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Income Tax Appellate Tribunal, BANGALORE BENCH B, BANGALORE
Before: SHRI. N. V. VASUDEVAN
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In this appeal filed by assessee, it assails an order dt.30.03.2013, u/s.263 of the Income-tax Act, 1961 (‘the Act’in short), for the assessment year 2008- 09.
Facts apropos are that assessee had filed its return for A. Y. 2008-09 declaring income of Rs.4,17,60,770/- and the assessment was completed u/s.143(3) of the Act, on 21.12.2010, assessing the total income at ITA.722/Bang/2012 Page - 2 Rs.4,70,77,660/-. In the said assessment, disallowance of Rs.16,896/- was made in relation to claim of depreciation on computers, for a reason that a part of such claim were on computer peripherals.
Thereafter on 28.03.2013, Notice u/s.263 of the Act was issued by the CIT citing two reasons. First was that interest expenditure of Rs.73,12,500/- claimed on a loan of Rs.6.5 crores raised from State Bank of India was not allowable since the loan was intended for starting a new amusement park at Mumbai and assessee had dropped the plan. The second reason cited by the CIT was that assessee had made an investment of Rs.4 crores in M/s. Wonderla Holiday (P) Ltd, under the same management and on such investment Section 14A of the Act was applicable.
In its reply to the show-cause notice assessee stated that land was purchased for the project which was an extension of its already existing businessand the loan taken from SBI was utilised for this purpose. As per the assssee, since land could be used as soon as it was purchased and there was no question of any installation, interest could be claimed as revenue expenditure.
Alternatively it was submitted by the assessee that if it was not considered as revenue expenditure, it should be allowed to be capitalised along with the cost of acquisition of the asset. Vis-à-vis, application of Section 14A of the Act, on investments made in Wonderla Holiday (P) Ltd, submission of the assessee was that no dividend what so ever was received from the said company during the relevant previous year.
ITA.722/Bang/2012 Page - 3
However, CIT was not impressed in the above reply. According to him, the land purchased using the loan raised by the assessee was not used for the purpose for which it was acquired and therefore, the interest paid on such loans could not be allowed as revenue outgo. Vis-à-vis application of Section 14A of the Act, the view of CIT was that in the judgment of Hon’ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd v. DCIT [(2010) 328 ITR 81), it had held that Rule 8D(2)(iii) of the IT Rules could be applied for ascertaining the administrative and other expenditure relating to tax free investments. As per the CIT, the AO had failed to take into consideration these issues and therefore, he considered the assessment order to be erroneous insofar as it was prejudicial to the interests of Revenue.
Now before us, Ld. AR submitted that in so far as the issue, viz., interest on loan from SBI was concerned, he was not pressing the relevant grounds.
However, in so far as the disallowance contemplated u/s.14A of the Act, Ld.AR submitted that there was no error in the order of the AO since there was no scope for any such disallowance, assessee having not received any exempt dividend income from the investments during the relevant previous year.
Per contra, Ld. DR supported the orders of the authorities below.
We have perused the materials on record and considered the rival contentions. In so far as the first issue viz., interest claimed on loan from SBI, used for acquiring the land in question was concerned, Ld. AR has admitted that the issue required a look by the AO, since it was not verified by him at the stage ITA.722/Bang/2012 Page - 4 of the assessment proceedings. Hence, in so far as this particular claim of the assessee is concerned, we cannot find any fault in the order of the CIT.
However, vis-a-vis the second issue, viz., disallowance u/s.14A of the Act, assessee had pointed out before the CIT that it did not have any exempt income.
That a disallowance u/s.14A of the Act, can be made only if there is a claim of exempt income, is clear from various judgments of Hon’ble High Courts, which have been discussed hereunder in the following paragraphs :
In the case of CIT Vs M/s. Shivam Motors P.Ltd. (ITA number 88 of 2014 judgment dated 5-5-2014 for AY 2008-09) the question of law raised by the Revenue before the Hon Allahabad High Court was as under:
Whether on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was justified in upholding the decision of CIT(A) in deleting the disallowance of Rs 2,03,752/- u/s.14A ignoring the fact that there is difference of opinion of various courts on the view taken by the ITAT that in the absence of tax free income, no disallowance u/s.14A is permissible.
The High Court while answering the above question held as under:- “As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the ITA.722/Bang/2012 Page - 5
corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2,03,752/- made by the Assessing Officer was in order.” 11. The Gujarat High Court in the case of CIT Vs. Corrtech Energy Pvt. Ltd.(Tax Appeal 239 0f 2014 dated 24-3-2014) held as under:-
We have given our thoughtful consideration to the facts and the decision relied upon by the Id AR. The Hon'ble Punjab & Haryana High Court in the case of CIT vs. Winsome Textile Industries Ltd. reported at (2009) 3191TR 204(P&H) has held that in the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application. In this case also, the assessee has not claimed any exempt income in this year. Therefore, respectfully following the judgement of Hon'ble High Court of Punjab & Haryana in the case of CIT vs. Winsome Textile Industries Ltd. (supra), we hereby allow this ground and direct the AO to delete the addition. Therefore, ground Nos 1 to 1.2 raised by the assessee in its cross objection are allowed.
The Division Bench of Hon Punjab and Haryana High Court in case of Commissioner of Income Tax v Winsome Textile Industries Ltd reported in (2009) 319 ITR 204 had observed as under:
"7. We do not find any merit in this submission. The judgment of this court in Abhishek Industries Ltd (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly ITA.722/Bang/2012 Page - 6 the assesse did not make any claim for exemption. In such a situation section 14A could have no application." 13. The Hon’ble Bombay High Court in the case of CIT Vs.Delite Enterprises(Tax Appeal 110 of 2009 dated 26-2-2009) held as under:-
“The Revenue is in appeal on the following questions ;
A-Whether on the facts and in the circumstance of the case and in law the Hon'ble Tribunal was right in deleting the disallowance made by the Assessing Officer of interest paid by the Assessee Company on borrowed funds amounting to Rs.241.10 lakhs overlooking the fact that the borrowed funds were used by the Assessee Company to invest in the Capital of another Partnership Firm and since profits derived by the Assessee Company from a Partnership firm were exempt from tax u/s.10(2A) of the Income-tax Act, the interest expense related to such tax free profits is to be disallowed u/s.14A of the Income Tax Act? In so far as Question (A) is concerned, on facts we find that there is no profit for the relevant assessment year. Hence the question as framed would not arise.
Similar view has been taken by the Hon’be Punjab & Haryana High Court in the case of CIT Vs. M/s. Lakhani Marketing Incl. in of 2008 dated 2.4.2014. The Hon’ble High Court while affirming the decisions of CIT(A) as well as the Tribunal in deleting the disallowance made under section 14A observed as under:-
“7. After hearing learned counsel for the parties, we do not find any merit in the appeals. The primary issue that arises for consideration in these appeals is whether the CIT(A) as well as the Tribunal were right in allowing deduction of interest liability out of other income and the claim of the revenue to disallow the same under section 14A of the Act was justified.
ITA.722/Bang/2012 Page - 7 The CIT(A) vide order dated 24.6.2004 annexure A.II, recorded as under:- "7.2 Keeping in view the above facts and circumstances of the case it is held that the AO was not correct in applying section 14A of the IT Act in disallowing the expenditure on account of interest amounting to Rs.46,91,684/-. It was incumbent on the AO to establish a nexus between the expenditure incurred and the income which was exempt under the Act. Facts clearly do not support the action of the AO. Disallowance is accordingly deleted. The AO is directed to recompute the income accordingly."
We are, therefore, of the opinion that in so far as the issue relating to disallowance u/s.14A is concerned, there was no error in the assessment order, which could be considered as prejudicial to the interests of Revenue.
Therefore, while sustaining the order of CIT, passed u/s.263 of the Act, we modify such order in that the AO shall in the assessment to be done pursuant to such order, consider only the issue with regard to interest on loans taken from SBI and not the other issue, viz, disallowance u/s.14A of the Act. Order of the CIT is modified to this extent.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 11th day of June, 2015.