ITAT,
Kolkata holds in a landmark judgement that in computing
disallowance u/s 14A r.w Rule 8D , only investment in those shares are to be
considered which has yielded exempt income in the form of dividends. In other words, disallowance cannot be made in respect of shares on which dividend income has not been received. Read the full text:
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA
[Before Shri K.K.Gupta, A.M. & Shri George Mathan,
J.M.]
I.T.A. No. 1331/Kol/2011 : Assessment Year : 2008-09
REI Agro Ltd., Kolkata -Vs- DCIT, Central Circle-XXVII, Kol.
(PAN : AABCR 4929H)
(Appellant) (Respondent)
I.T.A. No. 1423/Kol/2011 : Assessment Year : 2008-09
DCIT, Central Circle-XXVII, Kol. –Vs- REI Agro Ltd., Kolkata
(Appellant) (Respondent)
Date of concluding the hearing : 22.05.2013
Date of pronouncing the Order : 19.06.2013
Appearances :
For the Department : Shri L.K.S. Dehiya, CIT(DR)
For the Assessees : Shri Ravi Tulsiyan, FCA
O R D E R
Per Shri George Mathan,J.M.
The ITA No.1331/Kol/2011 is an appeal filed by the
Assessee and the ITA
No.1423/Kol/2011 is an appeal filed by the Revenue
against the order of the CIT(A),
Central-I, Kolkata in Appeal
No.03/CC-XXVII/CIT(A),C-II/10-11 dated 2nd
August,
2011 for the assessment year 2008-09.
2. Shri L.K.S.Dehiya, CIT,D.R appeared on behalf of the
Revenue and Shri Ravi
Tulsiyan. FCA appeared on behalf of the assessee.
3. In the assessee’s appeal, the assessee has raised the
following grounds:
“1. The
orders passed by the lower authorities are unwarranted, arbitrary,
without proper reasons, invalid and bad in law, in so far
as they are against
the interest of the appellant company.
2. On the facts and in the circumstances of the case, the
learned CIT(A)
erred in holding that proportionate management and
administrative expenses are required to be deducted while computing exempt
income or dealing with investment matter and in that view, in sustaining thedisallowance
of Rs.26,09,386/- under Rule 8D(2)(iii) of the Income Tax Rules.
3. On the facts and in the circumstances of the case, the
learned CIT(A)
erred in sustaining disallowance of Rs.26,09,386/- u/s
14A of the Incometax
Act, 1961, by applying the provisions of Rule 8D(2)(iii)
of the Income
Tax Rules against meager Dividend income of Rs.1,32,638/-
only.
4. The appellant craves leave to amend, alter, modify,
add to, abridge
and/or rescind any or all the above grounds in future.”
3.1 In the Revenue’s appeal, the Revenue has raised the
following grounds:
“01. That
in the facts and circumstances of the case and in law, the Learned
CIT(A) has erred in law in deleting the disallowance of
Rs.37727610/- in
respect of interest made u/s.14A of the Act read with
Rule 8D of IT rules by
holding that the investment of shares was made out of own
funds of the
assessee without considering that the linkage between the
funds borrowed
and the investments, the income of which is exempt, was
not established by
the assessee.
02. That in the facts and circumstances of the case, the
Ld. CIT(A) has
erred in law in deleting the disallowance of Rs.3,77,27,610/-
in respect of
interest made u/s.14A r/w Rule 8D of the Act, in view of
the decision of the
Hon’ble Kolkata High Court in the case of Danukha &
Sons –Vs- CIT
(Central)-I, Kolkata reported in 201 Taxman 105 (Kol)
(Mag), wherein it
has been held that in the absence of any material
disclosing the source of
acquisition of shares which is within the special
knowledge of the assessee,
the assessing authority can make proportionate
disallowance.
03. That the Department craves leave to add, modify or
alter any of the
above ground(s) of appeal and/or adduce additional
evidence at the time of
hearing of the case.”
4. At the time of hearing, it was submitted by the ld.
D.R. that the assessee is a company which is doing the business of rice
processing, power generation and Retail sale. It was a submission that during
the year, the assessee had received dividend income of Rs.1,32,638/-, which was
claimed as exempt. The assessee had not debited any expenses in respect of
expenditure incurred for earning such exempt income. The AO has invoked the
provisions of section 14A read with rule 8D of the Act and has made a
disallowance of an amount of Rs.4,03,36,996/-. It was a submission that on
appeal, the ld. CIT(A) had reduced the disallowance under section 14A to
Rs.26,09,386/-. It was a submission that against the relief granted of
Rs.4,03,36,996/-, the Revenue has filed the appeal in ITA No.1423/Kol/2011 and
in respect of disallowance confirmed by the CIT(A) to the extent of
Rs.26,09,386/-, the assessee has filed the appeal in ITA No.1331/Kol/2011. It
was a submission that the ld. CIT(A) had considered the various case laws to
come to the conclusion that no disallowance under section 14A would be made. It
was a submission that the case laws relied on by the ld. CIT(A) related to the
period prior to the assessment year 2008-09, being the assessment year from
which the provisions of Rule 8D came into application. It was a submission that
the assessee had invested Rs.103 crores in shares during the relevant
assessment year. It was a further submission that there was no increase in
the share capital during the relevant assessment year. It
was a submission that however, the assessee’s loan account had increased by
Rs.122 crores. It was, thus, the submission by the ld. D.R. that the investment
in the shares was out of interest bearing funds. It was a submission that the
ld. CIT(A) had in his order in para 4.1 held that the assessee was having a
common pool in respect of its own fund as also its loan fund. It was a
submission that as the assessee had used interest-bearing fund for purchasing
shares and the assessee had paid interest on the same, the disallowance as made
by the AO by invoking the provisions of section 14A read with Rule 8D was
liable to be upheld. It was a further submission that though the AO has in his
assessment order specifically held that there is no disallowance liable to be
made under rule 8D(i), disallowance under rule 8D(ii) had been made on the
basis of the computation provided thereunder, as also under Rule 8D(iii). It was
a submission that in view of the decision of the Hon’ble Jurisdictional High
Court in the case of Danukha & Sons –Vs- CIT
(Central)-I, Kolkata reported in
201 Taxman 105 (Kol), it was for the assessee to show the
source of acquisition of the shares by production of the materials that those
were acquired from funds available in the hands of the assessee at the relevant
point of time without taking benefit of any loan. The assessee having not shown
such availability of funds, the disallowance was liable to be upheld.
4.1 He also relied upon the decision of the Hon’ble
Kerala High Court in the
case of Leena Ramchandran reported in 339 ITR 296. It was
a submission that the order of the ld. CIT(A) was liable to be reversed to the
extent that he has reduced the disallowance.
5. In reply, the ld. A.R. submitted that as per the
provisions of section 14A(2),
the AO was to determine the amount of expenditure
incurred in relation to such income which does not form part of the total
income, in accordance with such method as may be prescribed. It was a further
submission that there was also supposed to be satisfaction to the correctness
of the claim of the assessee. It was a submission that at the outset, the AO
has not shown that the claim of the assessee that there is no amount
disallowable was wrong nor is there any satisfaction recorded to such effect.
On this point, the ld. D.R. submitted that the Coordinate Bench of this
Tribunal has, in the case of Champion Commercial reported in 26 Taxman.com 342,
held that it is only where the assessee offers a disallowance under section
14A, the AO is required to record satisfaction. When no expenditure is offered
by the assessee, the AO need not record such satisfaction.
5.1 It was
submitted by the ld. A.R. that as per the provisions of section 14A(3), the
provisions of sub-section (2) also apply in relation to a case where an
assessee claims that no expenditure has been incurred by him in relation to the
income which does not form part of the total income under the Act. In the
return filed by the assessee, there is no provision for making a claim that
there is no expenditure. The fact that the assessee did not make any
disallowance under section 14A, in the return filed itself was the claim that
no expenditure has been incurred. The ld. A.R. further drew our attention to
P&L a/c. of the assessee for the year ended on 31.03.2008 as also the
balance-sheet, which were at pages 78 to 95 of the paper book. It was a
submission that the shareholders’ funds in the balance-sheet showed that the
share capital had increased by Rs.4 crores during the relevant assessment year
and the Reserves and Surplus had gone up by Rs.112 crores. The loan fund had
increased by Rs.122 crores. It was a submission that the loan funds were used for the acquisition of assets as also
towards working capital and in fact the fixed assets net block increased by
Rs.116 crores, after considering a depreciation of 57 crores. It was, thus, a
submission that the actual increase in the fixed assets when compared to the
net block for the year ended on 31.03.2007 was 174 crores. It was a submission
that the profits available to the assessee before taxation for the assessment
year 2008-09 was Rs.130 crores and the profit, after taxation, was Rs.109
crores. The amount available for appropriation for the assessment year 2008-09
was Rs.128 crores. He further drew our attention to the investments during the
year, which is shown at page 84, being the investment in Varrsana Ispat Limited
at Rs.103 crores. It was a submission that the other investments, which were
there as on the beginning of the assessment year was to an extent of Rs.58,27,282/-.
It was a submission that it is out of the shares of this investment of Rs.58,27,282/-,
the assessee had received the dividend income and not on the investment of
Rs.103 crores. The ld. A.R. further drew our attention to page 362 of the paper
book, which was the copy of the loan sanction document from the State Bank of
Bikaner and Jaipur dated 22.12.2007 for letter of credit of Rs.175 crores.
It was a submission that this was on the security of the
stock available with the
assessee. He further drew our attention to page 370 of
the paper book, which was the letter from Allahabad Bank for reviewing and
enhancing the limits for working capital from the existing Rs.250 crores to
Rs.500 crores. It was a submission that this was also enhanced working capital
limit, which was to be released only after the tie-up of the entire limit of
Rs.1800 crores from the Consortium. This was also for the Letter of Credit
purpose. He further drew our attention to pages 372, 374 and 381, which were
all credit sanction advices given by the various banks, being United Bank of
India, Indian Overseas Bank. It was a submission that all these were for L.C.
only. It was a submission that all the loans were directly related to the
business of the assessee. The ld. A.R. further drew our attention to the
decision of the Coordinate Bench of this Tribunal in the case of Balarampur
Chini Mills
Ltd. 140 TTJ (Kol) 73, wherein the Tribunal has held that
section 14A and Rule 8D can be invoked only when the AO is not satisfied with
regard to the account of the assessee that the claim of expenditure made by the
assessee is not correct and the claim made by the assessee that no expenditure
has been made in relation to income, which does not form part of total income
under the Act. Where the assessee has explained that the share capital and
reserves, that is its own funds, were utilized for the purpose of investment in
shares for earning dividend income which has not been negated by lower
authorities and there is no linkage or nexus between the funds borrowed by the
assessee and the impugned investments, no interest expenditure can be
disallowed by mechanically applying the provisions of rule 8D. It was a
submission that the decision of the Hon’ble Jurisdictional High Court in the
case of Danukha & Sons (supra) would not apply in so far as in that case the assessee
was not able to show that the investment was made out of its own
independent non-interest bearing funds. It was a
submission that no disallowance under section 14A could be made.
6. We have considered the rival submissions. A perusal of
the provisions of
section 14A, more specifically sub-section (2), shows
that if the AO is not satisfied with the correctness of the claim of the
assessee, then the AO shall determine the amount of expenditure incurred in
relation to such income, which does not form part of total income under the
Act. For this the method is prescribed in rule 8D. The provision of section
14A, sub-section (3) specifies the provision of 14A(2) would also apply where
the assessee makes a claim that there is no expenditure incurred. This is
because if the assessee does not make a disallowance under section 14A in its
computation of total income, when filing the return, then if subsection (3) was
not available, the AO might not be able to make a disallowance under section
14A. Thus, where the assessee makes a claim that only a particular amount is to
be disallowed under section 14A or where the assessee does not make a
disallowance under section 14A, if the AO proposes to invoke the section 14A, he
is to record a satisfaction on that issue. This satisfaction cannot be a plain satisfaction
or a simple note. It is to be done with regard to accounts of the
assessee. In the present case, there is no satisfaction
by the AO and consequently, in view of the decision of the Coordinate bench of
this Tribunal in the case of Balarampur Chini Mills Ltd. referred to supra, no
disallowance under section 14A can be made.
7. Now coming to the merits of the issue. A perusal of
the provision of section
14A(1) clearly shows the wordings, “in relation to the
income which does not form part of the total income under this Act”. In the
present case, this income, which does not form part of the total income under
the Act, is the dividend income of Rs.1,32,638/-. Therefore, if any
disallowance is to be made in respect of expenditure incurred, it should be in
relation to this dividend income of Rs.1,32,638/-. If an assessee has invested
in shares, which could get dividend or there is investment which generates
dividend income or exempt income as also investment which does not generate
exempt income, it is only such investments in respect of which the dividend
income or exempted income has been earned which can be considered when
computing the disallowance under section 14A read with rule 8D. A perusal of
the provisions of rule 8D also talks of satisfaction in sub-rule (1). Rule
8D(2) has three sub-parts. The first sub-part i.e. (i) deals with the amount of
expenditure directly relating to the income which does not form part of the
total income. That issue is not in dispute here and therefore, we do not go
into it in this case. In second sub-part i.e.(ii), it is a computation provided
in respect of expenditure incurred by the assessee by way of interest during
the previous year which is not directly attributable to any particular income
or receipt. This clearly means that if there is any interest expenditure, which
is directly relatable to any particular income or receipt, such interest
expenditure is not to be considered under rule 8D(2)(ii). In the assessee’s
case here the interest has been paid by the assessee on the loans taken from
the banks for its business purpose. There is no allegation from the banks nor
the AO that the loan funds have been diverted for making the investment in
shares or for non-business purposes. Further rule 8D(2)(ii) clearly is worded
in the negative with the words “not directly attributable”. Thus for bringing
any interest expenditure, claimed by the assessee, under the ambit of rule
8D(2)(ii) it will have to be shown by the AO that the said interest is not
directly attributable to any particular income or receipt. Why we say here that
it is to be shown by the AO is on account of the words in Rule 8D(1) being “where
the Assessing Officer, …… is not satisfied with.
(a) ……..
(b) ……..
in relation to income……., he shall determine the amount
of expenditure in
relation to such income in accordance with the provisions
of sub-rule (2).
In the assessee’s case, admittedly, the assessee has
substantial capital. The increase in the capital itself is to an extent of Rs.4
crores and in respect of reserves and surplus, the increase is Rs.112 crores.
The loans taken during the year admittedly are for the letters of credit and
the assessee is bound to provide the bank stock statement and other details to
show the utilization of the loans. No bank would permit the loan given for one
purpose to be used for making any investment in shares. The ld. CIT(A), it is
noticed that after considering these facts that the assessee had not used any
of its borrowings for purchasing the shares, has deleted the disallowance. On
this ground itself, the deletion as made by the ld. CIT(A) is liable to be
confirmed and we do so.
7.1 In any case, the working of the disallowance under
sub-part (ii) of subclause (2) of rule 8D as made by the AO also suffers from a
substantial error in so far as in the said rule in regard to the numerator B,
the words used are the average value of the investment, income from which does
not form or shall not form part of the total income as appearing in the
balance-sheet as on the first day and in the last day of the previous year.
Here the AO has taken into consideration the investment of Rs.103 crores made
this year, which has not earned any dividend or exempt income. It is only the
average of the value of the investment from which the income has been earned
which is not falling within the part of the total income that is to be
considered. This is why the question of satisfaction is provided in section 14A
and rule 8D(1), that relates to the accounts of the assessee.
Thus, it is not the total investment at the beginning of
the year and at the end of the year, which is to be considered but it is the
average of the value of investments which has given rise to the income which
does not form part of the total income which is to be considered. A question
may arise as to why the term “average of the value of investment” is then used.
The term average of the value of investment would be to take care of cases
where there is the issue of dividend striping. In any case, as we have already
held that the assessee has not incurred any expenditure by way of interest
during the previous year, which is not directly attributable to any particular
income, the findings of the ld. CIT(A) on the issue stand confirmed and consequently
the appeal filed by the Revenue stands dismissed.
8. In respect of provisions of rule 8D(2)(iii), which is
the subject-matter of the
appeal in the assessee’s hand, a perusal of the said
provision shows that what is disallowable under rule 8D(2)(iii) is the amount
equal to ½ percentage of the average value of investment the income from which
does not or shall not form part of the total income. Thus, under sub-clause
(iii), what is disallowed is ½ percentage of the numerator B in rule 8D(2)(ii).
Again this is to be calculated in the same line as mentioned earlier in respect
of Numerator B in rule 8D(2)(ii) of the Act.
8.1 Thus, not all investments become the subject-matter
of consideration when computing disallowance under section 14A read with rule
8D. The disallowance under section 14A read with rule 8D is to be in relation
to the income which does not form part of the total income and this can be done
only by taking into consideration the
investment which has given rise to this income which does not form part of the
total income. Under the circumstances, the computation of the disallowance
under section 14A read with rule 8D(2)(iii), which is issue in the assessee’s
appeal, is restored to the file of the AO for recomputation in line with the
direction given above. No disallowance under section 14A read with rule 8D(2)(i)
and (ii) can be made in this case.
9. In the result, the appeal filed by the Revenue stands
dismissed and the
appeal filed by the assessee stands partly allowed for
statistical purposes.
This Order is pronounced in the Court on 19th June, 2013.
Sd/- Sd/-
(K. K. Gupta) (George Mathan)
Accountant Member Judicial Member
Dated : 19th June, 2013
Order pronounced by:
Sd/- Sd/-
A.M. J.M.
(NSS) (GM)
Copy of the order forwarded to:
1. REI Agro Ltd., 46C, Chowringhee Road, Kolkata - 700 071
2 DCIT, Central Circle-XXVII, Kolkata
3. The CIT(A),
4. CIT,
5. DR, Kolkata Benches,
Kolkata
True Copy, By order,
Asstt. Registrar, ITAT, Kolkata
Talukdar(Sr.P.S.)
