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Income Tax Appellate Tribunal, DELHI
Before: SH. SHAMIM YAHYA & SH. ANUBHAV SHARMA
The appeal has been preferred by the Assessee against the order dated 18.12.2017 of CIT(A)-04, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal No. 39/16-17/CIT(A)-4 arising out of an appeal before it against the order dated 7.03.2016 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the DCIT, Circle-12(1), New Delhi (hereinafter referred as the Ld. AO).
The facts in brief are that the assessee is a Private limited company engaged in the business of manufacturing and sale of herbal products. Assessee M/s. Indian Herbs Specialities P. Ltd. 2 company came into existence on 13.08.2012 and before that it was a partnership firm. The instant year is the first year of assessee company on 13.08.2012. The return of company was filed declaring total income of Rs.7,80,02,150/- the purchaser partnership firm of the assessee company had set up a new industrial undertaking in the area notified by the Board in accordance with the scheme framed and notified u/s 80IC(2)(a)(ii) in Himachal Pradesh with effect from 14.06.2006. Apart from making other disallowance, Ld. AO examined the investment and exempt income of the assessee and observed that having earned dividend income amounting to Rs. 40,57,602/-. The assessee was required to make disallowance u/s 14A whereas no such disallowance was made by the assessee. To this the assessee has responded as under :- “1. That the company has invested some of its surplus fund in short term mutual funds and earned exempted income of dividend during the year of Rs. 4057602.91. As on year ending there is an investment of Rs. 100241254.33 in mutual funds. The surplus amount which was lying in the current account with bank was invested in mutual fund on which divided was declared and received. The work of making the investment is done and managed by one of the staff of the company by giving some time whenever required& accordingly out of his salary Rs. 2000/- per month may be said as expenses made for making the investment by the company in mutual funds. The investments was made by the company out of it's own funds. The company has not borrowed any amount as loan on interest. Thus the expenses of Rs. 2000/- per month may be disallowed u/s 14A of the Income tax Act treating expenses made for investment to earn dividend income.”
The Ld. AO was not satisfied and considering that the assessee failed to prove the source of investment was own funds and no part of borrowed funds M/s. Indian Herbs Specialities P. Ltd. 3 was used. He further observed that pasive cost were involved in the investments and thus computed the disallowance u/s 14A r.w.r. 8D, which was sustained by Ld. CIT(A) with following relevant finding of para 8.2.2 to 8.2.4 reproduced as under :- “8.2.2 I have carefully considered the order passed by the AO, written submission made by the appellant during the course of appellate proceedings. The fact is that the appellant has earned dividend income of Rs.40,57,603/- and has not offered any disallowance in computation of taxable income. During the course of assessment proceedings, appellant offered to disallow Rs. 2000/- per month u/s 14A of Income Tax Act which was not accepted by AO. The AO has made detailed working of disallowance u/s 14A as per Rule 8- D of Income Tax Rules. The major components of disallowance is under clause (ii) of Rule 8-D of interest expense worked out at Rs.24,02,772/-. The appellant has paid interest of Rs.2.05 crores during the year. The appellant has mainly contested the disallowance made under Rule 8D(2)(ii). No submission has been made to counter disallowance under Rule 8D(2)(iii). 8.2.3 The appellant has taken the plea that share capital and retained earnings of appellant far exceeded the investment in Mutual fund and other securities. It was submitted that at the time when the appellant company came into existence i.e. 13/08/2012, it was having share capital and share premium amounting of Rs 4.99 crores (approx.) arid that the investments made in mutual funds after the company came into existence is only Rs 3.36 crores (approx.) It was submitted that investment of 6.71 crores were made earlier in amalgamating entities. Such investments as appearing at the end of the assessment year were at Rs 10, 02,51,254/- and available surplus was at Rs 14,58,70,390/-. It was also submitted that the AO has failed to record a cogent and objective satisfaction regarding disallowance u/s 14A. 8.2.4 However, it is important to mention that appellant has not submitted any documentary evidence to show that investments were made out of share capital and retained earnings. The appellant has not filed any documentary evidence to establish that it had surplus funds at the time of incorporation as mentioned by it in its written submission and only such fund was used for making investment yielding exempt income. On the other hand, from the Note 2 of balance sheet as on 31/03/2013, it is seen that reserve and surplus as on 01/10/2012 i.e. as on effective date of merger, is (-) Rs 4,63,96,349/-. No nexus was established that investments were made out of share capital and retained earnings. No bank statement of the account(s) in which overdraft has been availed was produced to establish that overdraft/loan taken was not diverted towards investment yielding M/s. Indian Herbs Specialities P. Ltd. 4 exempt income. The plea of appellant cannot be accepted simply on bare statements and without any documentary evidences brought on records and simply relying on judicial pronouncement without showing that facts of case relied is similar to the case of appellant.”
Heard and perused the record.
The Bench is given thoughtful consideration to the submissions on behalf of the assessee it has been submitted that the Assessing Officer and even Ld. CIT(A) failed to record ‘cogent’ and ‘objective satisfaction’ for the purpose of Clause 2 of Section 14A of the Act and thus, the addition is not sustainable. In this context, cited following judgments in Godrej Boyee and Manufacturing Co. Ltd. vs. DCIT reported in 394 ITR 449 (SC) (Para 37) and Maxopp Investment ltd. vs. CIT reported in 402 ITR 640 (SC) (Para 41) and Hon’ble Delhi High Court in the case of HT Media Ltd. vs. PCIT reported in 399 ITR 576 (Del.).
It was further submitted that in the balance sheet suggestion reserved and surplus and share capital to the extent of 14,55,50,389/- are shown by the investments and mutual funds were only of Rs. 10,02,41,254/- it was submitted that interest free fund very much available with the assessee and the exceeded their investments relying judgment of Hon’ble Supreme Court of India in South Indian Bank Ltd. vs. CIT reported in 438 ITR 1 (SC) it was submitted that when assessee was investing their own funds proportionate disallowance of interest is not warranted u/s 14A. It was also submitted that complete documentary evidence was furnished before the Ld. Tax Authorities and assessee had around 57 crores available out of sales during the year and the credit balance in the current accounts were very much available for investment in mutual funds. It was submitted that when the present assessment M/s. Indian Herbs Specialities P. Ltd. 5 year is the first year of incorporation, therefore, comparative value for the earlier years were not available.
Ld. DR however submitted that the Ld. AO has given satisfaction in para 5.4 of the Assessment Order. The Ld.CIT(A) in para 8.2.5 has categorically agreed with Ld.AO’s detailed reason in the assessment order leading to his satisfaction that this is a fit case for computing the disallowance u/s 14A read with Rule 8D. It is submitted that there may be two views about onus to be discharged by assessee or the Department about source of investment being from own funds or borrowed funds. But first the assessee has to demonstrate that there were its own sufficient funds available. Referring to page 51 of the paper book given by the Ld.AR, which is a balance sheet of the appellant for the year in question, it was pointed that same reveals that it gives figures as on 31.03.2013 only and no comparative earlier period results have been given. And this makes it difficult to ascertain as to whether reserves & surplus of Rs. 14,55,50,389/- were consumed in the current investments of Rs. 100241254. He submitted that if say, entire reserves were consumed in assets in earlier years then nothing will be left for current investments in the year under question. This may be why the Ld.CIT(A) has given in para 8.2.4 that appellant has not submitted any documentary evidence to show that investments were made out of share capital & retained earnings. In this para, the Ld. CIT(A) has given some more reasons to not accept the assessee’s plea of its own funds having been utilized for investments.
The Bench has given thoughtful consideration with the matter on record and submissions made before it. At the outset, it is relevant to observe that the Ld. AR has admitted that the addition made under Rule 8D(2)(iii) of Rs. 2,62,353/- out of total addition of Rs. 26,65,125/- is not being pressed.
M/s. Indian Herbs Specialities P. Ltd. 6
The stress of Ld. AR was on the fact that AO has not recorded the satisfaction for which reliance is specifically placed on various judicial pronouncements. It can be observed that in the case in hand the assessee has not come up with claim in the return filed if any suo moto disallowance was being made. It was on the query of the Ld. AO, the assessee came forward with a proposition that the work of making investment is done and managed by one of the staff of the company by giving some time whenever required and accordingly, out of his salary, a sum of Rs. 2000 per month may be said as expenses made for making the investment by the company in mutual funds. Thus, requested that expenses of Rs. 2000/- per month may be disallowed u/s 14A of the Act treating expenses made for investment to earn dividend income.
Hon’ble Delhi High Court in the case of HT Media Ltd. vs. PCIT has made relevant observations and same need to be kept in mind. As for convenience the same are reproduced below; “30. Rule 8 D (1) states more or less what Section 14 A (2) of the Act states. It requires the AO to first examine the accounts of the Assessee and then record that he is not satisfied with (a) the correctness of the Assessee's claim of expenditure or (b) the claim made by the assessee that no expenditure has been incurred. Unless this stage is crossed i.e. the stage of the AO recording that he is not satisfied with the clam of the Assessee in the manner indicated i.e. after examining the Assessee's accounts, the question of applying the formula under Rule 8D (2) does not arise. That this is a mandatory pre-requisite for applying Rule 8D (2) is fairly well- settled. 31.1 Illustratively reference may be made to the decision of the Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd v.
M/s. Indian Herbs Specialities P. Ltd. 7 CIT (supra) which was concurred with by this Court in Maxopp Investment Limited v. CIT (supra) and reiterated in Commissioner of Income Tax v. Taikisha Engineering India Limited (supra). 31.2 The Bombay High Court in Godrej and Boyce Mfg. Co. Ltd v. DCIT (supra) upheld the constitutional validity of sub-sections (2) and (3) of Section 14 A of the Act. It was held that Section 14A was applicable to the dividend income earned from mutual funds. The exercise that had to be undertaken by the AO for applying Section 14A was explained thus: "What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the Assessee in respect of the expenditure which the Assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the Assessee. Hence, sub- section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the Assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the Assessee in that regard is correct and the determination must be made having regard to the accounts of the Assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the Assessee, that the Legislature directs him to follow the method that M/s. Indian Herbs Specialities P. Ltd. 8 may be prescribed. In a situation where the accounts of the Assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the Assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law." 31.3 The Bombay High Court further observed as under: "Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the Assessee, having regard to the accounts of the Assessee. When a statute postulates the satisfaction of the Assessing Officer "Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated". (M. A. Rasheed v. State of Kerala [1974] AIR 1974 SC 2249). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the Assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the Assessee, he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under M/s. Indian Herbs Specialities P. Ltd. 9 Article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under sub-section (2) of section 14A."
Now coming to the question of failure of the Ld. AO to record reasons what comes up from the record is that assessee had claimed that all investments were made out of own surplus funds and no borrowings are involved in making of such investments. The same has been duly exhibited before this Bench on behalf of the assessee by Ld. AR by referring to the balance sheet as on 31.03.2013, available on page no. 51 of the paper book, that the reserves and surplus stood at Rs. 14,55,50,389.76. It is also established by statement of profit and loss account for the period ending 31.03.2013 available at page no. 52 of the paper book that assessee had revenue from operation to the extent of Rs. 57,41,74,764/- . The assessee had also produced before the Ld. Tax Authorities below details of investment in mutual funds as on 31.03.2013, which is made available at page no. 127-128 of the paper book. The name of mutual funds and the name of bank account out of which funds are invested as disclosed shows that investment is made through current account of the company. However, without expressing anything specifically on the aforesaid material and recording objective satisfaction, disallowance has been made.
It is also established that during the year exempt dividend income earned is Rs. 40,57,603/- and the investments at the end of year are Rs. 10,02,51,254/- while available surplus with the assessee are Rs. 14,58,70,390/-. The assessee company come into to existence on 13.08.2012 only and also had share premium in its account. It is established that assessee had sufficient interest free own funds available which far exceeded investments and in these circumstances investments would be presumed to be made out of assessee’s own funds and proportionate disallowance is not warranted u/s 14A on ground that separate account were not maintained by the assessee for investments and other M/s. Indian Herbs Specialities P. Ltd. 10 expenditure incurred for earning tax free income. Reliance in this regard can be placed on the judgment of Hon’ble Supreme Court of India in South Indian Bank Ltd vs. CIT (221) 130 taxman.com 178 (SC).
Thus, the Bench is of considered opinion that the grounds raised deserve to be sustained to the extent of Rs. 24,02,772/- , in regard to the additions made under Rule 8D(2)(ii) of the Act. Accordingly, the appeal is allowed partly.
Order pronounced in the open court on 26th April, 2023.