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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI RAJPAL YADAV & SHRI ABRAHAM P GEORGE
PER SHRI ABRAHAM P GEORGE, AM:
This appeal and Cross Objection are directed against an order dated
21-12-2012 of CIT(A)II, Bangalore. Grounds raised by the revenue in its
appeal is on the deletion of disallowance made by the AO under Rule-
8D(2)(ii) of the Income Tax Rules 1962 read along with Section 14A of the
2 ITA No.404(B)/13 & C.O.No.89(B)/13
Income-tax Act, 1961.( in short ‘The Act’). As per the revenue, a
disallowance u/s 14A could be made only by resorting to Rule-8D and not
otherwise.
As against this, assessee in its cross objection, is objecting to the
disallowance made by the AO under rule-8D(2)(iii) which was sustained by
the CIT(A).
Facts apropos are that assessee a builder had filed its return
declaring income of Rs.4,06,68,720/-. It had earned a dividend income of
Rs.33,600/- which was claimed exempt. AO found that assessee had
investments totaling to Rs.63,49,38,874/- in equity shares at the year end.
The AO further noted assessee had charged in its P&L account interest of
Rs.33,93,15,003/-. A proposal was made to disallow the expenditure
attributable to the investments. In reply assessee stated that none of the
investments were made out of any loans. As per the assessee it had
general reserves of Rs.5.15 Crores and interest free deposits from tenants
Rs.49.13 Crores, apart from its capital. As per the assessee therefore, there
was no question of disallowance u/s 14A of the Act. AO was of the opinion
that reply was superficial and the assessee had not adduced anything to
show that the investments was made from non interest bearing funds. As
per the AO assessee did not produce the fund flow statement without
which it was not possible to verify its claim. Further, as per the AO
whether the dividend was declared by various private companies in which
3 ITA No.404(B)/13 & C.O.No.89(B)/13
assessee had invested was irrelevant since non-declaration of dividend
were only to avoid dividend distribution tax. He therefore, applied Rule
8D(2)(ii) on the interest claim of Rs.33,93,15,003/-and computed a
disallowance of Rs.4,64,15,708/-. For the disallowance under Rule
8D(2)(iii), AO applied 0.5% of average value of investments and arrived at a
figure of Rs.31,74,299/-. The total disallowance made u/s 14A came to
Rs.4,95,90,007/-.
Aggrieved assessee moved in appeal before the CIT(A). Argument
of the assessee was that the investments were made out of the funds
internally generated and no portion of the bank loans wERE utilized. As
per the assessee there was no nexus between bank loans and the
investments. Assessee pointed out that the exempt income earned came to
Rs.33,600/- only and it had not expended any amount for earning such
income. Further, as per the assessee, AO had not effectively rebutted its
claim of no expenditure for earning exempt income. Reliance was placed
on the decision of Hon’ble P&H High Court in the case of CIT Vs Hero
Cycles Ltd.,323 ITR 518 and that of Chennai Bench of the Tribunal in the
case of Siva Industries & Holdings Ltd., Vs ACIT 59 DTR 182. Assessee
also pointed to the CIT(A) that investments were all made prior to the
relevant previous year.
4 ITA No.404(B)/13 & C.O.No.89(B)/13
Learned CIT(A) after considering submissions and details filed by
the assessee held that assessee had interest free funds which satisfied the
requirement of the investments made by it. As per the CIT(A) major
portions of the investments were made during FY: 2005-06. He therefore,
held that disallowance under Rule 8D(2)(ii) was not called for. However,
vis-a-vis disallowance made under Rule 8D(2)(iii), learned CIT(A) was of the
opinion, that no investment could stand together for years without any
expenditure. As per the learned CIT(A), disallowance under Rule 8D
should be limited to what was mandated under sub-clause(iii) thereof. He
therefore, deleted the disallowance made under Rule 8D(ii) while
confirming the disallowance made under Rule 8D(2)(iii) of the Act.
Now before us, learned DR strongly assailing the order of the
CIT(A) in so far as the disallowance under Rule 8D(ii) was deleted
submitted that assessee was unable to bring on record any evidence to
show that only own funds were utilized for making the investments. As
per the learned DR, AO had recorded his satisfaction that the claim of the
assessee was incorrect in this regard. Assessee had failed to produce a
cash flow statement to show that only non-interest bearing funds were
used for making the investments. Further, according to the learned DR,
earning of income from investments was not necessary pre-requisite for
invoking Sec14A of the Act. Once the said section was invoked AO was
duty bound to make a disallowance under every clause of Rule 8D and
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could not limit himself to clause(iii) thereof, Thus, according to learned
DR, the CIT(A) erred in deleting the disallowance made under Rule 8D(2)(ii).
Per contra, and in support of the Cross Objection learned AR
submitted that assessee had total investments working out to
Rs.63,49,8,874/- of which the interest from dividend of Rs.33,600/- came
from investments in shares worth Rs.2,30,400/- of M/s Indian Overseas
Bank (IOB). The major investments were in shares of Drive-in enterprises
Limited, M/s Prakruthi Infrastructure and Development Co.,Ltd., and
Chamundi Plasto Sacks Pvt.Ltd and these had not yielded any dividend.
The share capital and reserves of the assessee as on 31-03-2009 came to
Rs.52,64,52,854/- apart from the interest free advance received from its
lessees. As per the learned AR the increase in investments during relevant
previous year was negligible. Major part of the investments pertained to
the preceding years. Learned AR submitted that when the funds had gone
out of a mixed pool the presumption was that investments in tax free
instruments had gone out of interest free funds. Further, as per the
learned AR assessee had not incurred any indirect expenditure and
sustenance of the disallowance under rule 8D(2)(iii) was incorrect.
According to him, computation of disallowance under Rule 8D was not
automatic. Learned AR submitted that disallowance under Rule 8D(2)(iii)
was not warranted since the investments which had yielded the dividend
income were held without any change and no expenditure whatsoever was
6 ITA No.404(B)/13 & C.O.No.89(B)/13
incurred by the assessee for getting the tax free dividend of Rs.33,600/-.
In any case, as per the learned AR, the AO had not recorded the necessary
satisfaction for discounting the claim of the assessee of having incurred no
expenditure vis-à-vis the tax free investments. Thus, according to him,
there was no case of disallowance u/s 14A of the Act.
We have heard the rival contentions and perused the orders
carefully. A look at the balance sheet of the assessee would show its share
capital and reserves as on 31-03-2008 and as on 31-03-2009 as under;
Share holders fund: As at 31-03-2009 As at 31-03-2008
a) Share capital 174,001,100 174,001,100
b) Reserves & Surplus 352,451,754 346,701,344 526,452,854 520,702,444
Apart from this, assessee had rental deposits from its tenants, which as per schedule-IV of its balance sheet dated 31-03-2009. a) Payable to IBM India for rent deposit for SA 73,471,321 73,471,321 b) Payable to EMC for rent deposit 40,986,000 35,640,000 c) Payable to IBM India for rent deposit for block A 69,129,574 69,129,574 d) Payable to IBM India for rent deposit for block C 110,643,679 110,643,679 e) Payable to CISCO for rent deposit for block D 156,315,852 156,315,852 f) IBM Tower KEB refundable deposit 14,493,848 14,493,848 g) CISCO KEB refundable deposit 7,437,845 7,437,845 472,478119 467,132,119
As against this, the total investment of the assessee as on 31-03-
2008 stood at Rs.63,47,80,874/- and as on 31-03-2009 Rs.63,49,38,875/-
7 ITA No.404(B)/13 & C.O.No.89(B)/13
Revenue has not rebutted the contention of the assessee that rental
deposits carried no interest. Thus, without doubt, interest free funds were
available with assessee which was substantially higher than the
investments made by it. In our opinion, it is not necessary to draw a one
to one nexus between investments and interest free funds. When the
funds had gone out of a common pool and the assessee had interest free
funds in excess of the investments, it could take a valid plea that such
investments were made out of interest free funds. In taking this view we
are fortified by the judgment of Hon’ble Gujarat High Court in the case of
CIT Vs Gujarat Industrial Development Corporation Ltd (2013) 218
Taxmann Guj.142, which view was taken also by Hon’ble Punjab &
Haryana High Court in the case of CIT Vs Deepak Metal (2014)361 ITR
Relevant parts of the former judgment are reproduced hereunder;
4.1 At the outset, it is needed to be mentioned that Section 14A was incorporated in relation to the income not includible in total income. The assessee obtained unsecured Government loans of huge amount of Rs.384.95 crores and paid interest to the tune of Rs.6.62 crores (rounded off). It also invested in different kinds of equity shares, a large amount to the tune of Rs.295.78 crores (rounded off) and as per the provision of Section 10(34), the prospective dividend income received from such investment is exempted from tax. This was
8 ITA No.404(B)/13 & C.O.No.89(B)/13
perceived to be a diversion of business fund as the investment in equity shares bearing tax free returns was held not permissible by the Assessing Officer under Section 14A for the purpose of computing total income under this Chapter. No deduction is permissible in respect of the expenditure incurred by the assessee in relation to the income, which does not form part of the total income under the Act.
The Tribunal on considering the case of Maruti Udyog Ltd v/s. DCIT (supra) did sustain the proposed disallowance under Section 14A of the Act. The Tribunal rightly held that the nexus between the borrowed fund and the investment can be said to be established only when the interest free funds are not available with the assessee. It further held that no nexus of such kind was proved before the Assessing Officer. Thus, when there was sufficient interest free funds available with the assessee and when the Department failed to establish the link between the borrowed fund and the investment made by the assessee in the equity shares, addition made on account of disallowance of Rs.6,62,50,000/- by Assessing Officer has been rightly deleted by both the CIT(A) and the Tribunal.
It would be apt to refer to the decision of this Court rendered in the case of Commissioner of Income Tax vs. Raghuvir Synthetics Ltd. in Tax Appeal No.829 of 2007 where the question was of assessee having given interest free loans to the associates concerns when it was otherwise paying the interest on certain funds it had borrowed. Factually, when it was found that huge funds were available without any interest liability with the assessee and with no evidence to indicate that the borrowed money was utilized for the purpose of advancement of the sister concerns, the assessee was held eligible for allowance of the interest.
Reference is needed here to the judgment of the Delhi High Court in the case of Commissioner of Income-Tax vs. Kribhco reported in (2012) 349 ITR 618 (Delhi), wherein also similar question was answered in favour of the assessee and against the Revenue.
9 ITA No.404(B)/13 & C.O.No.89(B)/13
In view of the discussion made hereinabove, it is to be stated that it is expected of the Department to establish a nexus between the interest bearing funds borrowed and those invested by the assessee respondent. Only when it is shown that the interest free funds are not available with the assessee, the question would arise of fastening the tax liability on the assessee. In the instant case, the respondent assessee had not used borrowed funds, for the purpose of investment in equity shares. For the deduction claimed under Section 80M, on the dividend income of these shares, both the CIT (Appeals) and the Tribunal have rightly allowed the interest free expenses incurred for earning the dividend and allowed the deduction under Section 80M on the net income received. And, the Revenue having failed to establish that the respondent assessee had incurred any expenses for earning dividend income from the amount borrowed, they have rightly not added sum of Rs.6.62 crores invoking provisions of Section 14A which does not permit deduction of expenditure incurred in relation to income not includible in total income
In the case of CIT Vs Deepak Metal observations of the Hon’ble Punjab & Hayana High Court were as under;
Sole ground taken by the revenue in these appeals is that the dividend income returned by the assessee could not have been earned by him without making direct or indirect expenses. Contention of the revenue is that Section 14-A of the Act is a special provision and in order to escape applicability of this provision, onus was upon the assessee to prove that no expenditure was incurred by him for earning this exempted income. It is further urged by the revenue that the Tribunal completely overlooked the scope of Rule 8-D of the Rules in relation to provision of Section 14-A of the Act.
The revenue has referred to sub-section 3 of Section 14-A of the Act, whereas the assessee has pointedly mentioned about sweep of
10 ITA No.404(B)/13 & C.O.No.89(B)/13
sub-section 2 of Section 14-A of the Act to which sub-section 3, relied upon by the revenue, also makes reference.
For better evaluation, provision of Section 14-A of the Act is reproduced as below:
"14A. (1) For the purposes of computing the total income under this 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 this Act.
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section147 or pass an order enhancing the assessment or reducing are fund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001."
Perusal of the aforesaid Section leaves no manner of doubt that plea of the revenue that onus was upon the assessee to prove quantum of expenditure incurred on earning of tax free income of dividend, is correct.
11 ITA No.404(B)/13 & C.O.No.89(B)/13
When consistent case of the assessee, despite notice given by the Assessing Officer to give details of the expenditure made on earning of exempted income in the nature of dividend, version of the assessee was that he had not made any expenditure on earning such income, the Assessing Officer in terms of sub-section 2 of Section 14-A of the Act was to proceed further to collect such material or evidence to determine expenditure, if any, incurred by the assessee but the Assessing Officer instead relying on Rule 8-D of the Rules applied as a formula, applicable to an assessee who has incurred expenditure by way of interest which is not directly attributable to any particular income or receipt which is not the case of the present assessee, which was clearly a wrong application introduced as a substitute for sub- section 2 of Section 14-A of the Act and thus was not permissible in law.
At this stage, reference to the impugned judgment of the Tribunal is necessary. In para 14 of its judgment, the Tribunal has observed as under:
"Before any disallowance is made, essentially there has to be certain expenditure which must have been incurred by the assessee, which in the present case is missing. The Assessing Officer has not brought on record any expense having been incurred by the assessee to earn the non-exempt income or the exempt income. In the absence of the same, it cannot be said that the assessee had actually incurred any expenditure. Therefore, whether before insertion of Rule 8-D or thereafter this fact has to be brought on record by the authorities below which in the present case has not been done."
"Having not incurred any expenditure which can be disallowed or any such expenses having not been brought on record, there cannot be any disallowance of any expenditure under Rule 8-D or otherwise against the exempt income. Our view finds support from the decision in the case of Hero Cycles Limited and Walfort Share & Stock Brokers (P) Ltd. (supra). In the circumstances and facts of the case, we find
12 ITA No.404(B)/13 & C.O.No.89(B)/13
no infirmity in the findings of ld. CIT(A). Thus, ground No.2 of Revenue is dismissed."
At this stage, reference may be made to decision of this Court dated 4.11.2009 in ITA No.331 of 2009 Commissioner of Income Tax- II Versus M/s Hero Cycles Limited wherein this controversy has been set at rest. Paras 3 and 4 of the said judgment for ready reference are given as below:
"3. Learned counsel for the appellant relies upon Section14A (2) and Rule 8D (1) (b) to submit that even where the assessee claimed that no expenditure had been incurred, the correctness of such claim could be gone into by the Assessing Officer and in the present case, the claim of the assessee that no expenditure was incurred was found to be not acceptable by the Assessing Officer and thus disallowance was justified. We are unable to accept the submission.
In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under Section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under Section 14A and the impact of expenditure so incurred cannot be allowed to be setoff against the business income which may nullify the mandate of Section 14A, cannot be accepted. Disallowance under Section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible. We have taken this view earlier also in ITA No.504 of 2008 (Commissioner of Income Tax Chandigarh II vs. M/s Winsome Textile Industries Limited,
13 ITA No.404(B)/13 & C.O.No.89(B)/13
Chandigarh),decided on 25.8.2009, wherein it was observed as under:-
"6. Contention raised on behalf of the revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this Court in CIT v. Abhishek Industries Limited, (2006) 286 ITR 1and therefore, disallowance under section 14A was justified."
In view of law laid down by judgment of this Court which is fully applicable to the facts of this case, nothing remains to be adjudicated afresh.
In view of the discussion made earlier, we are of the opinion that no substantial question
This being the case, question of disallowance of interest u/s 14A of the Act,
do not arise at all.
Vis-à-vis the disallowance made under Rule 8D(2)(iii), a look at the
assessment order clearly show that assessee, though it did not take
specific plea it had stated that there was nothing which called for a
disallowance under section 14A investment portfolio. Reply of the assessee
on the proposed disallowance under section 14A of the Act given before the
AO read as under;
“ The question of disallowance u/s 14A r.w. Rules 8D will not arise since the company has not made investments out of the loans taken from various banks. All these investments have been made out of its internal generation
14 ITA No.404(B)/13 & C.O.No.89(B)/13
and the rent deposits from various tenants on which no interest is payable. Major portion of investments were made during the financial year 2005-06 in which year the general reserve was Rs.5.15 Crores and the deposits received from the tenants was Rs.49.13 Crores. Hence no portion of the loans from banks was used for the purpose of investments. With regard to investment in Drive in Enterprises, the said amount is on account of revaluation of lease hold right and hence no cash has been paid”.
Though, nothing specific has been mentioned about non-incurring of any
indirect expenditure, it is clear that major part of the investments were
done in FY: 2005-06. Incremental investment was only 4.80 lakhs. The
investment which yielded the dividend income of Rs.33,600/- claimed as
exempt, came from shares worth Rs.2,30,400/- held in M/s Indian
Overseas Bank, which holding was the same all though, brought forward
from earlier year. Under section 14A of the Act, once assessee has taken a
stand that it had not incurred any expenditure under section 14A, then in
our opinion, the AO is not justified in invoking Rule 8D(2)(iii) for a
disallowance of indirect expenditure unless he recorded his dis-satisfaction
of claim. It is essential such non-satisfaction has to be given with cogent
reasons before invoking Section 14A. Doctrine of satisfaction no doubt,
does not mean that an AO should presume what was in the mind of the
assessee and express his approval or disapproval thereon. However, once
assessee say that it had incurred no expense covered by section 14A of the
15 ITA No.404(B)/13 & C.O.No.89(B)/13
Act for its investment portpolio, AO has to make a verification. Especially
so, when incremental investments is negligible. In these circumstances, we
are of the opinion that CIT(A) while he was justified in deleting the
disallowances made under Rule 8D(2)(ii) and ought not have sustained the
disallowance made under Rule 8D(2)(iii). Order of the learned CIT(A) is set
aside to the extent. Disallowance under rule 8D(iii) is also deleted.
In the result, the appeal of the revenue is dismissed whereas the
cross objection of the assessee is allowed.
Order pronounced in the open Court on 20-02-2015.
Sd/- Sd/- (RAJPAL YADAV) (ABRAHAM P GEORGE) JUDICIAL MEMBER (ACCOUNTANT MEMBER) Bangalore: D a t e d : 20-02-2015 am* Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order
AR, ITAT, Bangalore