• Oct
  • 24
  • 2012

Even if assessee not earns any exempt income, disallowance u/s. 14A can be made

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IN THE ITAT CHENNAI BENCH ‘A’

Siva Industries & Holdings Ltd.

versus

Assistant Commissioner of Income-tax, Co. Circle VI(4), Chennai

IT APPEAL NO. 1917 (MDS.) OF 2011

[ASSESSMENT YEAR 2007-08]

APRIL 30, 2012

ORDER

N.S. Saini, Accountant Member

This is an appeal filed by the assessee against the order of Dispute Resolution Panel (DRP) dated 08.09.2011.

2. The ground No. 1 of the appeal is directed against the disallowance of Rs. 72,83,21,913/- made by the Assessing Officer u/s. 14A read with Rule 8D of the Act.

3. The brief facts of the case are that the Assessing Officer observed that whether the shares are held as investments or as stock-in-trade or held for strategic purposes is a business decision taken by the assessee. Whatever be such decision, any dividend earned on such shares will be exempt by virtue of section 10. As the dividend income does not form part of the total income under the Act, the provisions of Sec.14A would come into play. Therefore, the Assessing Officer disallowed the interest of Rs. 72,83,21,913/- on the ground of borrowed funds utilized for investment in shares. The same was confirmed in appeal by the DRP.

4. Ld. Authorised Representative of the assessee filed a copy of order of the Tribunal for immediately preceding Assessment Year 2006-07 in assessee’s own case in ITA No. 2148/Mds./2010 order dated 20th May, 2011 wherein the Tribunal at page-14, para Nos.7 to 8 of its order held that where the assessee does not have any income, which does not form a part of the total income, no disallowance u/s.14A can be made on the assessee. Ld. AR submitted that following the same as the facts in the present year are also same, the disallowance made should be deleted.

5. Ld. DR, on the other hand, submitted that the decision of the Tribunal was per incurim as the Tribunal failed to take into consideration the decision of Special Bench of the Tribunal in the case of Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi)(SB) where it was held that disallowance u/s. 14A can be made in the year in which no exempt income has been earned or received by the assessee.

6. After considering the rival submissions and perusing the orders of lower authorities and materials available on record, we find that the Assessing Officer has disallowed the interest of Rs. 72,83,21,913/- on the ground of borrowed funds were used by the assessee for making investment in shares. The contention of the assessee is that in the earlier Assessment Year 2006-07 where no dividend income was received by the assessee, the Tribunal has held that no disallowance of expenditure can be made u/s. 14A of the Act and therefore, the disallowance made in the year under appeal may also be deleted as in this year also the assessee has not received any dividend income on the shares, which is exempt from tax. We find that the Tribunal while deciding the appeal of assessee for Assessment Year 2006-07 failed to consider the decision of the Delhi Special Bench of the Tribunal in the case of Cheminvest Ltd. (supra) where it was held that even in a year where no exempt income was earned or received by the assessee, disallowance u/s. 14A can be made. Respectfully following the decision of the Delhi Special Bench of the Tribunal, we dismiss this ground of appeal of assessee.

7. The ground No.2 of the appeal of assessee relates to Hon’ble DRP erred in holding that the transaction between the assessee and its AE were not at arm’s length and in upholding the adjustments of Rs. 4,72,06,208/- made to the interest income of the assessee by the TPO. Ld. AR submitted that this issue is covered in favour of the assessee by the order of Tribunal in assessee’s own case in the immediately preceding Assessment Year 2006-07 in ITA No. 2148/Mds./2010 order dated 20th May, 2011. Ld. DR also agreed with the submissions of the assessee.

8. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. The brief facts of case are that the assessee has entered into international transaction with its associated enterprises, India Telecom Holdings Ltd., Mauritius by way of granting a loan in Indian Rs. 248.50 crores. As the case was covered under transfer pricing, reference was made to the TPO. The TPO vide order u/s. 92CA(3) dated 28.10.10 suggested upward revision in the income of assessee amounting to Rs. 4,72,06,028/- by adopting interest rate at 14% on the loans advanced for the reason that assessee had huge adverse foreign currency movement risk which assessee had not factored in. Rupee appreciated by 10% in 2006 and 13.5% in 2007. Therefore, interest should have been charged @ 14%.

9. On appeal, DRP confirmed the action of the Assessing Officer by observing that though it is true that the decision in the earlier year is in favour of the assessee, with due respect the decision is not being followed as it has not attained finality.

10. We find that the Tribunal in the immediately preceding Assessment Year 2006-07 while deciding the same issue, has observed at page-19 at para-11 as under:-

“11. We have considered the rival submissions. A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0% optional convertible preferential shares. Thus it is noticed that the funds raised by the assessee company for giving the loan to India Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm’s length interest rate in respect of the transaction between the assessee and the Associate Enterprises. As it is noticed that the average of the LIBOR rate for 1.4.05 to 31.3.06 is 4.42% and the assessee has charged interest at 6% which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted.”

Ld. DR could not bring any material on record to show that the above quoted decision of the Tribunal has been reversed in appeal by a higher forum. As the facts are identical, therefore, respectfully following the same, we reverse the order of DRP and allow this ground of appeal of assessee.

11. The ground No. 3 of the appeal is directed against the order of DRP in confirming the disallowance of TDS credit made by the Assessing Officer. The brief facts of the case are that the Assessing Officer had taken the figure of Rs. 61,04,722/- as TDS paid for computing the tax payable. The assessee claimed TDS in the return of income at Rs. 7,49,23,898/-. The DRP has observed that in the submissions assessee has not given any basis for TDS claim made by it. In the earlier year also, dispute on TDS has raised and it was found by the DRP that the TDS credit was not given for defective certificates. The issue was restored t the Assessing Officer by the Hon’ble ITAT. In the present year, the assessee’s claim was quite bad and unsubstantiated and therefore, the objection was not accepted. However, DRP directed the Assessing Officer to consider the claim as per law with respect to the claim of TDS.

12. Before us, the Ld. Authroised Representative of the assessee submitted that issue of credit of TDS should be restored to the file of Assessing Officer by following the order of the Tribunal for the Assessment Year 2006-07. We find that the Tribunal in the case of the assessee in Assessment Year 2006-07 held as under:-

“We have considered the rival submissions. As it is noticed that the remand report has been received by the DRP on 27.08.2010 and the same has not been granted to the assessee for its rebuttal, this issue is restored to the file of the Assessing Officer for re-adjudication. The Assessing Officer shall reconsider the issue of grant of credit for the TDS certificates and if he finds any of them to be defective, he shall give the assessee adequate opportunity to rectify the same and re-adjudicate the issue in accordance with law.”

We find that the DRP has held that the Assessing Officer will be free to consider the claim as per law before completing the assessment with respect to claim of TDS. Thus, we find that in fact the assessee has no grievance from the above direction of the DRP. Therefore, we dismiss this ground of appeal of the assessee.

13. In the result, the appeal of the assessee is partly allowed.

Sandeep Kanoi

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