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Income Tax Appellate Tribunal, : PANAJI BENCH: GOA
Before: SHRI CHANDRA MOHAN GARG & SHRI GIRISH AGRAWAL
IN THE INCOME TAX APPELLATE TRIBUNAL : PANAJI BENCH: GOA BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No.140/PAN/2018 Assessment Year: 2011-12 M/s. Gangadhar Narsingdas Assistant Commissioner of Agrawal (HUF) Income-tax, Circle-1, 1st floor, Anand Bhavan, Vs. Margao-Goa. Old Station Rod, Margao- Goa 403601 (PAN: AABHG4804R) (Appellant) (Respondent) Present for: Appellant by : Shri Nishant Thakkar, Advocate Respondent by : Shri Mayur Kamble, Sr. DR Date of Hearing : 16.06.2022 Date of Pronouncement : 30.08.2022 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal by the assessee is directed against the order of ld. CIT(A), Panaji-1 vide ITA No. 42/MRG/2014-15 dated 16.03.2018 for A.Y. 2011-12 passed against the assessment order u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) by ACIT, Circle-1, Margao, Goa dated 25.03.2014.
Shri Nishant Thakkar, Advocate appeared on behalf of the assessee and Shri Mayur Kamble, Sr. DR appeared on behalf of the revenue.
The only issue involved in this appeal by the assessee is in respect of disallowance made by the Ld. AO u/s. 14A of the Act read with Rule 82(2)(ii) of Rs.5,67,749/- and under rule 8D(2)(iii) of Rs.10,46,911/- totaling to Rs.16,14,660/-.
Brief facts as culled out from records are that assessee is engaged in the business of iron ore mining and power generation through wind
2 ITA No.140/PAN/2018 M/s. Gangadhar Narsingdas Agrawal (HUF), A.Y: 2011-12 mill. Assessee filed its return of income on 30.09.2011 reporting a total income of Rs.107,25,18,208/-. During the course of assessment, Ld. AO noted that assessee has claimed dividend income of Rs.1,81,25,423/- as exempt u/s. 10(34) of the Act. Ld. AO also noted from the Balance Sheet of the assessee, the details of investment made by the assessee in various mutual funds, which is tabulated as under:
Particulars AY 2010-11 (Rs.) AY 2011-12 (Rs.) SBI SHF liquid Plus 56,299,080.34 0.00 SBI Magnum Insta Cash Fund 0.00 150,495,987.34 SBI SHF Ultra Short Term 0.00 46,334,759.47 J.M. Basic Fund 10,000,000 0.00 LIC Mutual Fund – Liquid Plus Plan 52,027,936.07 0.00 TOTAL 118,327,016.41 196,830,746.81
4.1. Since assessee suo motto did not make any disallowance u/s. 14A of the Act, Ld. AO sought explanation from the assessee in this respect. Assessee submitted that it invested its surplus in mutual funds. The fund managers approached the assessee for the purpose of making investments and collected cheques from the office of the assessee. Dividends are directly credited to the bank account of the assessee as and when declared and in most of the occasions, dividends automatically get reinvested until such time the units of mutual funds are redeemed. Based on these assertions, assessee submitted that it has not incurred any expenditure to earn the dividend income and there are no direct cost involved in making investment in mutual funds.
4.2. Ld. AO further noted that there is a hotch-potch of funds comprising of term loan from Axis Bank, cash credit account with Axis Bank and Saraswat Bank, funds of which are used to finance the investments made in mutual funds, yielding exempt income. Ld. AO noted that submissions made by the assessee are not acceptable and proceeded to compute the disallowance as per the provisions of section
3 ITA No.140/PAN/2018 M/s. Gangadhar Narsingdas Agrawal (HUF), A.Y: 2011-12 14A read with Rule 8D for which disallowance made under Rule 8D(2)(i) – nil, under rule 8D(2)(ii) – Rs.5,67,749/- and under rule 8D(2)(iii) – Rs.10,46,911/-, totaling to Rs.16,14,660/-. Aggrieved, assessee went into appeal before the Ld. CIT(A).
4.3. While confirming the addition, ld. CIT(A) noted that in the instant case assessee has not maintained any separate accounts in respect of investments made by it in mutual funds. Thus, in absence of separate accounts maintained by the assessee, ld. CIT(A) noted that AO cannot be expected to examine the claim of the assessee having regard to its accounts. Further, he noted that incurring of establishment expenses, other administrative and general expenses etc. cannot be ruled out in regard to maintaining of investment portfolio coupled with fact of involvement of key-management personnel, experts, executives, officials etc. in the decision making process and management of investment portfolio. He noted that AO is absolutely correct in coming to a conclusion that certain common expenses were ipso facto incurred by the assessee while managing its investments and earning the tax free income. Aggrieved by the disallowance so sustained by the Ld. CIT(A), assessee is in appeal before the Tribunal.
Ld. Counsel for the assessee reiterated the submissions made before the authorities below. From the paper book placed on record, Ld. Counsel referred to the Balance Sheet as at 31.03.2011 placed at page 1 of the paper book to show that the reserves and surplus stood at Rs.140,71,25,248/- against which the investments were at Rs.30,14,91,271/-. He further pointed out to the details of loans and deposits placed at pages 54 to 61 of the paper book marked as Schedule ‘B’ to the Balance Sheet wherein it has a consolidated pool of mixed funds comprising of secured loans, cash credit loans, unsecured loans and advances against sale of iron ore as well as deposits.
4 ITA No.140/PAN/2018 M/s. Gangadhar Narsingdas Agrawal (HUF), A.Y: 2011-12 5.1. Ld. Counsel further submitted that provisions of section 14A read with Rule 8D are to be applied if the AO is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred on earnings that do not form part of the total income under the Act. He further referred to the CBDT Circular No. 14 of 2006 dated 28.12.2006 to reiterate that Ld. AO has to follow the prescribed modalities if he is not satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee. He thus laid emphasis on the fact that recording of satisfaction of the AO is a must and such satisfaction must be arrived at on an objective basis. He thus, stated that in a situation where the accounts of the assessee furnished an objective basis for which AO is to arrive at a satisfaction with regard to the correctness of the claim of the assessee for the expenditure which has been incurred in relation to exempt income, there is no occasion for taking recourse to the method prescribed under Rule 8D. According to the ld. Counsel in absence of such a finding by the Ld. AO, disallowance so made by applying rule 8D is bad in law and ought to be deleted.
5.2. To buttress his contention, Ld. Counsel for the assessee placed reliance on the decision of Hon’ble Supreme Court in the case of South Indian Bank Ltd. Vs. CIT (2021) 130 taxman.com 178 (SC) dated 09.09.2021 wherein it was held that where interest free own funds available with assessee bank exceeded the investment in tax free securities, investments would be presumed to be made out of assessee’s own funds and proportionate disallowance was not warranted u/s. 14A on the ground that separate accounts were not maintained by the assessee for investments and other expenditure incurred for earning tax free income.
5 ITA No.140/PAN/2018 M/s. Gangadhar Narsingdas Agrawal (HUF), A.Y: 2011-12 5.3. Ld. Counsel also referred to the decision of Hon’ble Jurisdictional High Court of Bombay in the case of CIT Vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom.) wherein it was held that if there are funds available, both interest free and overdraft and/or loans taken, a presumption would arise that investment would be out of interest free funds generated or available with company, provided such funds are sufficient to meet the said investments.
5.4. Reference was also made to another decision of Hon’ble Jurisdictional High Court of Bombay in the case of CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom.) wherein also similar views were upheld.
On the other hand, Ld. Sr. DR placed reliance on the orders of the authorities below.
We have heard the rival submissions and perused the material available on record and gone through the judicial precedents referred to before us. Admittedly, it is a fact that the own funds i.e. interest free funds available with the assessee in the form of Reserves and Surplus as reported in its Balance Sheet placed on record stand at Rs.140.71 Cr. as against total investment of Rs.30.15 Cr. It is also a fact on record noted by the authorities below that there is a huge hotch-potch of funds comprising of both interest bearing and interest free funds. We also note that neither Ld. AO nor Ld. CIT(A) have brought on record direct nexus of any part of interest bearing funds which have been used for the purpose of making investments yielding exempt income. Also nothing has been specifically pointed out in respect of administrative and general expenses which have been incurred in respect of earning of exempt income from the P&L Account of the assessee.
7.1. There is no satisfaction which has been recorded by the authorities below to this effect to dislodge the claim of the assessee that
6 ITA No.140/PAN/2018 M/s. Gangadhar Narsingdas Agrawal (HUF), A.Y: 2011-12 no expenses have been incurred for earning of exempt income. We also note that provisions of section 14A read with Rule 8D are to be applied if the AO is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred on earning exempt income. It is a settled position of law as held by the Hon’ble Supreme Court in the case of South Indian Bank Ltd. (supra) that where interest free own funds available with assessee bank exceeded the investment in securities yielding exempt income, such investments would be presumed to be made out of assessee’s own funds and proportionate disallowance was not warranted u/s. 14A on the ground that separate accounts were not maintained by the assessee for investments and other expenditure incurred for earning tax free income.
7.2. Further, Hon’ble jurisdictional High Court of Bombay has also dealt with the issue favouring the assessee in the case of Reliance Utilities & Power Ltd. (supra) and HDFC Bank Ltd. (supra). In the present case before us, Reserve & Surplus are far exceed the total amount of investment made and further, there is a huge hotch-potch of funds available with the assessee comprising of own funds and borrowed funds. Accordingly, respectfully following the decisions of Hon’ble Supreme Court and the Hon’ble jurisdictional High Court of Bombay referred to above, disallowance made under Rule 8D(2)(ii) of Rs.5,67,749/- is directed to be deleted.
7.3. Further, in respect of disallowance made under rule 8D(2)(iii) of Rs.10,46,911/- Hon’ble jurisdictional High court of Bomaby, Panaji Bench in CIT Vs. Sociedade De Fomento Industrial Pvt. Ltd. (No. 2) (2020) 429 ITR 358 (Bom.) has held that –
“19. Here, on facts, the Tribunal noted that the. Assessing Officer only discussed the provisions of section 14A(1) but has not justified how the expenditure the assessee incurred during the relevant year related to the income not forming part of its total income. The Assessing Officer,
7 ITA No.140/PAN/2018 M/s. Gangadhar Narsingdas Agrawal (HUF), A.Y: 2011-12 according to the Tribunal, straightaway applied rule 8D. Indeed, there must be a proximate relationship between the expenditure and the tax exempt income. Only then would a disallowance have to be effected. This court, we may note, on more than one occasion, has held that the onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. That is, the application of section 14A and rule 80 is not automatic in each and every case, where there is income not forming part of the total income. No doubt, the expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with the exempted income. Surmise or conjecture is no answer. 20. We may further reiterate that before rejecting the disallowance computed by the assessee, the Assessing Officer must give a clear finding with reference to the assessee’s accounts as to how the other expenditure claimed by the assessee out of the non-exempt income is related to the exempt income. 21. So, we see no valid reasons to upset the Tribunal’s well reasoned judgment on this substantial question of law.” 7.4. Accordingly, respectfully following the said decision of Hon’ble jurisdictional High Court of Bombay wherein it is mandatory to record an objective satisfaction by the ld. AO before resorting to the computation of disallowance under Rule 8D read with section 14A of the Act, we direct the Ld. AO to delete the disallowance of Rs.10,46,911/-so made. Accordingly, grounds of appeal are allowed. 10. In the result, appeal of the assessee is allowed. Order pronounced under Rule 34(4) of the IT (AT) rules, 1963 on 30.08.2022. Sd/- Sd/- (CHANDRA MOHAN GARG) (GIRISH AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 30.08.2022 JD, Sr. P.S. Copy to: 1. The Appellant: 2. The Respondent:. 3. CIT(A), Panaji-1, Panaji 4. The CIT- Panaji. 5. The DR, ITAT, Panaji Bench, Goa //True Copy// [ By Order Senior Private Secretary