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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
Date of Hearing – 23.02.2016 Date of Order – 29.02.2016 2 Sitson India Ltd. O R D E R PER SAKTIJIT DEY, J.M.
Aforesaid cross appeals are directed against the order dated 30th April 2013, passed by the learned Commissioner (Appeals)–1, Thane, for the assessment year 2009–10.
./2013 – Assessee’s Appeal
The only issue in dispute is disallowance of ` 6,08,404 under section 14A r/w rule 8D(2)(iii).
Briefly stated the facts are, assessee a company, filed its return of income on 31st October 2009, declaring total income of ` 6,77,76,910. During the assessment proceedings, the Assessing Officer noticing that assessee had earned dividend amounting to ` 19,09,430 during the relevant previous year whereas, it has not disallowed any expenditure for earning the exempt income called upon the assessee to explain why proportionate disallowance out of the expenditure claimed should not be made towards earning of exempt income. Though, the assessee objected to the proposed disallowance but the Assessing Officer finding no merit in the submission of the assessee proceeded to compute disallowance under section 14A r/w rule 8D and worked out the total disallowance at ` 19,57,262, which 3 Sitson India Ltd.
included amount of ` 6,08,404 being 0.5% of the average value of investment in terms of rule 8D(2)(iii). Being aggrieved of such disallowance assessee preferred appeal before the learned Commissioner (Appeals).
Learned Commissioner (Appeals), however, confirmed the disallowance of ` 6,08,404, as according to him, the disallowance is in terms of rule 8D(2)(iii).
We have considered the submissions of the parties and perused the material available on record. Undisputed facts are, assessee has made investment in shares which has resulted in earning of dividend income of ` 19,09,430, during the relevant previous year which is otherwise exempt under section 10 of the Act. Admittedly, assessee has not disallowed any expenditure under section 14A on its own. As the provisions of rule 8D applies to the impugned assessment year, proportionate disallowance out of the expenditure has to be made as per section 14A r/w rule 8D(2)(iii). As the Assessing Officer has disallowed the amount of ` 6,08,404, in terms of rule 8D(2)(iii), we do not find any infirmity with the same. Accordingly, we uphold the order of the learned Commissioner (Appeals) on this issue.
In the result, assessee’s appeal is dismissed.
4 Sitson India Ltd. ./2013 – Department’s Appeal The Department has raised the following effective grounds:–
On the facts and in the circumstances of the case, and 1. in law, the Id. CIT(A)-I, Thane has erred in deleting the addition of Rs. 13,48,858/- made u/s 14A of I.T. Act, overlooking the fact that the disallowance was made as per provisions of sub-section 2 & 3 of Section 14A r.w.r. 8D and further ignoring the fact that the interest expenditure is not attributable to any particular income or receipt. On the facts and in the circumstances of the case, and 2. in law, the Id. CIT(A)-1, Thane has erred in deleting the addition of Rs. 30,63,133/-, made u/s 36(1)(iii) of IT. Act, on account of disallowance of interest claim, overlooking the fact that the assessee company had no need to raise unsecured loans from it's directors as the assessee company had sufficient funds of it's own and that no benefit is derived by the assessee company from its investment with M/s Hassan Biomass Power Co. Pvt. Ltd.
As already stated earlier, in course of assessment proceeding the Assessing Officer, while examining the balance sheet of the company as on 31st March 2009, noticed that assessee has received unsecured loans of ` 2,21,22,000, from director and paid amount of ` 30,63,133 as interest. Whereas company has invested ` 3,25,00,000, in M/s. Hassan Biomass Co. Pvt. Ltd., wherefrom assessee has not derived any benefit. The Assessing Officer, therefore, was of the view that the assessee diverted interest bearing fund to known productive assets while paying interest on loan taken from directors. He, therefore,
5 Sitson India Ltd. made disallowance of the amount of ` 30,63,133, being the interest paid to the directors. Having done so, the Assessing Officer also included the amount of ` 30,63,133, for computing disallowance under section 14A r/w rule 8D(2). Being aggrieved of such disallowance assessee challenged the same in appeal before the learned Commissioner (Appeals).
The first appellate authority, after considering the submissions of the assessee and in the context of material on record, found that the assessee had entered into an agreement with Hassan Biomass Co. Pvt. Ltd. to design finance, built and commission, 8 MW Biomass fuelled power plant. Another agreement was entered into between the parties for set–up 8MW Biomass Fuelled Power Plant for which purpose assessee had made investment of ` 3.25 crore. He also found that the investment of ` 3.25 crore is not interest free loan to Hassan Biomass Co. Pvt. Ltd., but purely an investment with commercial consideration and expedient to the business of assessee company. Therefore, following the ratio laid down in S.A. Builders v/s CIT, [2007] 288 ITR 001 (SC), he held that as investment was for business purpose, no disallowance under section 36(1)(iii) could be made out of the interest expenditure. He further found that, though, the assessee had paid the interest amounting to ` 30,63,133, on unsecured loans but at the 6 Sitson India Ltd.
same time it has earned interest income of ` 163,33,413, resulting in net interest income offered for taxation amounting to ` 13,20,70,280. He was, therefore, of the opinion that there is no necessity to disallow interest expenditure. As far as action of the Assessing Officer in including the amount of ` 30,63,133, for the purpose of making disallowance under section 14A r/w rule 8D(2), the learned Commissioner (Appeals) held that as the assessee during the relevant year has earned net interest income of ` 1,32,72,280, which was offered to tax there is no justification in again considering the interest payment of ` 30,63,133 under rule 8D. Accordingly, he restricted disallowance under section 14A r/w rule 8D to ` 6,08,404. Being aggrieved of the aforesaid decision of the first appellate authority, the Department is in appeal before us.
While the learned Departmental Representative relied upon the reasoning of the Assessing Officer, learned Authorised Representative submitted that the Tribunal in assessee’s own case for assessment year 2008–09, has decided the issue in favour of the assessee by holding that no disallowance of the interest expenditure on unsecured loan can be made under section 36(1)(iii) as the investment of ` 3.25 crore made in Hassan Biomass Co. Pvt. Ltd. was for assessee’s business purpose. It is relevant to reproduce the findings of the 7 Sitson India Ltd.
Tribunal has rendered in ITA no.4540/Mum./2012, dated 14th February 2004.
“9. We have heard rival contentions on this issue and carefully perused the record. We notice that the assessee had entered into an agreement with M/s Nucon Energy Group, Mauritius, way back in the year 2003 for setting up a Biomass fuelled power plant. There is no dispute that the assessee was required to invest a sum of Rs.3.70 crore as per the above said agreement. Further the terms of the agreement also show that the assessee was selected as a turnkey contractor for executing the project. According to the assessee, a special purpose vehicle, viz., M/s Hassan Biomass Powser Company Private ltd was formed and the assessee has contributed a sum of Rs.3.25 crores towards its share capital. According to the Ld A.R, the other share holder was M/s Nucon Energy Group, Mauritius. We notice that these factual aspects have not been examined by the assessing officer. However, the factual position narrated by the Ld A.R would show that the assessee was having a commercial interest and also obligation in making investment of Rs.3.25 crores, referred above. Besides the above, the assessee has also supplied the materials to M/s Hassan Biomass power company Pvt Ltd. We notice that the said investment has been made in the earlier years, i.e., it is reflected in the Balance sheet as at 31.3.2005. Under these set of facts, the Ld CIT(A) has expressed the view that the investment of Rs.3.25 crores cannot be said to be for non-business purposes. In view of the foregoing discussions, we are also inclined to accept the view expressed by Ld CIT(A). Accordingly, we uphold his view on this issue.”
Thus, from the aforesaid facts, it is clear that the interest expenditure incurred by the assessee is for the business purpose and not related to its investment activity in shares. Moreover, as rightly observed by the learned Commissioner (Appeals), assessee has offered net interest income of ` 1.32 crore for taxation. Moreover, once Assessing Officer has disallowed the expenditure under section 8 Sitson India Ltd.
36(1)(iii), he could not have considered the same for disallowance under section 14A r/w rule 8D. Further, Assessing Officer has not established that interest expenditure has a nexus with the exempt income. In this view of the matter, we do not find any infirmity in the order of the learned Commissioner (Appeals) in deleting the addition made on account of section 36(1)(iii) as well as section 14A of the Act.
In the result, Department’s appeal is dismissed.
To sum up, assessee’s appeal as well as Department’s appeal is dismissed. Order pronounced in the open Court on 29.02.2016