exempt to tax along with agriculture income and dividend. And, during assessment proceedings, the assessee claimed that she did not incur any expenditure in relation to such exempt income. Under such circumstances, the AO rightly invoked the provisions of section 14A(3) and worked out the quantum of disallowance as provided in rule 8D. Therefore, no fault can be found in the action of the AO. 4.3 As regards the assessee argument that provisions u/s 14A were not applicable to as the strategic investments made in the firm, the same is not acceptable in view of the Apex court's decision in the case of Maxopp Investment Ltd wherein it was held that the dominant purpose for which the investment was made was not the relevant factor in applying section 14A. Therefore, the assessee’s plea to delete the addition u/s 14A is rejected and the addition is confirmed.”

Shri Mehul Shah, Learned Counsel for the assessee, argued that average investment worked out by the assessing officer is to the tune of Rs.1,67,23,284/-. However, own funds of the assessee is to the tune of Rs.17,6,80,573.51 as per balance sheet as on 31.03.2014,

On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.

I have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee. I note that the assessment year involved in the assessee`s case is the A.Y.2014-15 wherein old Rule 8D of the Rules, is applicable for disallowance under section 14A of the Act. The Rule 8D is amended by the Income Tax (Fourteenth Amendment) Rules, 2016, w.e.f. 02.06.2016, which is not applicable to the assessee under consideration. Section 14A of the Income-Tax Act, 1961, provides for disallowance of expenditure incurred in relation to earning of exempt income. The Central Board of Direct Taxes (CBDT) vide notification no. 43/2016 dated 2 June, 2016, has amended Rule 8D. The new Rule 8D will come into effect from the date of its notification in Official Gazette. In terms of the existing provisions of Rule 8D, the amount to be disallowed shall be the aggregate of (i) expenses directly incurred to earn exempt income; (ii) interest expense (not directly attributable to any exempt income) worked out on the basis of a prescribed formula; and (iii) 0.5% of the average value of investments yielding exempt income. I note that assessee has invested the amount out of own free funds, which is more than the investment, hence no disallowance on account of interest expenses should be made. For that I rely on the judgment of ITA.535/SRT/2023/AY.2014-15 Kiritkumar Nagindas Shah Bennett Coleman & Co. Ltd. vs. Additional Commissioner of Income-tax, Mumbai, [2018] 89 taxmann.com 415 (Mumbai - Trib.), wherein it was held as follows: “Section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to exempt income (Interest) - Assessment year 2008-09 - During relevant year, assessee had earned dividend income from investments in shares and securities and long-term capital gain on sale of mutual funds which it claimed as exempt under section 10(34) and 10(38) respectively - Assessing Officer having invoked section 14A disallowed interest expenses incurred for earning exempt income - It was noted that assessee had furnished details that its own funds were sufficient to cover investments yielding exempt income - Borrowings of assessee were utilised for other business requirements and not for making said investments - Whether, on facts, impugned disallowance of interest paid on borrowed funds was to be deleted - Held, yes [Para 6] [In favour of assessee]IT : Where assessee had furnished details that it had surplus own funds to make investments in shares and mutual funds and it had not used borrowed funds for such purpose, disallowance of interest expenses under section 14A was to be deleted IT: Where assessee had transferred its business division to its subsidiary against shares and debentures, same was not a 'slump sale' but an 'exchange'; thus, provisions of section 50B not would be applied”

From the above judgment of Coordinate Bench of ITAT, Mumbai in the case of Bennett Coleman & Co. Ltd. (supra), it is vivid that where assessee had furnished details that it had surplus own funds to make investments in shares and mutual funds and it had not used borrowed funds for such purpose, the disallowance of interest expenses of Rs.6,73,350/-, under section 14A of the Act, is to be deleted. Therefore, respectfully following the binding precedent, in the case of Bennett Coleman & Co. Ltd(supra), I delete the addition of Rs.6,73,350/- made by the Assessing Officer in respect of interest disallowance under section 14A of the Act.

However, I direct the assessing officer to make the disallowance (addition) at Rs.83,616/- (being 0.50% of average investment of Rs.1,67,23,284/-)

Regarding ground No.2 raised by the assessee, I note that assessee paid interest charges of Rs.17,30,151/- to four different financial institutions without deducting tax u/s 194A of the Act. Since part of the interest amounting to Rs.7,56,965/- was already disallowed u/s 14A, therefore, the assessing officer (AO) considered only the balance interest of Rs.9,73,186/- (Rs.17,30,151 - Rs.7,56,965) for disallowance u/s 40(a)(ia) for non-deduction of tax at source. On appeal by the assessee, the ld CIT(A) has enhanced the addition from Rs.9,73,186/- to Rs. 11,35,955/-, without giving notice of enhancement. However, I note that during the appellate proceedings, the assessee submitted before ld CIT(A) that out of the total interest of Rs.17,30,151/-, the interest of Rs.5,94,196/- was paid to M/s Deutsche Bank AG and since the entity was a banking company, the provisions of section 194A were not applicable. This argument of the assessee was accepted by ld CIT(A), as M/s Deutsche Bank AG is a banking company and hence the corresponding disallowance was deleted by ld CIT(A). The ld Counsel stated that despite of this, ld CIT(A) had enhanced the addition from Rs.9,73,186/- to Rs.11,35,955/-, without issuing notice to the assessee for enhancement and without giving opportunity to the assessee. Therefore, enhancement made by the ld CIT(A) is bad in law and needs to be deleted. In this regard, reliance can be placed on the judgment of Hon`ble Madras High Court in the case of CIT Vs. Lotte India Corporation Ltd (2007) 290 ITR 248 (Mad). Hence, I note that ld. CIT(A) without giving an opportunity to the assessee, has ITA.535/SRT/2023/AY.2014-15 Kiritkumar Nagindas Shah enhanced the assessment, therefore addition made by the ld CIT(A) to the tune of Rs. 11,35,955/-, is hereby deleted.

In the result, ground No.2 raised by the assessee is allowed.

In the result, the appeal filed by the assessee is partly allowed.