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Income Tax Appellate Tribunal, RAIPUR BENCH, RAIPUR
Before: SHRI RAVISH SOOD & SHRI JAMLAPPA D BATTULL
आदेश / ORDER PER RAVISH SOOD, JM: The present appeal filed by the assessee is directed against the order passed by the CIT (Appeals)-1, Raipur, dated 01.03.2016, which in turn arises from the order passed by the A.O under Sec.143(3) of the Income-tax Act, 1961 ( in short ‘the Act’) dated 31.07.2014 for assessment year 2012-13. Before us the assessee has assailed the impugned order on the following grounds of appeal:
“1. On the facts and in the circumstances of the case, the Ld. Assessing Officer has erred in making disallowance of Rs.9,64,389/- on account of inadmissible expenses u/s.14A r.w.r.8D. The disallowance is unjustified, unwarranted and uncalled for. 2. On the facts and in the circumstances of the case, the Ld. Assessing Officer has erred in making disallowance of Rs.1,00,000/- out of Traveling & conveyance expenses. The disallowance is unjustified, unwarranted and uncalled for. 3. The assessee reserves the right to add, amend or alter any grounds of appeal at any time of hearing.”
Succinctly stated, the assessee company had e-filed its return of income for A.Y 2012-13 on 26.09.2012, declaring its total income at Rs.2,80,47,160/-. The case of the assessee was thereafter selected for scrutiny assessment u/s. 143(2) of the Act. During the assessment proceedings, it was observed by the Assessing Officer that the assessee had claimed to have invested an amounting of Rs.1,50,10,109/- towards
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purchase of shares of various companies. Backed by the aforesaid fact, the Assessing Officer called upon the assessee to explain as to why the expenditure incurred for earning of the exempt income may not be disallowed u/s.14A of the Act. In reply, the assessee tried to impress upon the A.O that no disallowance u/s.14A was called for in its hands. However, the Assessing Officer was not persuaded to subscribe to the claim of the assessee. Observing that as per CBDT Circular No.14 of 2001, dated 11.01.2014, irrespective of the fact that as to whether or not the assessee had earned any exempt income during the year under consideration, the Assessing Officer was of the view that as per the mandate of law the disallowance of the expenditure incurred for earning of the exempt income was to be worked out as per the provisions of Sec. 14A of the Act. Also the claim of the assessee that the investments in the exempt dividend income yielding shares were made out of its self-owned/interest free funds and not the interest bearing funds did not find favour with the Assessing Officer. Observing, that the assessee had failed to establish that the source of the investments in the exempt income yielding shares was not made out of the borrowed funds, the Assessing Officer declined to accept the aforesaid explanation. Backed by his aforesaid observation, the Assessing Officer worked out the disallowance u/s.14A of the Act by triggering the mechanism provided in Rule 8D of the Income Tax Rules, 1962 at Rs.9,64,389/-. Accordingly, the Assessing Officer vide his order passed
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u/s.143(3) of the Act, dated 31.07.2014 assessed the total income of the assessee company at Rs.2,91,11,549/-.
Being aggrieved, the assessee carried the matter before the CIT(Appeals). Observing, that the assessee during the year under consideration had invested in exempt dividend income yielding shares, the CIT(A) was of the view that the disallowance of the expenditure incurred for earning of the exempt income was to be worked out u/s.14A of the Act. In so far the claim of the assessee that investments in the exempt income yielding shares were made from its self-owned/interest free funds was concerned, the CIT(A) observed that as the assessee had failed to place on record its ‘balance sheet’ in support of its aforesaid claim, therefore, it could not be gathered as to how much of own funds, reserves and capital was available with it prior to making of the investment in the exempt income yielding shares. Accordingly, the CIT(A) backed by his aforesaid observation upheld the disallowance of Rs.9,64,389/- made by the Assessing Officer u/s. 14A r.w Rule 8D of the Income Tax Rules, 1962.
The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. At the very outset of the hearing of the appeal, the Ld. Authorized Representative (in short ‘AR') submitted, that as per instructions the Ground of appeal No.2 is not being pressed. In view of
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the aforesaid concession of the Ld. learned Authorized Representative for the assessee the Ground of appeal No.2 is dismissed as not pressed.
Before us, it is the claim of the Ld. AR that the CIT (Appeals) had erred in upholding the disallowance of Rs.9,64,389/- made by the A.O u/s.14A r.w Rule 8D of the Income-tax Rules, 1962. Elaborating on his aforesaid contention, it was claimed by the Ld. AR that as the investments made by the assessee company in the exempt income yielding shares could justifiably be traced to the sufficient self-owned/interest free funds available with it, therefore, no part of the interest expenditure was liable to disallowed u/s.14A r.w.r.8D (2)(ii) of the Income Tax Rules, 1962. In order to buttress his aforesaid claim of availability of sufficient self- owned/interest free funds with the assessee company, the Ld. AR has drawn our attention to the ‘balance sheet’ of the assessee company at Page 1 of the Assessee’s Paper Book (APB). Also our attention was drawn towards the investment in the exempt income yielding shares of Rs.1.50 crore that was made by the assessee during the year under consideration. Backed by the aforesaid facts, it was submitted by the Ld. AR that while for it had sufficient self-owned/interest funds in the form of share capital and reserves aggregating to Rs.23,78,16,054/- available with during the year under consideration; the investments made towards exempt income yielding shares stood at comparative miniscule amount of
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Rs.1,50,10,105/-. On the basis of his aforesaid contention, it was claimed by the Ld. AR that as the assessee had sufficient self-owned/interest free funds available with it which justifiably explained the investments in the exempt income yielding shares, therefore, no disallowance of any part of interest expenditure was called for u/s.14A r.w Rule 8D (2)(ii) of the Income Tax Rules, 1962. In support of his aforesaid contention the Ld. AR had relied on the judgment of the Hon’ble Supreme Court in the case of South Indian Bank Limited Vs. CIT, Civil Appeal Nos. 9606, 9609, 9610, 9611, 9615 of 2011 dated 09.09.2021. It was submitted by the Ld. AR that the Hon’ble Apex Court in its aforesaid decision, had observed, that in a situation where interest-free funds available with the assessee were sufficient to meet its investments, then, it was to be presumed that the investments in question were made from such interest-free funds. Backed by his aforesaid contention, it was submitted by the Ld. AR that the disallowance of interest expenses made by the Assessing Officer u/s.14A r.w Rule 8D(2)(ii) could not be sustained and was liable to be vacated.
Adverting to the disallowance of the administrative expenses so made by the A.O u/s.14A r.w Rule 8D(2)(iii), it was submitted by the Ld. AR that as per the settled position of law only those investments which had yielded exempt income were to be considered for computing the “average value of investment” for computing the aforesaid disallowance in
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question. It was, thus, submitted by the Ld. AR that necessary direction be given to the Assessing Officer for restricting the disallowance of the administrative expenses u/s.14A r.w Rule 8D(2)(ii) of the Income Tax Rules, 1962 i.e as per the aforesaid mandate of law.
Per contra, the Ld. Departmental Representative (in short ‘DR’) relied on the orders of the Authorities below.
We have heard the Ld. Authorized Representative of both the parties, perused the orders of the lower authorizes and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the ld. A.R in support of his contentions. Admittedly, the assessee during the year under consideration was holding exempt income yielding shares of Rs. 1,50,10,109/-. As the assessee had failed to suo-motto offer any disallowance u/s.14A of the Act, therefore, the Assessing Officer had triggered the mechanism contemplated in Rule 8D of the Income Tax Rules, 1962 and had determined the disallowance u/s 14A at Rs.9,64,389/-. As regards the claim of the Ld. AR that as the assessee company during the year under consideration had sufficient self- owned/interest free funds which would justifiably suffice to explain the investments in the exempt income yielding shares, therefore, no disallowance of any part of interest expenditure was called for in its hands, we find substantial force in the same. On a perusal of the financial
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statements of the assessee company, we find that as on 31.03.2012, it had self-owned/interest free funds aggregating to Rs.23,78,16,054/- available with it, viz. (i) share capital: Rs. 9,00,00,000/-; and (ii) Reserves and surplus: Rs.14,78,16,054/-. As against the aforesaid interest-free funds of Rs. 23,78,16,054/-; the exempt income yielding shares held by the by assessee as on 31.03.2012 amounted to Rs.1,50,10,109/-. In the backdrop of the aforesaid factual position, we are of the considered view, that as stated by the ld. A.R, and rightly so, as the assessee had sufficient self- owned/interest-free funds available with it, therefore, no part of the interest expenditure was liable to be disallowed u/s.14A r.w Rule 8D(2)(ii) of the Income Tax Rules, 1962. Our aforesaid conviction is fortified by the decision of the Hon’ble Supreme Court in the case of South Indian Bank Limited Vs. CIT (supra), wherein it was observed as under :
“22. The High Court herein endorsed the proportionate disallowance made by the Assessing Officer under Section 14A of the Income Tax Act to the extent of investments made in tax-free bonds/securities primarily because, separate account was not maintained by assessee. On this aspect we wanted to know about the law which obligates the assessee to maintain separate accounts. However, the learned ASG could not provide a satisfactory answer and instead relied upon Honda Siel Power Products Ltd. v. DCIT to argue that it is the responsibility of the assessee to fully disclose all material facts. The cited judgment, as can be seen, mainly dealt with re-opening of assessment in view of escapement of income. The contention of department for re-opening was that the assessee had earned tax-free dividend and had claimed various administrative expenses for earning such dividend income and those (though not allowable) was allowed as expenditure and therefore the income had escaped assessment. On this, suffice would be to observe that the action in Honda Siel (supra) related to re-opening of assessment where full disclosure was not made. An assessee definitely has the obligation to provide full material disclosures at the time of filing of Income Tax Return but there is no corresponding legal
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obligation upon the assessee to maintain separate accounts for different types of funds held by it. In absence of any statutory provision which compels the assessee to maintain separate accounts for different types of funds, the judgment cited by the learned ASG will have no application to support the Revenue’s contention against the assessee. 9 [(2012) 12 SCC 762] 23. It would now be appropriate to advert in some detail to Maxopp Investment Ltd. v. CIT. This case interestingly is relied by both sides’ counsel. Writing for the Bench, Justice Dr. A.K. Sikri noted the objective for incorporation of Section 14A in the Act in the following words: - “3…………. The purpose behind Section 14-A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit.
Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income……..” The following was written explaining the scope of Section 14-A(1): “41. In the first instance, it needs to be recognised that as per Section 14-A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee “in relation to income which does not form part of the total income under this Act”. Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such 10 (2018) 15 SCC 523 expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income.” Adverting to the law as it stood earlier, this Court rejected the theory of dominant purpose suggested by the Punjab & Haryana High Court and accepted the principle of apportionment of expenditure only when the business was divisible, as was propounded by the Delhi High Court.
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Finally adjudicating the issue of expenditure on shares held as stock-in-trade, the following key observations were made by Justice Sikri: “ 50. It is to be kept in mind that in those cases where shares are held as “stock-in-trade”, it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. [Maxopp Investment Ltd. v. CIT, 2011 SCC OnLine Del 4855 : (2012) 347 ITR 272] where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock- in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits……….” The learned Judge then considered the implication of Rule 8D of the Rules in the context of Section 14-A(2) of the Act and clarified that before applying the theory of apportionment, the Assessing Officer must record satisfaction on Suo Moto disallowance only in those cases where, the apportionment was done by the assessee. The following is relevant for the purpose of this judgment: 51. ……………….It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect.………….”
Another important judgment dealing with Section 14A disallowance which merits consideration is Godrej and Boyce Manufacturing Company Ltd. V. DCIT. Here the assessee had access to adequate interest free funds to make investments and the issue pertained to disallowance of expenditure incurred to earn dividend income, which was not forming part of total income of the Assessee. Justice Ranjan Gogoi writing the opinion on behalf of the Division Bench observed that for disallowance of expenditure incurred in
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earning an income, it is a condition precedent that such income should not be includible in total income of assessee. This Court accordingly concluded that for attracting provisions of Section 14A, the proof of fact regarding such expenditure being incurred for earning exempt income is necessary. The relevant portion of Justice Gogoi’s judgment reads as follow: “36. ……… what cannot be denied is that the requirement for attracting the provisions of Section 14-A(1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income………….”
Proceeding now to another aspect, it is seen that the Central Board of Direct Taxes (CBDT) had issued the Circular no. 18 of 2015 dated 02.11.2015, which had analyzed and then explained that all shares and securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in-trade and not investments and income arising out of those is attributable, to business of banking. This Circular came to be issued in the aftermath of CIT Vs. Nawanshahar Central Cooperative Bank Ltd. wherein this Court had held that investments made by a banking concern is part of their banking business. Hence the income earned through such investments would fall under the head Profits & Gains of business. The Punjab and Haryana High Court, in the case of Pr. CIT, vs. State Bank of Patiala while adverting to the CBDT Circular, concluded correctly that shares and securities held by a bank are stock in trade, and all income received on such shares and securities must be considered to be business income. That is why Section 14A would not be attracted to such income. 26. Reverting back to the situation here, the Revenue does not contend that the Assessee Banks had held the securities for maintaining the Statutory Liquidity Ratio (SLR), as mentioned in the circular. In view of this position, when there is no finding that the investments of the Assessee are of the related category, tax implication would not arise against the appellants, from the said circular. 27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under Section 14A of Income 12 [(2007) 15 SCC 611] / [(2007) 160 TAXMAN 48 (SC)] 13 2017 (393) ITR 476 (P&H) Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded
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their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees. 28. The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents as earlier noted, have failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel (Supra) to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance. 29. In the above context, the following saying of Adam Smith in his seminal work – The Wealth of Nations may aptly be quoted: “The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person.” Echoing what was said by the 18th century economist, it needs to be observed here that in taxation regime, there is no room for presumption and nothing can be taken to be implied. The tax an individual or a corporate is required to pay, is a matter of planning for a tax payer and the Government should endeavour to keep it convenient and simple to achieve maximization of compliance. Just as the Government does not wish for avoidance of tax equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these, unnecessary litigation can be avoided without compromising on generation of revenue.”
Accordingly, in the backdrop of our aforesaid deliberations, we concur with the claim of the Ld. learned Authorized Representative for the assessee that no part of interest expenditure was liable to be disallowed in the hands of the assessee company. We, thus, in terms of our aforesaid observations vacate the disallowance of interest expenditure of
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Rs.890,454/- made by the Assessing Officer u/s.14A r.w.r.8D(2)(ii) of the Income Tax Rules, 1962.
Adverting to the disallowance of the administrative expenses made by the Assessing Officer by triggering the mechanism contemplated under Rule 8D(2)(iii) of the Income-tax Rules, 1962, we are of the considered view, that as stated by the ld. A.R, and rightly so, for the purpose of computing the disallowance of the administrative expenses the “average value of investment” has to be computed by considering only those investments which had yielded exempt income during the year under consideration. Our aforesaid conviction is fortified by the order of the Income-tax Appellate Tribunal, Special Bench, Delhi in the case of ACIT Vs. Vireet Investment Pvt. Ltd., ITA No.502/Del/2012; dated 16.06.2017, wherein the Tribunal had held that for the purpose of computing the disallowance of the administrative expenses under Rule 8D(2)(iii) of the Income-tax Rules, 1962, only those investment have to be considered for computing the “average value of investments” which had yielded exempt income during the year under consideration. Backed by our aforesaid observations, we herein direct the Assessing Officer to rework out the disallowance of the administrative expenses u/s.14A r.w Rule 8D(2)(iii) by determining the “average value of investments” after considering only those investments that had yielded exempt income during the year under
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consideration. The Ground of appeal No.1 is allowed in terms of our aforesaid observations.
Resultantly, the appeal of the assessee is allowed in terms of our aforesaid observations. Order pronounced on 21st day of February, 2022.
Sd/- Sd/- JAMLAPPA D BATTULL RAVISH SOOD ACCOUNTANT MEMBER JUDICIAL MEMBER रायपुर/ RAIPUR ; �दनांक / Dated : 21st February, 2022 **SB आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant. 2. ��यथ� / The Respondent. 3. The CIT(Appeals)-1,Raipur (C.G) 4. The Pr. CIT-1, Raipur (C.G) 5.�वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण,रायपुरब�च, रायपुर / DR, ITAT, Raipur Bench, Raipur. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER,
// True Copy // �नजी स�चव / Private Secretary आयकर अपील�य अ�धकरण, रायपुर / ITAT, Raipur.
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Date 1 Draft dictated on 02.02.2022 Sr.PS/PS 2 Draft placed before author 08.02.2022 Sr.PS/PS 3 Draft proposed and placed JM/AM before the second Member 4 Draft discussed/approved by AM/JM second Member 5 Approved draft comes to the Sr.PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr.PS/PS 7 Date of uploading of order Sr.PS/PS 8 File sent to Bench Clerk Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order