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Income Tax Appellate Tribunal, KOLKATA BENCH “C” KOLKATA
Before: Shri Mahavir Singh & Shri Waseem Ahmed
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal by the Revenue is arising out of order of Commissioner of Income Tax (Appeals)-VIII, Kolkata in appeal No.289/CIT(A)-VIII/Kol/09-10 dated 09.08.2011. Assessment was framed by DCIT, Circle-8, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 14.12.2009 for assessment year 2007-08. Grounds raised by Revenue are reproduced below:- “1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not upholding the finding of the Assessing Officer that the entire interest expenditure of Rs.3,52,12,792/- was paid on borrowed fund utilized by the assessee in investment in shares which is easily ascertainable from the shareholder’s fund available with the assessee and the amount of investment standing in the assessee’s balance sheet.
ITA No.1558/K/2011 A.Y. 2007-08 DCIT CIR-8, Kol. v. M/s Newdeal Finance & Investment Ltd. Page 2
That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance u/s. 14A to Rs.2,80,090/- being 2% of the dividend income, which is arbitrary and contrary to the facts of the case in relation to the assessment year 2007-08.”
First we take up Revenue’s ground No.1 where the assessee raised the issue is that Ld. CIT(A) erred in upholding the entire interest expenditure of Rs.3,52,12,792/-. 2.1 Brief facts of the case are that assessee is a Non banking Financial Company (NBFC for short) registered with Reserve Bank of India and mainly dealing in the business of buying and selling of shares and securities. Assessee has filed its return of income for the AY 2007-08 as on 30.10.2007 showing a business loss of Rs.3,36,20,144/-. The return was duly processed under sec 143(1) of the Act and notice u/s 143(2) of the Act was issued upon the assessee for scrutiny assessment.
The financial position of the company as on 31st March 2007 and 31st March 2006 stands as under : Sources of Funds As on 31.03.07 As on 31.03.06 Shares Capital 11,76,00,070 11,76,00,070 Reserve & surplus 2,43,24,828 1,60,03,634 Current liabilities 64,03,66,977 54,98,59,339 Application of Funds As on 31.03.07 As on 31.03.06 Investments 77,66,33,978 68,04,03,245 Current Assets 56,57,897 30,59,798 During the assessment proceedings, AO observed that assessee had borrowed fund which was utilized for the investment in shares. A comparison of the investment and borrowed fund between balance sheet of 31st March 2006 and 31st March 2007 respectively reveals that the entire amount of borrowed fund has been utilized in the investment in shares. The assessee has incurred the expense of interest on loan liability of Rs.3,52,12,792/-. So, it is clear that the assessee is not in the trading business of shares. The investment made by the assessee will either result in dividend income or capital gain income. All the incomes from the investment will either be exempted or be subject to concessional rate of tax. However, assessee has declared following income in its Income Tax Return for the year under consideration
ITA No.1558/K/2011 A.Y. 2007-08 DCIT CIR-8, Kol. v. M/s Newdeal Finance & Investment Ltd. Page 3 Income from business Rs.3,36,20,144/- (-) Income from other sources Rs. 10,46,801/- Income from capital gains Rs. 14,20,475/-
From the above, it is clear that the assessee has claimed the interest expenditure from the business income on the borrowed fund which was utilized in the investment of shares and the same has resulted in the exempted income and the income which is subject to concessional rate of tax. Accordingly, AO disallowed the interest expenditure of Rs. 3,52,12,792/- from the business income and added it to the total income of the assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) . Before Ld. CIT(A) assessee submitted that in previous AYs i.e.1999-00 to 2004-05 and expenditure on interest was disallowed by the AO but Ld. CIT(A) allowed the same u/s 36(1)(iii) of the Act. However the ld. CIT(A) disallowed of expenses u/s 14A of the Act @ 2% of exempt income. Ld. AR of assessee submitted that assessee has borrowed money for its business activities as well as its own money which represents in the books of account as trade investments. The principle as specified u/s 36(1)(iii) of the Act for deduction is that borrowings on which interest is paid should be used for the purpose of business irrespective of whether it is used for capital or revenue purpose. Ld. AR further submitted that assessee rebuts the contention of AO that whole objective of assessee’s investments was with a view to acquiring control over EIH Ltd. The assessee held only 4.5% of shares in the capital of EIH Ltd. and not with a view to acquiring control over it. Ld. AR stated that it was nothing but a strategic investment and he relied on the decision of Hon'ble Gujarat High Court in the case of CIT v. Amola Holdings (P) Ltd. 197 taxmann. 18, where Hon'ble deleted the addition of disallowance of interest made by the AO and held that shares were purchased not for acquiring controlling rights in another company. Ld. AR further relied another case of law Hon'ble Gujarat High Court in the case of ACIT v. Laxmi Agents 125 ITR 227 (Guj), where Hon'ble court held that even if the company invests in shares with a view to exercising control over another company as it is done by the managing agent in order to have more and better control over it, such investments would constitute to have close connection with the business activities of the company. Accordingly, the investments made by the appellant in the present case of EIH Ltd. were not investments simpliciter but those were for the
ITA No.1558/K/2011 A.Y. 2007-08 DCIT CIR-8, Kol. v. M/s Newdeal Finance & Investment Ltd. Page 4 purpose of business of the appellant as held by the Tribunal. Ld. AR further stated that money borrowed was for the purpose of business and the interest expenditure incurred thereon is an allowable deduction and in this regard relied on the decision of Hon'ble Supreme Court in the case of State of Madras v. Coelho (1964) 53 ITR 186 (SC) held that “in ordinary commercial practice, payment of interest is taken as a revenue expenditure”. Further, when the capital was borrowed for the purpose of business, it is immaterial how the borrowed capital was applied because clause (ii) of Sec. 36(1) requires that borrowings, on which interest is paid, should be for the purpose of business. Even if the borrowed money is applied in making investment which yield dividend, the entire interest paid on borrowing should be allowed as deduction for computing business income and no part of interest should be apportioned and deducted from dividend as per ratio held by Hon'ble Supreme Court in the case of Veecumsees v. CIT (1996) 220 ITR 185 (SC). This principle has been enunciated in various judicial pronouncements in the case of India Cements Ltd. v. CIT 60 ITR and by hoc Gujarat High Court in the case of Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj). Accordingly the Ld. CIT(A) disallowed the addition made by AO by observing as under:- “The AO has discussed the issue at length in the assessment order and observed that the appellant had huge temporary overdraft as on 31.3.2007 and it has made investment in shares more than that amount Therefore, he concluded the whole overdraft was utilized for acquisition of shares and thus he made impugned disallowance on account of interest paid on such overdrafts. The AR of the appellant has also made detailed and lengthy submissions in this regard by rebutting the allegation of the AO. Identical issue had come up for consideration in appellant’s own appeal for the assessment years 1999-2000, 2000-2001-2002 & 2004-05 also and the observations and findings of the AO and the submissions of the AR in respect of this issue for the year under consideration are similar to those made for the assessment years 1999-2000, 2000-2001, 2001-2002 & 2004-05. The salient features of the AO's observations and findings and of the AR’s submissions shave been discussed by the CIT(A)V & VI, Chennai in the appellant’s appeal for the above mentioned assessment years. The facts of the case in respect of thee present issue for the year under consideration are identical to those for the assessment years 1999-2000, 2000-2001, 2001-2002 & 2004-05.
For the reasons discussed in the appellant’s appeal for the assessment years 1999-2000, 2000-2001, 2001-2002 2004-05, relying upon the decision of the Hon'ble Chennai Bench of ITAT in the case of M/s Sundaram Finance Ltd., the AO is directed to restrict the disallowance at Rs.2,80,090/- being 2% of the exempt dividend income of Rs.1,40,04,552/- considered to be attributed to the earning of such exempt income.”
ITA No.1558/K/2011 A.Y. 2007-08 DCIT CIR-8, Kol. v. M/s Newdeal Finance & Investment Ltd. Page 5 Being aggrieved by this order of Ld. CIT(A) Revenue is an appeal before us.
We have heard rival contentions and perused the materials available on record. Before us Ld. DR submitted that the investment made by assessee is out of borrowed fund and income from the investment is either exempted from tax or chargeable at concessional rate of tax. Ld. DR submitted the case laws in support of his contentions and he relied on the order of AO. 1) CIT Thrissur v. Smt. Leena Ramachandran (2011) 10 taxman.com 109 (Ker) 2) DCIT V. S.G. Investment & Industries (2004) 89 ITD 44 (Kol) 3) Dhanuka & Sons v. CIT (2011) 12 taxmann.com 227 (Cal) 4) CIT, Thiruvananthapuram v. State Bank of Travancore (2011) 16 taxmann.com 289 (Ker) 5) Mohan T. Advani Finance (P) Ltd. v. ITO (2006) 9 SOT 675 (Mum) 6) Mohanlal M. Shah v. DCTI, (2007) 105 ITD 669 (Mum) Pradeep Kar v. ACIT (2009) 319 ITR 416 (Kar) ITO v. Sanatan Textrade Ltd. (2010) 4 ITR (Trib) 593 (Mum)
On the other hand, Ld. AR relied on the order Ld. CIT(A). the ld. AR further submitted that from the reading of the aforesaid Section, it is clear that no deduction is disallowable in respect of expenditure incurred by the assessee for earning exempt income. In this regard, a Special Bench of this Tribunal in the case of Punjab State Industrial Corporation v. DCIT 102 ITD 1 (SB) held that no disallowance can be made in this regard on estimate basis. In our opinion, this ratio is very much applicable in this case also. In view of the above decision of the Special Bench, the decision of ITAT Chennai relied upon by the Ld. CIT(A) will not be applicable. Both the counsels fairly agreed that they will not have any objection if the matter is remitted back to the file of AO to decide the issue de novo after examining the expenditure actually incurred by the assessee in earning the exempt income. Accordingly, we remit this issue to the file of the AO to find the expenditure incurred in this regard and decide this issue afresh. Ld. AR further relied on that in earlier assessment years i.e., AYs 1999-00 to 2002-03 and AY 2004-05 the expenditure on interest was disallowed by the AO. On appeal, Ld. CIT(A) allowed the interest u/s. 36(1)(ii) of the Act but made a disallowance of interest u/s. 14A to the extent of 2% of exempt income. The Revenue preferred appeal before ITAT and the assessee
ITA No.1558/K/2011 A.Y. 2007-08 DCIT CIR-8, Kol. v. M/s Newdeal Finance & Investment Ltd. Page 6 also filed a cross objection. The Hon'ble ITAT relying on the decision of the Special Bench of the Tribunal in Punjab State Industrial Corporation v. DCIT 102 ITD 1 held that “no disallowance can be made in this regard on estimate basis” and therefore the matter was restored to the file of the Assessing Officer for examining the expenditure actually incurred by the assessee in earning the exempt income”. The cases were fixed for hearing and the appellant made written submissions on the 9th and 14th December, 2009 before the Assessing Officer during the course of income tax proceedings for all the years. However, the Assessing Officer did not proceed further on the matter. He also did no interfere with the order of the Ld. CIT(A). Accordingly, the order of Ld. CIT(A) continues to persist in respect of disallowance of interest to the extent of 2% of exempt income.
5.1 We have heard rival contentions and gone through facts and circumstances of the case. From the facts of the case we understand that the AO disallowed the interest expenditure as the borrowed fund was invested in the investment in shares which has given rise to the exempted income from tax or chargeable at concessional rate of tax. The section 14A of the Act provides for the disallowance of the expenses incurred in relation to exempted income. The provisions of section 14A read as under:- “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.”
From the plain reading of the provisions of section 14A, it is clear that expenditure incurred by the assessee in relation to exempted income deserve disallowance. However the ld. CIT A in the instant case has allowed the interest expenditure on the ground that in the earlier years the interest expenses were allowed so these should be allowed in this year as well. The ld. CIT(A) further observed that the disallowance u/s 14A was restricted to 2% in the own case of the assessee in the earlier year. So the disallowance was restricted by the Ld.CIT(A) @ 2% of the dividend income. However, we disagree the view taken by Ld. CIT(A) that the interest expenses should be
ITA No.1558/K/2011 A.Y. 2007-08 DCIT CIR-8, Kol. v. M/s Newdeal Finance & Investment Ltd. Page 7 disallowed to the extent of 2% of dividend income. As such, each year is a separate assessment year, therefore the allowance or disallowance for each year should be made independently and separately, for each year, depending on the facts & circumstances.
However, we observe from the order of the AO that the disallowance of the interest expenditure was made on comparing the balance sheet of the last two financial years i.e. 31st March 2007 and 31st March 2006. Accordingly, the AO assumed that all borrowed fund was utilized for the investment in shares. In our considered view, the base taken by the AO for the disallowance is skeptical in nature. We rather feel that fund flow statement will give the actual picture for the basis of allocation of interest expenditure. We, therefore, are inclined for restoring the file to the A.O. for re-examination the issue of interest expense with the direction to check whether the source of investment was made out of the borrowed fund and adjudicate the matter accordingly as per law. This ground of Revenue’s appeal is allowed for statistical purpose.
The issue raised in ground No. 2 in this appeal of Revenue is that Ld. CIT(A) erred in restricting the disallowance u/s. 14A to Rs.2,80,090/- being 2% of the dividend income, which is arbitrary and contrary to the facts of the case in relation to the assessment year 2007-08.
The AO disallowed the entire interest expenditure for an amount of Rs. 3,52,12,792/- on the ground that the borrowed fund was utilized in the investment of shares which resulted in the dividend income to the assessee. However, Ld. CIT(A) allowed the interest expenditure holding that it was incurred for the purpose of assessee’s business. But the Ld. CIT(A) made the disallowance u/s. 14A of the Act @ 2% of the dividend income on the ground that in the earlier years, the disallowance was made @ 2% only.
Aggrieved, Revenue is in appeal before us.
ITA No.1558/K/2011 A.Y. 2007-08 DCIT CIR-8, Kol. v. M/s Newdeal Finance & Investment Ltd. Page 8 9. From the above discussion, we understand that the disallowance of interest was made by AO as the entire borrowed fund was utilized in making the investment in the shares. The AO assumed that the investment was made out of the borrowed fund by comparing the balance-sheet of last two financial years. The AO did not make any other disallowance under section 14A of the Act. However the ld. CIT(A) deleted the addition of the disallowance made by the AO and disallowed the expenses under section 14A of the Act @ 2% of the income. Now, it is clear that the issue of the disallowance u/s 14A of the Act was not before the AO at the time of framing assessment order. Therefore, we are inclined to restore this matter to the file of AO for adjudication as per law. Accordingly, this ground of Revenue’s appeal is allowed for statistical purpose.
In the result, Revenue’s appeal is allowed for statistical purpose. Order pronounced in the open court 11/03/2016 Sd/- Sd/- (Mahavir Singh) (Waseem Ahmed) (Judicial Member) (Accountant Member) Kolkata, *Dkp �दनांकः- 11/03/2016 कोलकाता । आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-DCIT, CIR-8, Aayakar Bhawan, 5th Fl, P7, Chowringhee Sq. Kol-69 2. ��यथ�/Respondent- M/s Newdeal Finance & Investment Ltd., 37, J.L.Nehru Road, Kol-71 3. संबं�धत आयकर आयु�त / Concerned CIT Kolkata 4. आयकर आयु�त- अपील / CIT (A) Kolkata 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता ।