Ten escape routes from the mischief of sec 14A r.w Rule 8D ( Part II )

Second and concluding part of the write up providing ready reference to the relevant and latest case-laws on the subject

        5. NETTING OF INTEREST INCOME IS  ALLOWED

        [Relevant prior to 2-6-2016]

Courts have held that Interest expenditure has to be netted against interest income and only the difference, if any, can be considered for disallowance.

In Trade Apartment Ltd’s case ,I.T.A. No. : 1277/ Kol . / 2011, order  dtd 30.03.2012,

ITAT  Kolkata  held that  as the interest income was more than interest expense and the assessee was having net positive interest income, the interest expenditure cannot be considered for disallowance u/s 14A and Rule 8D. Following further decisions may be gainfully used in this regard by the assessees-       

(a) ITO vs. Karnavati Petrochmem Pvt. Ltd , I.T.A. No. 2228/AHD/2012 (ITAT Ahmedabad), Order dated: 5.07.2013

(b) CIT vs. Jubiliant Enterprises (P) Ltd. 2017(2) TMI 1219 (Bom)

(c) Sanjay Kumar Gupta vs. DCIT, ITA No. 105/K/18, Order dated 24.05.2018 

( ITAT Kolkata)

(d) Dismissing the appeal of the revenue, the Court held that; Prior to its amendment with effect from 2-6-2016, amount of expenditure by way of interest would be interest paid by assessee on borrowings minus taxable interest earned during financial year. (AY. 2008-09)
PCIT v. Nirma Credit & Capital (P.) Ltd (2017) 85 taxmann. com 72 / (2018) 300 CTR 286/ 161 DTR 333 (Guj)HC)

(e)  Disallowance of expenditure-Exempt income –Net of interest-Benefits of netting of interest under rule 8D(2)(ii) be allowed without even emphasising on need of having any inextricable link between interest earned and interest paid prior to 2-6-2016. [R. 8D(2)(ii)]
Dy. CIT v. UMIL Share & Stock Broking Services Ltd. (2018) 171 ITD 713 / 170 DTR 441 / 196 TTJ 91(Kol.)(Trib.)

6.  EXPENSES SPECIFICALLY RELATED TO TAXABLE INCOME IS TO BE EXCLUDED

Courts have held that Rule 8D is not mandatory and should be applied as a last resort. In this regard reference may be made to the case of M/s. Soyuz Trading Co. Ltd. Versus I.T.O., No.- ITA.2530/Kol/2013,  ITAT Kolkata; order dtd July 8, 2016 wherein ITAT held as under-

“We find that the total expenses debited to profit and loss account is ₹ 2,28,25,154/- and out of this, direct expenses of consultancy and professional charges amounting to ₹ 1,96,48,885/- for earning consultancy income i.e taxable income would be automatically out of the purview of computing disallowance u/s 14A of the Act. The remaining common expenses of ₹ 31,76,269/- have to be apportioned between taxable and non-taxable income. We find that the ratio of apportionment adopted by the assessee at 45.5% in the income component is very fair and accordingly direct the Learned AO to disallow ₹ 14,45,202/- being 45.5% of ₹ 31,76,269/- u/s 14A of the Act to meet the ends of justice.

We hold that the Learned AO cannot mechanically apply the provisions of Rule 8D for the purpose of disallowance u/s 14A of the Act. In our opinion, the same could be used only as a last resort only in the event of the AO not able to make a fair substitution of the disallowance figure as contemplated u/s 14A(2) of the Act. In any case, the provisions of the Act would always prevail over the Rules as admittedly the Rules are only subordinate piece of legislation and are meant only to support the Act. Rules could act only as a guiding force to effectively implement the provisions of the Act. If the manner so contemplated in the Act fails, then as a last resort, the AO should go to Rules for making disallowance u/s 14A . Hence we hold that the Learned AO has got sufficient powers to substitute the disallowance figure at ₹ 14,45,202/- in terms of section 14A(2) of the Act itself and hence Rule 8D need not be followed in the facts of the instant case. - Decided partly in favour of assessee.”

Further decisions in this connection are as under-

(a) ITO vs. Narain Prasad Dalmia (ITAT Kolkata). Order dated: 27.1.2014

interest expenditure on loans taken for taxable business purposes has to be excluded.

(b) ACIT vs. Best & Crompton Engineering Ltd (ITAT Chennai), Order dated: 16.07.2013

Interest on loans for specific taxable purposes to be excluded.

(c) JCIT vs. Pilani Investment & Industries Corpn. Ltd (ITAT Kolkata), Order dated: 4.02.2013

Expense specifically relatable to taxable income cannot be disallowed.

(d) REI Agro Ltd vs. DCIT (ITAT Kolkata), Order dated: 19.06.2013

Interest on Loans taken for specific business purposes cannot be included under Rule 8D(2)(ii)

(e) CIT vs Shreno Ltd. (2018) 409 ITR 401/ (2019) 261 Taxman 239 (Guj)(HC)

7. THE DISALLOWANCE CANNOT EXCEED THE EXPENSES CLAIMED.

i) PCIT vs Adani Agro (P) Ltd. (2018) 253 Taxman 507 (Guj) (HC)

8. THE DISALLOWANCE CANNOT EXCEED THE EXEMPTED INCOME.

i) Pragathi Krishna Gramin Bank vs JCIT (2018) 256 Taxman 349 (Karn) (HC)

ii) Gold Seal Engineering Products P. Ltd. vs ACIT (2018) 66 ITR  37 (SN) (Mum) (Trib.)

iii) ITO vs. Accord Capital Markets Ltd., ITA No. 2076/K/2016 dated 16.03.2018 –

            Following –

Daga Global Chemicals (P) Ltd. vs. ACIT, ITA No. 5592/M/12 dated     01.01.2015 ( disallowance limited to the extent of dividend income)

iv) Delhi High Court order in the case of Joint Investments (P) Ltd. vs. CIT 372 ITR 694 (Del) dated 25.02.2015  ( disallowance limited to the extent of dividend Income.

(v) Magic Share Traders Ltd. DCIT (2019) 174 ITD 230 (Ahd) (Trib.)

(vi) PCIT v. State Bank of Patiala (2018) 99 taxmann.com 285 / 259 Taxman 315 (P& H) (HC)
Note:  SLP of revenue is dismissed, PCIT v. State Bank of Patiala (2018) 259 Taxman 314(SC)

9.  Where assessee maintains separate final accounts for personal investments recording investments generating exempt income and has not claimed expenses in personal  accounts –  sec14A/R 8D cannot be applied.

a)   Pawan Kumar Parmeshwarlal, ITA No 530/Mum/2009, dtd 11.01.2011

b)  ACIT, Kolkata vs  Usha Ranjan Sarkar, ITA 2674/K/2013 dtd. 24/05/2017

        10.  NON- APPLICATION IN COMPUTATION OF BOOK PROFIT 

N         (CONSIDERING CLAUSE (f) OF EXPLANATION 1 TO SEC 115JB)

   

 In  Universal Industrial Fund Ltd. (in the matter of Hill top Holdings India Ltd. since   amalgamated) Versus DCIT,  2016 (5) TMI 1259 - ITAT KOLKATA, addition of  expense including the interest disallowed u/s. 14A r.w. R. 8D of the IT Rules in computing the book profit u/s. 115JB fell for consideration. It was held that no addition to the book profit shall be made on account of alleged expenditure incurred to earn exempt income while computing income u/s115JB of the Act. Following Quippo Telecom Infrastructure Ltd. case [2011 (2) TMI 1400 - ITAT DELHI.

However, adverse view has been taken in CIT vs. Goetze (India) Ltd (Delhi High       Court) , Order dated 9.12.2013

 

But Spl Bench at Delhi in ACIT vs Vireet Investments P. Ltd.(2017) 165 ITD 27/ 154   DTR  241/ 188 TTJ 1 (SB)(Delhi)(Trib.) has held that the computation of BP 

( considering  clause (f) of Explanation 1 to section 115JB) is to be made without resorting to the computation as contemplated u/s 14A r.w.r. 8D .  It has considered Delhi High Court in CIT vs. Goetze (India) Ltd but didn’t found to be binding since the said decision was rendered on the basis of conset by the parties to the lis.

Ten escape routes from the mischief of sec 14A r.w Rule 8D ( Part I )

This write up  in two partes will provide ready reference to the relevant and latest case-laws on the subject

1. WHERE NO TAX FREE INCOME IS RECEIVED

1.1 The CBDT has issued  in which the issue as to whether disallowance under section 14A and Rule 8D can be made in cases where the corresponding exempt income has not been earned/received during the financial year has been considered. The operative part of the circular is as under-

“Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective’of the fact whether any such income has been earned during the financial-year or not.

4. The above position is further clarified by the usage of term ‘includible’ in the Heading to section 14A of the Act and also the Heading to Rule 8D of I.T.Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year’s income, for disallowance to be triggered. Also, section 14A of the Act does not use the word “income of the year” but “income under the Act”. This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration.”

1.2 Earlier in Cheminvest Ltd. vs. ITO 121 ITD 318 (Ahd) (SB), the special Bench of ITAT has also subscribed to the view expressed by the CBDT circular. The ITAT Banglore Bench in Alliance Infrastructure Projects Pvt. Ltd vs. DCIT 
( decision dated 12.09.2014 ; source itatonline.org ) held that Sec. 14A & Rule 8D disallowance cannot be made if there is no exempt income and further held that the decision of Special Bench of the Tribunal has been impliedly overruled by various decisions of different High Courts, namely, CIT vs Shivam Motors P. Ltd. (All HC),CIT vs. Corrtech Energy Pvt. Ltd (2015 372 ITR 97 (Guj.) (Guj HC), CIT vs. Winsome Textile Industries Ltd 319 1TR 204 (P&H), CIT Vs.Delite Enterprises (Bom HC) & CIT vs. Lakhani Marketing (P&H HC) and is no more a good law. Therefore, unless and until there is receipt of exempted income for the concerned assessment years, s. 14A of the Act cannot be invoked.

1.3  In this regard, following further decisions may be considered-

    i)PCIT vs Ballapur Industries Ltd. (Bom) (HC) Source : www.itatonline.org

   ii) ACIT vs Gini & Jony Ltd. (2018) 172ITD 472

  iii) ACIT vs Dish TV India Ltd. (2018) 194 TTJ 897/ 169 DTR 253 (Mum) (Trib.)

  iv) HLL Lifecare Limited vs ACIT (2018) 191 TTJ 1 (UO) / 66 ITR 361 
      (Cochin) (Trib.)

  v) ACIT vs Claridges Hotels P. Ltd. (2018) 61 ITR  135 (Delhi )(Trib.)

  vi) CIT vs Goldman Sachs Services P. Ltd. (2018) 409 ITR 268 (Karn) (HC)

vii)  Calcutta High Court in the case of CIT vs. Ashika Global Securities Lt,d..
ITAT 100 of   2014. Dtd 11.06.2018

viii) CIT, Chennai vs Chettinad Logistics P. Ltd. T.C.A. No. 24 of 2017 {[2017] 80 taxmann.com 221}  {SLP dismissed}

ix) Satyam Tradecom Pvt. Ltd. vs ITO, Kolkata ITA No. 2363/ Kol/ 2016

x) ACIT vs. Punjab State Coop and Marketing Fed. Ltd., ITA No. 548/Chd/11, Order dated 30.09.2011

xi) PCIT v. Oil Industries Development Board ( 2019) 262 Taxman 102 (SC) { SLP dismissed}

{ PCIT v. Oil Industries Development Board ( 2019) 103 taxmann.com 325 ( Delhi)(HC) is affirmed .

     ( ITA No. 187/2018 dt 16-02-2018) }

xii) Cheminvest Ltd v. CIT ( 2015) 378 ITR 33 (Delhi)

xiii) PCIT .v. GVK Project and Technical Services Ltd. (2019)106 taxmann.com 180 / 264 Taxman    77 (Delhi)(HC)

Followed Cheminvest Ltd v. CIT ( 2015) 378 ITR 33 (Delhi) (HC) ( AY. 2013-14)

SLP of revenue is dismissed in PCIT . v. GVK Project and Technical Services Ltd. (2019) 264 Taxman 76 (SC)

xiv)  Unless and until there is receipt of exempted income for concerned assessment year, section 14A is not attracted . Circular No 5/2014, dt. 11-2-2014 is considered.

PCIT v. Vardhman Chemtech (P.) Ltd. (2019) 261 Taxman 233/ 179 DTR 35 (P&H)(HC)

2. WHERE OWN FUNDS/ INTEREST FREE FUNDS EXCEED INVESTMENT
 IN TAX-FREE SECURITIES – no disallowance of interest

Following decisions are quite relevant in this regard-

  a)CIT vs Gujarat State Fertilizers and Chemicals Ltd. (2018) 409 ITR 378 (Guj) 
(HC)

  b)PCIT vs Rasoi Ltd. (2018) 407 ITR 126 (Cal) (HC)

  c) CIT vs Deepak Vegpro (P) Ltd. (2018) 406 ITR 496 (Raj) (HC)

  d)  Bennett Coleman & Co. Ltd. vs Addl. CIT (2017) 168 ITD 631 
(Mumbai) (Trib.)      If   both interest free funds and overdraft balance were available, 
it is to be presumed that  investments were out of interest free fund generated or 
availed, if such funds were sufficient to meet investments.

 e)) Order of the Hon'ble Gujarat High Court in the case of Principal CIT vs. Sintex Industries (SLP dismissed)

 f) CIT vs Max India Ltd.  (2017) 398 ITR 209/ 295 CTR 448/ 151 DTR 220 (P&H)(HC)

g) PCIT vs Ashok Apparal (P) Ltd (2019) 264 Taxman 50 (Bom) (HC)

h) PCIT v. Premier Finance & Trading Co. Ltd. (2019) 262 Taxman 341 (Bom) (HC)

3. WHERE AO INVOKED RULE 8D WITHOUT RECORDING 
OBJECTIVE SATISFACTION THAT ASSESSEE’S METHOD IS 
INCORRECT – Courts have 
held the addition made by the A.O is liable to be deleted

 Following favourable –to-the-assessee decisions may be referred to-

 i)  Morgan Stanley Investment Management (P) Ltd. vs DCIT (2017) 160 DTR 19 /     

     (2018) 191 TTJ 365 (Mum.) (Trib.)

ii) M. Junction Services Ltd. v. (2018) 65 ITR 40 (SN) (Kol) (Trib.) -  AO 
commented that the assessee did not maintain separate books of accounts for the 
expenses incurred in relation to earning of income not includible in the total income. 
This assumption of AO was held to be incorrect as he had not given any cogent reason.

  iii) ACIT vs Karnataka Bank Ltd. (2018) 63 ITR 433 (Bang.) (Trib.)

  iv) Oricon Enterprises Ltd. vs ACIT (2018) 171 ITD 231/ 67 ITR 433 (Mum)
    (Trib.)

  v) IMC Ltd. vs Dy. CIT (2018) 191 TTJ 73 (Kol) (Trib.)

 vi) Feresthe Sethna (Ms) vs ACIT (2017) 162 ITD 412(Mum) (trib) – AO 
cannot directly   invoke rule 8D for making disallowance without examining the claim 
of the assessee.

vii) Exim Scrips Dealers (P) Ltd. vs DCIT (2017) 162 ITD 390 (Kol) (Tribunal)

viii)  REI Agro Ltd vs. DCIT (ITAT Kolkata) Order dated:        19.06.2013         (No s. 14A disallowance if satisfaction is not recorded with         reference   to A/cs. )

 ix) DCIT vs Vantage Advertising P. Ltd. (2018) 61 ITR 564 (Kol) (Trib.)

{Satisfaction has to be recorded by AO, it cannot be substituted by 
recorded satisfaction of CIT (A)

x)  Arnav Gruh Ltd. vs DCIT (2018) 168 ITD 518 (Mum) (Trib.)  

xi) Dismissing the appeal of the revenue the Court held that the Asseee has made suo 
motu disallowance , however the AO applied the Rule 8D(2) of the Act. Tribunal held that the AO has not recorded the satisfaction for not accepting the disallowance hence , 
deleted the addition. Order of Tribunal is affirmed by High Court.( ITA No. 237 of 2017, dt. 02.04.2019) ( AY.2009 -10)

PCIT v. Bajaj Finance Ltd ( 2019) 178 DTR 219/ 309 CTR 28 (Bom)(HC),www.itatonline.org

xii) High Court held that the AO cannot reject the disallowances offered by the assessee , without adducing any reasons .

PCIT v. Moonstar Securities Trading and Finance Co. (P.) Ltd. (2019) 105 taxmann.com 274 /263 Taxman 459 (Delhi) (HC)

{ SLP of revenue is dismissed, PCIT v. Moonstar Securities Trading and Finance Co. (P.) Ltd. (2019) 263 Taxman 458 (SC) }

xiii)  Dismissing the appeal of the revenue the Court held that  explanation of assessee and amount offered to tax under said section could not have been rejected by Assessing Officer in arbitrary manner.

PCIT v. Hero Corporate Service Ltd. (2019) 103 taxmann.com. 199/ 262 Taxman 30 (Delhi ) (HC)

{SLP of revenue is dismissed , PCIT v. Hero Corporate Service Ltd. (2019) 262 Taxman 29 (SC) }

xiv) Tribunal held that the assessee had filed details of expenses which were suo moto disallowed by it which showed that suo moto disallowance included expenses which were coming under purview of rule 8D(2)(iii) . Accordingly without verifying the facts disallowance of expenses by applying rule 8D(2)(iii) is held to be not justified .
( AY.2013-14)

Olive Bar & Kitchen (P.) Ltd. v. DCIT (2019) 175 ITD 72 (Mum) (Trib.)

xv) Dismissing the appeals of the revenue the Court held that AO cannot disallow he expenditure far in excess of what has been disallowed , without demonstrating how the working of the assessee is wrong . ( AY.2009-10)

CIT v. DSP Adiko Holdings Pvt. Ltd. (2019) 414 ITR 555 (Bom) (HC)

xvi) Disallowance of expenditure - Exempt income - Applicability of Rule 8D is not mandatory in every case where assessee earns tax free dividend income - Rule 8D cannot be invoked and applied unless Assessing Officer records his dissatisfaction regarding correctness of claim made by assessee in relation to expenditure incurred to earn exempt income

PCIT v. Vedanta Ltd. (2019) 261 Taxman 179 (Delhi)(HC)

4. SHARES HELD AS STOCK IN TRADE

a) Principle of apportionment-Only that expenditure which is "in relation to" 
earning dividends can be disallowed-AO has to record proper satisfaction on why 
the claim of the assessee as to the quantum of suo moto disallowance is not correct. 
[R. 8D]
Court held that; The argument that S. 14A & Rule 8D will not apply if the 
"dominant intention" of the assessee was not to earn dividends but to gain control of the company or to hold as stock-in-trade is not acceptable. S. 14A applies irrespective of whether the shares are held to gain control or as stock-in-trade. However, where the 
shares are held as stock-in-trade, the expenditure incurred for earning business profits 
will have to be apportioned and allowed as a deduction. Only that expenditure which is
 "in relation to" earning dividends can be disallowed u/s 14A & Rule 8D. The AO 
has to record proper satisfaction on why the claim of the assessee as to the quantum of 
suo moto disallowance is not correct.(AY. 2002-03, 2008-09, 2009-10)
Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640/ 164 DTR 1 / 254 Taxman 325
 (SC)
PCIT v. State Bank of Patiala (2018) 402 ITR 640/ 164 DTR 1/254 Taxman 325 (SC)
{ Maxopp Investment Ltd v CIT (2012) 347 ITR 272 (Delhi) (HC) is affirmed.
Decision of special Bench in ITO v. Daga Capital Management (2009) 312 ITR (AT) 1 (Mum.) (SB) is referred }

 b) Kolkata ITAT in Maruti Traders & Investors vs  ACIT, Kolkata ITA No. 846/Kol/2017 & ITA No. 637/Kol/2018 followed SC’s decision in the case of 
Maxopp Investment Ltd. vs CIT (2018) 402 ITR 640 / 164 DTR 1/ 254 Taxman 325. It 
held that since the shares were held as stock in trade and not as investments, the computation mechanism under rule 8D will not apply [rule 8D contemplates 
consideration of average value of investments and not stock in trade]. Disallowance u/s 
14A shall be made. Only rule 8D will not apply for computation purposes. –
 Following ITAT’s decision in the case of DCIT vs S.G. Investments & Industries 
Ltd. 89 ITD 44(Kol) dtd 29.05.03, the amount to be disallowed with regards to 
exempt income shall be calculated by working out the percentage of exempt income
 vis a vis total turnover during the year. Say, the exempt income earned worked out 
to be 10% of total earnings, then, the amount to be disallowed shall be the same 
percentage (in this case, 10%) of the related expense debited in the profit and loss 
account.

 c) PCIT vs State Bank of Patiala (2018) 402 ITR 640/ 164 DTR 1/ 254 Taxman 
325 (SC)

  – No disallowance in relation to shares and securities held as stock in trade and where
 own funds are more than the value of the shares and securities

        

..... to be continued