DCIT, BANGALORE vs. M/S MICRO LABS LTD.,, BANGALORE

A reading of the provisions of Sec.115JB(1) shows that when an Assessee is a company and the income-tax, payable on the total income as computed under this Act (under the normal provisions of the Act) in respect of any previous year relevant to the assessment year is less than prescribed percentage (this percentage keeps changing for various AYs) of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent. Book profit for the purpose of Sec.115JB of the Act has been defined by Expln.-1 below Sec.115JB(2) as net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956).

In the present case we are concerned with one item which needs to be added to the total income laid down in the first part of Expln.1 clause (f) viz., 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. Identical issue came up for consideration before this Tribunal in DCIT v. Sobha Developers, for A.Y. 2008-09 wherein on identical order of CIT(A) and on identical facts and identical arguments by the Assessee and Revenue, this Tribunal held as follows:- & 1429/B/13 & 764/B/14 Page 20 of 29 “33. As far as ground No.3 is concerned, viz., the addition to the net profit as per profit and loss account expenditure incurred in earning income which does not form part of the total income under the Act, u/s.10 of the Act, it is seen that the quantum of expenditure disallowed by the AO by invoking the provisions of Sec.14A of the Act while computing total income under the normal provisions of the Act has not been challenged by the Assessee and the said disallowance has been accepted by the Assessee. The provisions of section 115JB Explanation 1(f) lay down that the amount of expenditure relatable to income to which section 10 applies, should be added to the profit as per the P&L account. Section 14A of the Act r.w. Rule 8D of the Rules is a reasonable method of calculating the amount of expenditure, in a case where the Assessee has not been able to satisfy the AO regarding the quantum of expenditure incurred in earning income which does not form part of the total income under the Act. If the Assessee satisfies the AO regarding the quantum of expenditure incurred in earning income which does not form part of the total income under the Act than that can be adopted for the purpose of addition under clause (f) of Expln.1 below Sec.115JB(2) of the Act. Rule 8D of the rules come into play only when there is no other basis for arriving at the quantum of expenditure incurred in earning income which does not form part of the total income under the Act. 34. In our opinion, the question formulated by the CIT(A) whether Sec. 14A of the Act read with Rule 8D of the rules can be imported into the provisions of clause (f) to Explanation (1) to section 115JB of the Act, is itself erroneous. The question to be asked is as to how to give effect to the provisions of clause (f) to Explanation (1) to section 115JB of the Act. We do not think that there is any prohibition to adopt the disallowance made by the AO u/s.14A of the Act read with Rule 8D of the rules, while computing total income under the normal provisions of the Act. The argument of the learned counsel for the Assessee that section 14A of the Act is very specific and is applicable only for the purpose of computing total income under Chapter IV of the Act and that section 115JB appears in Chapter XII-B of the Act dealing with specific provisions relating to certain companies and therefore the provisions of Sec.14A read with Rule 8D of the Rules cannot be applied while making addition to net profit as per profit and loss account u/s.115JB Expln.1 clause (f) of the Act, & 1429/B/13 & 764/B/14 Page 21 of 29 because the expression “expenditure relatable” is used in sub- clause (f) of Explanation (1) to section 115JB of the Act whereas expression with the expression used in 14A of the Act is “expenditure incurred by the assessee in relation to” and therefore only direct expenditure attributable to earning of income which does not form part of the total income under the Act can be added under clause(f) of Expln.1 below Sec.115JB(2) of the Act, cannot be accepted. In our view, there is no difference between the expression “expenditure relatable” and the expression “expenditure incurred by the Assessee in relation to”. Both the expressions mean that whatever expenditure are incurred to earn income which does not form part of the total income under the Act, both direct and indirect expenditure, have to be disallowed. There is no basis for the argument u/s. 115JB of the Act, it is only direct expenses that are contemplated as capable of being added to the profits as per P&L account under clause (f) to Expln.1 below Sec.115JB(2) of the Act. 35. As we have already seen, the quantum of expenditure disallowed by the AO by invoking the provisions of Sec.14A of the Act while computing total income under the normal provisions of the Act has not been challenged by the Assessee and the said disallowance has been accepted by the Assessee. In such circumstances, we do not see any reason why the same disallowance cannot be adopted while arriving at the book profits u/s.115JB (2) of the Act read with Explanation 1(f) thereto. In our view the CIT(A) has fallen into an error in coming to a conclusion contrary. We therefore reverse the order the CIT(A) and restore the order of the AO in this regard.”

In our view, the aforesaid decision will apply to the facts of the present case also, however, with the modification that the quantum of deduction u/s. 14A of the Act which is determined while computing the total income of assessee under normal provisions of the Act and which is ultimately sustained by the Tribunal will be substituted with the sum disallowed by the AO. Thus, ground No.3 raised by the revenue is allowed. & 1429/B/13 & 764/B/14 Page 22 of 29 30. In the result, the appeal by the revenue is partly allowed and the assessee’s appeal is allowed.

Ground No.2 raised by the assessee reads as follows:-

The assessee earned dividend income of Rs.38,75,857. It quantified a sum of Rs.3,22,426 as expenditure incurred in earning tax free income dividend income which does not form part of the total income and which is to be disallowed u/s. 14A of the Act.

The break-up of the sum of Rs.3,22,426 is not specifically given, but is stated to be relating to management fee, legal & professional charges, security transaction charges and NSDL charges. It is thus clear that the assessee by implication had claimed that there was no expenditure incurred by way of interest, either directly or indirectly, which is attributable to the borrowed funds which were used for the purpose of investment which yielded tax free income.

The AO observed that Schedule G to the Financial Statements of the assessee had shown investment to the tune of Rs.28,45,29,937 in shares mutual funds of various companies. He was of the view that such investments cannot be made routinely. No prudent businessman would make any investment without applying the resources wisely. Obviously this entails expenditure, direct as well as indirect. He thereafter proceeded to make disallowance u/s. 14A of the Act, which is given as annexure to the assessment order and enclosed as ANNEXURE-II to this order.

Aggrieved by the assessment order, the assessee preferred appeal before the CIT(Appeals).

Before CIT(A), the Assessee submitted that interest bearing loans were borrowed for specific purposes and not for investment purposes and in support of the above contention, the Assessee filed copies of balance sheets as on 31.03.2003 upto 31.03.2009 to show that the various loans availed from banks were all taken for specific purposes and could not have been utilized for making any investments out of which exempt income was earned. These loans include short term loans from IDBI Bank, Exim Bank, Barclays Bank and Standard Chartered Bank in respect of which it was explained that the loans could not have been used for making any long term investment. Copies of some communications from banks regarding sanction of the loans were also filed before me to substantiate the nature of the loan. In respect of IDBI loan, it was submitted that the same had been returned back before the year end, thus bringing the balance to Nil.

On consideration of the above submissions and on perusal of the relevant documents, the CIT(A) was of the view that the claim of the Assessee was not evidenced from the documents submitted in view of the loans and other sources of funds being mixed up in the common pool of funds. The CIT(A) further held that the burden of proof in this matter clearly continues to rest with the Assessee and that it was not enough to merely show that surplus funds were available or that bank loans had been availed for specific purposes including short term reasons. A one-to-one correlation must also be established to prove that the loans were absolutely utilised for the purpose for which they were claimed. The CIT(A) also held that there was no utilisation certificate from the bank filed before the AO nor was such evidence furnished before the CIT(A). The CIT(A) also held that the documents submitted from the bank during the course of appeal only refer to the disbursal of the loan and even these specify certain conditions required to be met. The date-wise actual disbursal and utilisation is not proved from the ledger copies as submitted. The CIT(A) also referred to the decision of Mumbai ITAT in the case of Hercules Hoists Ltd. (ITA No.7944, 7946, 2255 & 7943/mum/2011), wherein it was held that with the introduction of Rule 8D the burden of proof on the assessee has become “more stringent, so that rather than showing existence of sufficient capital, the matter would be required to be examined from the stand point of utilisation of the borrowed interest bearing funds.” In the absence of categorical utilisation certificate from the bank, the CIT(A) was of the view that there was no evidentiary support of the assessee’s claim. Hence, the disallowance u/s.14A of the Act as made by the AO was upheld by the CIT(A).

Aggrieved by the order of CIT(A), the assessee has raised ground No.2.

We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee’s paperbook and the same is enclosed as ANNEXURE-III to this order. It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income.

The Hon’ble Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon’ble Bombay High Court in CIT v. HDFC Bank Ltd., of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made.

In the light of above said decisions, we are of the view that disallowance of interest expenses in the present case of Rs.49,42,473 made under Rule 8D(2)(ii) of the I.T. Rules should be deleted. We order accordingly.

As far as disallowance of Rs.13,91,922 made by the AO under Rule 8D(2)(iii) of the Rules i.e., other expenses are concerned, we find that the assessee had made a claim before the AO that ‘other expenses’ to be considered for disallowance under Rule 8D(2)(iii) is only Rs.3,22,426. The assessee had also given a break-up of ‘other expenses’ also. Without rejecting the claim of assessee, the AO proceeded to make a disallowance invoking Rule 8D of the Rules. In the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co., 328 ITR 81 (Bom), it was held that Rule 8D can be resorted to by the AO only when he rejects the claim made by the assessee regarding expenditure incurred in earning income which does not form part of total income. In the present case, the AO has not done so. We therefore deem it fit and proper to restore this issue of disallowance under Rule 8D(2)(iii) to the AO for fresh consideration in the light of observations made above, after affording assessee & 1429/B/13 & 764/B/14 Page 27 of 29 opportunity of being heard. Thus, ground No.2 raised by the assessee is allowed to the extent indicated above.

Ground No.3 raised by the assessee reads as follows:-

The question that arises for consideration on the aforesaid ground of appeal by the Assessee is as to whether wealth tax liability could be added to the profit as per P&L account for the purpose of arriving at the book profits u/s. 115JB of the Act? The AO did not give any reason for adding provision for wealth-tax to the net profit as per P&L account for arriving at the book profits of the assessee.

Before us, the ld. counsel for the assessee submitted that as per Explanation (1)(a) to section 115JB, the amount of income-tax paid or payable, and the provision therefor; has to be added, and wealth-tax is not included therein. According to him, if at all, addition could be made u/s. Explanation (1)(c) on the ground that provision made is not for an ascertained liability. It was submitted by him that provision for wealth-tax liability is made on the basis of actual net wealth declared by the assessee in wealth-tax returns and it is not an unascertained liability as is sought to be made out by the revenue.

We agree with the submission of the learned counsel for the Assessee that wealth tax liability provision is not covered under Expln— 1(a) to Sec.115JB(2) of the Act. Regarding applicability of Expln-1(c ) to Sec.115JB(2) of the Act is concerned, we are of the view that it would be just and proper to remand this issue for fresh consideration to verify the claim of assessee to the extent that the provision for wealth-tax is based on the actual wealth-tax returns filed by the assessee (and if so), then the same cannot be considered as unascertained liability. Ground No.3 is treated as allowed for statistical purposes.

Thus, the appeal by the assessee is partly allowed.