ACIT, NEW DELHI vs. M/S. DCM SHRIRAM CONSOLIDATED LTD., NEW DELHI

Facts related to this issue in brief are that the assessee in its return of income disallowed a sum of Rs. 21,83,313/- being 10% of the tax free dividend and interest income i.e. Rs. 2,18,33,132/- which was claimed as exempt. The AO however worked out the disallowance at Rs. 2,42,73,330/- and made the addition of Rs. 2,20,37,330/- by observing as under:

Being aggrieved the assessee carried the matter to the ld. CIT(A) who partly allowed the relief to the assessee and restricted the disallowance to Rs. 1,58,32,130/- by observing in para 6.2 of the impugned order as under: “I have considered the contentions of the appellant company as well as the facts of the case. I find from the balance sheet of the company that the appellant has made investment in shares and securities of Rs. 55.63 Crores. It is also seen that appellant has received exempt income of Rs. 2,18,33,138/- during the year. It is also seen from the balance sheet that appellant has share capital and reserve & surplus of Rs. 1231.59 crores and has also taken loan of Rs. 1961.62 crores from Financial Institutions and banks. It is also seen from the balance sheet that appellant has invested Rs. 2865.21 crores in the fixed assets. This shows that share capital, reserve & surplus and loan amount have been invested in fixed assets and very nominal amount is left with the appellant for making investment. Therefore, there is no truth in the submission of the appellant that investment in shares and securities have been made out of own funds available with the appellant & 1301/Del/2013 5 DCM Shriram Consolidated Ltd. company. It is seen that appellant has only disallowed Rs. 21,83,313/- being 10% of the exempt income as expenses relating to earning exempt income. This disallowance made by the appellant is not in accordance to the provisions of Rule 8D prescribed by the Act w.e.f. 01.04.2008. It is seen that the cost of funds which have been invested in earning exempt income and which is directly related has been debited to the profit and loss account. Similarly the expenditure on administration and on investment is embedded in the expenditure debited to the profit and loss account. It is also seen from the balance sheet that funds borrowed by the appellant were put in a common account and it is not ascertainable from the records whether investment was made out of own funds or funds borrowed during F.Y. 2008-09. No separate account is maintained for the investment purposes which could prove that funds used were not from the interest bearing loans obtained by the appellant during the year and in earlier years. Since no such evidence has been brought on record by the appellant, therefore, the contention of the appellant that investment of Rs. 55.63 Crores in shares and securities were made out of non interest bearing funds cannot be accepted and same is rejected. To deal this type of situation, Rule 8D has been incorporated in the statute and the expenses relating to earning exempt income has to be worked out according to the Rule 8D(2)(ii) and 8D(2)(iii). I am of the considered view that appellant has failed to apply rule 8D(2)(ii) which is clearly applicable in the case of appellant for the year under consideration. Further for applicability of the provisions of section 14A read with Rule 8D it is not necessary that exempt income has to be earned. It is so held by the Special Bench ITAT, Delhi in the case of Cheminvest Ltd. Vs ITO 317 ITR (AT) 86 (Del.). In view of the facts stated above it is established that investment in shares and securities made by the appellant ITA Nos. 274 & 1301/Del/2013 6 DCM Shriram Consolidated Ltd. were out of funds available in common account and there is no evidence that these investments were made from the non interest bearing funds. The appellant has argued that Assessing Officer has not established nexus between the interest bearing funds and investment made by the appellant. But at the same time the appellant has also not established nexus that investment in shares and securities was made out of non interest bearing funds. Hence, submission of the appellant that no interest expenditure has been incurred on earning exempt income is rejected. However, in regard to quantum of the disallowance, I am inclined to agree with the contention of the appellant that the Assessing Officer has wrongly taken average amount of investments at Rs. 54.515 crores as against correct figure of Rs. 40.205 Crores. It is submitted that after excluding the investment on which income is chargeable to tax, average amount of investment comes to Rs. 40.205 Crores, which had been intimated to Assessing Officer by the appellant company vide letter dated 13.10.2011. On the basis of above, the disallowance on account of interest comes to Rs. 1,58,31,130/- as against Rs. 2,15,06,580/- made by the Assessing Officer. I, accordingly, direct the Assessing Officer to restrict the disallowance on account of proportionate interest at Rs. 1,58,32,130/-. As regards, disallowance on account of administrative expenses, under Rule 8D(2)(iii) same comes to Rs. 20,10,250/- at 0.5% on average investments of Rs. 40.205 Crores. Since, the appellant has offered addition of Rs. 21,83,313/- on account of administrative expenses in the return of income, disallowance offered by the appellant company is to be accepted. Accordingly, the disallowance made by the Assessing Officer in the computation of taxable income of Rs. & 1301/Del/2013 7 DCM Shriram Consolidated Ltd. 2,20,37,330/- is to be restricted to Rs. 1,58,32,130/-. The Assessing Officer is directed accordingly.”

Now the assessee is in appeal. The ld. Counsel for the assessee at the very outset stated that this issue is covered in favour of the assessee by the earlier order dated 20.05.2015 of the ITAT in ITA No. 1447/Del/2012 for the assessment year 2008-09, copy of the said order is furnished which is placed on record.

In his rival submissions the ld. DR strongly supported the order of the AO.

We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that the facts for the year under consideration are identical to the facts involved in the preceding year i.e. assessment year 2008-09 which was a subject matter of adjudication in wherein relevant findings have been given in paras 15 to 18 of the order dated 20.05.2015 which read as under: “15. Briefly stated the facts giving rise to this appeal of the assessee are that the AO made disallowance of Rs. 90 lacs held to be expenses incurred in relation to earn the tax free income during the year under consideration and the AO made said disallowance u/s 14A of the Act read with Rule 8D of the I.T. Rules, 1962. The aggrieved assessee preferred an appeal before the CIT(A) but remained empty handed as the CIT(A) upheld the said addition. However, the CIT(A) considered the ITA Nos. 274 & 1301/Del/2013 8 DCM Shriram Consolidated Ltd. claim of the assessee that it had already disallowed Rs. 14,94,750/- in this regard in the return of income for which set off has not been allowed by the AO in the assessment order and the CIT(A) directed the AO to verify the record and allow the set off of the said amount which was suomoto disallowed by the assessee in the return of income. Now the aggrieved assessee is before this Tribunal with the sole ground as reproduced hereinabove. 16. The ld. AR contended that when the assessee itself has made suomoto disallowance then the conclusion of the authorities below should be demolished and dismissed. The ld. AR further contended that for making disallowance u/s 14A of the Act read with Rule 8D of the I.T. Rules, the Revenue authorities has to demonstrate and establish that the suomoto disallowance made by the assessee is not correct. The ld. AR further drawn our attention towards paragraph no. 4.4 of the assessment order and submitted that the assessee made investment in the equity shares of subsidiary companies of Rs. 20.15 crores out of current account of the company and there was no diversion of funds anywhere. The ld. AR further submitted that the investment of Rs. 20 crores in Sriram Bioseeds Ventures Ltd. was made on 28.02.2008 through HDFC Bank and copy of current account was also placed along with written synopsis/submissions of the assessee. The ld. AR further added that during the first appellate proceedings the CIT(A) examined details of investments including disallowance on account of interest after examining the factual position and after being satisfied that the investments has been made out of own funds of the assessee company. The ld. AR also placed a copy of the appellate order of the CIT(A) for A.Y. 2010-11 and drawn our attention towards paragraph no. 3.1 at page 7, 8 & 9 of the impugned order and submitted that the CIT(A) in the subsequent assessment year 2010-11 has not make any disallowance in & 1301/Del/2013 9 DCM Shriram Consolidated Ltd. regard to interest expenditure and has made disallowance u/s 14A read with Rule 8D(iii) of the I.T. Rules after giving credit of suomoto disallowance of the assessee. The ld. DR fairly accepted that the assessee was granted relief by the CIT(A) in A.Y. 2010-11 in the said manner and there was no disallowance on account of interest expenditure in F.Y. 2009- 10 relevant to A.Y. 2010-11. 17. In view of above noted facts and circumstances, we note that the assessee company was granted relief by the CIT(A) for A.Y. 2010-11 with following conclusions: “3.1 I have carefully considered the facts of the case and the submissions of the appellant in this regard. In regard to the disallowance under section 14A read with Rule 8D of the Income Tax Rules for interest expenditure, the appellant company gave date-wise details of investments held by the company as on 31.03.2010 and also explained the position regarding disallowance on account of interest with reference to particular investments in earlier years. The company as on 31.03.2010 had total investments of Rs. 58.85 crores and investments aggregating to Rs. 14.98 crore are the investments, income from which is taxable. The company filed the details of the amount of investment which has to be considered for the purpose of disallowance u/s 14A of the Act under cover of its letter dated 11.02.2012, a copy of which is in paper book on pages 14 to 17 and the statement is on page 17 of the Paper Book. The Assessing Officer inspite of details submitted by the company has adopted average investments at Rs. 57.24 crores, which is the amount of average investments including the amount of investments, income from which is taxable. No disallowance had been made in the earlier years upto A.Y. 2007-08 on account of interest relating to the investments under reference. In & 1301/Del/2013 10 DCM Shriram Consolidated Ltd. some of the years, disallowance on account of administrative expenses had been made equal to 10% of the dividend income. Year-wise position in this regard has been given in the statement on page 16 of the Paper Book, which had been submitted before the Assessing Officer under the cover of letter dated 11.02.2013. Accordingly, it is stated by the appellant that no disallowance on account of interest had been made in any of the assessment year’s upto A.Y. 2007-08. The AO had made ad-hoc disallowance on proportionate basis as per Clause (ii) of Rule 8D(2) of the Income Tax Rules. The CIT(A), in appeals of the company for those years had upheld the disallowance made by the AO on proportionate basis notwithstanding that the company had claimed in those years that no disallowance on account of interest is called for as the company was having sufficient funds in the form of share capital reserves and profits for the respective years which were much more than the amount of investments made in those years. The company has enclosed copies of relevant documents and statements as Annexures A1to A6 and it is observed from these statements that all the investments have been made by the company out of its own funds. During the year ended 31.03.2010 relevant to assessment year under appeal, the company had made three investments aggregating to Rs. 4.16 crores, details of which have been given in Annexure A. The bank statements have been filed in respect of these investments to substantiate the contention that all these investments have been made by the company out of its own funds as pinpointed in Annexure A7 to A9. It emerges from the details that during the current year, the appellant had made the investment of Rs. 4.16 crore out of its own funds as demonstrated with the bank statements and other & 1301/Del/2013 11 DCM Shriram Consolidated Ltd. documentary evidence. No specific disallowance of interest has been made by the AO in the earlier years regarding the tax free investments which are forming part of the total investments of Rs. 58.85 crore. In view of this, the disallowance of interest of Rs.1,33,27,000 under Rule 8D(ii) r.w.s. 14A of the Act is not warranted.” 18. In view of above, at the outset, we observe that we are unable to see any order of the appellate or higher firm to show that the relief granted by the CIT(A) on this issue in A.Y. 2010- 11 vide his order dated 10.06.2014 has been altered, modified or set aside. Hence, we can safely presume that the Department has accepted this contention of the assessee that the assessee has not diverted his interest bearing funds for the purpose of investments or any other manner for making investment which accrue tax free income for the assessee. In the same manner, we are further inclined to hold that the Revenue authority has not brought out any fact to establish this fact that the assessee diverted his interest bearing funds for making investments for earning tax free income. In this situation, we are fully agree with the approach of the CIT(A) for A.Y. 2010-11, wherein the CIT(A) has made disallowance only u/s 14A read with Rule 8D(iii) of the I.T. Rules, 1962 by making total disallowance of .5% of aggregate of opening and closing value of investments and the CIT(A) was also right in directing the AO to deduct the amount of suomoto disallowance already made by the assessee. Hence, the sole ground of the assessee is allowed with a direction to the AO that the disallowance u/s 14A read with Rule 8D(iii) of the I.T. Rules should also be made for the year under consideration in this appeal i.e. for A.Y. 2008-09 and the AO is also directed to give set off of amount of suomoto disallowance already made by the assessee in the computation of returned income. With these directions sole grounds of the assessee are allowed in the manner as indicated above.”

Now we will deal with the appeal of the department in . Following grounds have been raised in this appeal: “1. Whether the ld. CIT(A) on the facts and circumstances of the case is correct in deleting the disallowance of Rs. 7,21,00,000/- made on account of diminution in value of fertilizer bonds by the AO?

Facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee received Fertilizers & 1301/Del/2013 13 DCM Shriram Consolidated Ltd. Companies, Government of India, Special Bonds aggregating to Rs. 106.47 Crores against the fertilizer subsidy from the Government of India, as per Scheme, against the sale of fertilizer. He further observed that the assessee claimed deduction for loss of Rs. 7.21 crores on account of diminution in the value of the fertilizer bonds held at the year end, out of the bonds received during the year and in earlier year in lieu of fertilizer subsidy. He also pointed out that the assessee in the ‘Notes on Computation of Taxable Income’ had stated that on valuing the bonds at the market rate prevailing on 31.03.2009, there was a loss of Rs. 7.21 Crores on account of diminution in value of bonds which had been claimed in the computation of taxable income as business loss for the reason that those bonds were in the nature of business asset. The AO did not find merit in the submission of the assessee and disallowed Rs. 7.21 crores by observing in para 3.1 of the assessment order which read as under:

Being aggrieved the assessee carried the matter to the ld. CIT(A) who deleted the disallowance by observing in para 5.2 of the impugned order as under: “5.2 I have considered the claim of the appellant company and I fully agree with the claim of the appellant that deduction is allowable in respect of provision for loss made by the company in respect of fertilizer bonds which have been allotted to it by the Government in lieu of fertilizer subsidy and which are being held by the appellant as current ‘business asset’. Moreover, CIT(A)-IV, New Delhi has already taken a decision after considering the facts and the legal position. Accordingly, I direct the Assessing Officer to delete the disallowance made by her of Rs. 7.21 crores being the provisions for loss in respect of fertilizer subsidy bonds.”

We have considered the submission of both the parties and perused the material available on the record. It is noticed that an identical issue having similar fact has already been adjudicated by this Bench of the Tribunal in assessee’s own case vide order dated 20.05.2015 wherein the relevant findings are given in paras 12 & 13 of the said order in for the assessment year 2008-09 which read as under: “12. In view of the above noted facts and circumstances of the present case, we are inclined to hold that as we have already observed that the assessee company was compelled to receive fertilizer’s bonds in lieu of cash fertilizers subsidy by the Government of India. The AO has not brought out any allegation that the assessee company bought fertilizers bonds for the purpose of making investment and thus, the bonds were to be given the same treatment which was to be given to cash in hand, foreign currency or cash in bank as current trading assets. In this situation, we respectfully take cognizance of decision of Hon’ble Apex Court in the case of Patnaik & Company (supra) and decision of Hon’ble Jurisdictional High Court of Delhi in the case of CIT vs. D.S. Bisht, (supra) wherein it was held that the loss on investments which were & 1301/Del/2013 16 DCM Shriram Consolidated Ltd. made under commercial expediency did not bring an asset of a capital nature and losses thereon, therefore, is allowable as business losses. The dispute remains on the loss booked by the assessee on diminution of fertilizers bonds which were remained unsold at the end of the year. On careful consideration of the ratio laid down by Hon’ble Supreme Court in the case of Patnaik Co. (supra) and by Hon’ble Delhi High Court in the case of D.S. Bist (supra) we are inclined to hold that the fertilizer bonds received by the assessee in lieu of cash subsidy also deserves to be given the same treatment as foreign exchange because foreign exchange is also received in lieu of cash/Indian National Rupee (INR) and the same is also shown as current trading assets in the books of accounts as per well accepted accounting principles. 13. As observed by ITAT Mumbai in the case of Reliance Industries Limited (supra) the loss due to foreign exchange fluctuation in foreign currency transaction is derivatives has to be considered on the last date of accounting year and the same is deductible u/s 37 of the Act in the same manner the CIT(A) was right in holding that the difference in the amounts of loss/profit on actual sale of points has been duly accounted for in the books of accounts of the relevant assessment year and the loss of Rs. 9.52 crores on account of diminution in the market value of the fertilizers bonds held at the end of the year as business assets cannot be disallowed and such disallowance cannot be sustained on facts or in law. We, therefore, are of the considered opinion that the conclusion arrived by the CIT(A) is just and proper and we are unable to see any valid reason to interfere with the same and hence, we decline to interfere with the impugned order on this issue. Accordingly, sole ground of the Revenue being devoid of merits is dismissed.” & 1301/Del/2013 17 DCM Shriram Consolidated Ltd.

So, respectfully following the aforesaid referred to order we do not see any merit in this ground of the departmental appeal.

The next issue vide Ground No. 2 relates to the disallowance u/s 14A of the Act. Facts related to this issue are similar to the facts involved in ground no. 2 of the assessee’s appeal which we have already adjudicated in former part of this order and restored this issue back to the file of the AO to be decided in accordance with the directions given by the ITAT vide order dated 20.05.2015 in assessee’s own case in ITA No. 1447/Del/2012.

In the result, both the appeals of the department and the assessee are partly allowed for statistical purposes. (Order Pronounced in the Court on 14/10/2015)