V.S. Dempo Holdings Private Limited Vs ACIT (ITAT Panaji)
Section 14A Disallowance Cannot Exceed Exempt Income; ITAT Orders Fresh Calculation
Introduction
The Income Tax Appellate Tribunal, Panaji Bench, directed fresh computation of disallowance under Section 14A in the case of V.S. Dempo Holdings Private Limited, holding that the disallowance should not exceed the exempt income earned during the relevant year.
The consolidated order also addressed taxation of refund interest adjusted against outstanding demands, disputed TDS credit, and accrued interest on loans. While the Section 14A and TDS credit issues were restored to the Assessing Officer, the Tribunal upheld the additions relating to refund interest and unpaid accrued interest. All five appeals were partly allowed for statistical purposes.
Facts of the Case
The appeals arose from separate appellate orders concerning assessments completed under Section 143(3) of the Income Tax Act, 1961.
For Assessment Year 2014-15, the assessee filed its return declaring income of ₹10,10,93,300. It earned dividend income of ₹2,79,91,788 from subsidiary and other companies and voluntarily disallowed ₹43,46,293 under Section 14A.
The Assessing Officer computed the disallowance at ₹1,62,59,888 by applying Rule 8D. The CIT(A) upheld the assessment on this issue, leading to the appeal before the Tribunal. Similar disputes arose in the other assessment years.
Assessee’s Arguments on Section 14A
The assessee argued that the Assessing Officer incorrectly increased the book value of investments by adding back provisions for diminution in their value, although those provisions followed the applicable Accounting Standards.
Relying on the Special Bench decision in ACIT Vs. Vireet Investment Pvt. Ltd., the assessee submitted that only investments yielding exempt income should be considered. It also contended that the disallowance exceeded dividend income in some years and challenged the inclusion of investments in subsidiary companies.
The Revenue supported the CIT(A)’s order.
Tribunal’s Directions for Fresh Computation
The Tribunal found that the Assessing Officer had examined the voluntary disallowance and audited financial statements and recorded proper satisfaction before invoking Rule 8D. Nevertheless, it directed a fresh calculation subject to specific conditions.
First, provisions for diminution in investment value made in accordance with applicable Accounting Standards were not to be added back to the investment book values appearing in the audited balance sheet.
Second, for calculating the 0.50% component under Rule 8D, the Tribunal directed consideration of investments yielding exempt income. Its operative direction expressly included investments that had not yielded exempt income during the year but could generate exempt dividend income in subsequent years.
Third, the disallowance under Section 14A could not exceed the exempt income earned during the year.
Fourth, investments in subsidiary, holding and group companies were to be included, since dividend income arising from them, if any, was also exempt.
The Assessing Officer was further directed to give credit for the disallowance already offered voluntarily by the assessee for each relevant year. The common issue was restored for fresh computation.
Refund Interest Taxable Despite Adjustment Against Demands
For Assessment Year 2014-15, the Assessing Officer added ₹5,58,768 as interest under Section 244A, which had not been included in the assessee’s income.
The assessee argued that it had not received the interest because the refund was adjusted against dues for other assessment years.
The Tribunal rejected this contention. It reasoned that the interest had been calculated when the refund was generated, before adjustment against outstanding demands. Such adjustment did not remove its taxability. The addition was upheld.
A similar ground for Assessment Year 2012-13 was dismissed as not pressed.
TDS Credit Dispute Restored for Verification
The assessee also challenged denial of TDS credit of ₹21,64,800 and ₹11,96,921 for Assessment Years 2012-13 and 2013-14, respectively.
The dispute concerned interest on withheld sale consideration arising from the sale of shares. The assessee explained that it held a 60% interest in the transaction, while other Dempo family sellers held 40%. Although tax was deducted in the assessee’s hands, it claimed that the other sellers had offered their respective income to tax.
The Tribunal restored the issue to the jurisdictional Assessing Officer. It directed verification of whether the other sellers had offered their 40% share to tax, followed by a decision on TDS credit under Rule 37BA(2) in accordance with law.
Addition of Unpaid Accrued Interest Upheld
For Assessment Year 2012-13, the assessee disputed an addition of ₹17,42,466 relating to interest receivable from Shantidurga Transport Company Private Limited.
Although TDS was deducted on interest of ₹69,04,110, the assessee offered only the ₹51,61,644 actually received, citing recovery difficulties and litigation.
The Tribunal rejected the claim on the facts, emphasising accrual under the mercantile accounting system and noting that credit for the full TDS had been claimed. It upheld the addition. Accordingly, the appeals resulted in remand on specified issues and confirmation of the interest additions discussed above.
Cases Discussed
- ACIT Vs. Vireet Investment Pvt. Ltd. — [2017] 165 ITD 27 (Special Bench); discussed regarding investments yielding exempt income.
- CIT Vs. M/s. Pruthvi Brokers & Shareholders Pvt. Ltd. — [2012] 349 ITR 336 (Bombay High Court); cited concerning additional appellate grounds.
FULL TEXT OF THE ORDER OF ITAT PANAJI
1. The captioned appeals at the instance of assessee pertaining to A.Yrs. 2014-15 to 2016-17, 2013-14 and 2012-13 are directed against the separate orders of ld. NFAC, Delhi emanating out of respective Assessment Orders passed u/s.143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
2. The issues raised in the instant appeals are mostly common and relates to same assessee, therefore, these were taken up together and are being disposed of by this consolidated order for the sake of convenience.
3. First common issue raised by the assessee is against the disallowance u/s.14A of the Act. Since the issue remains the same except change of figures for the remaining assessment years 2013- 14 to 2016-17, our decision taken for A.Y. 2012-13 shall apply mutatis mutandis to the remaining appeals.
4. Brief facts of the case are that the assessee is a Private Limited Company and declared income of Rs.10,10,93,300/- in the return for A.Y. 2014-15 filed on 28.09.2014. Case selected for scrutiny followed by validly issuing notices u/s.143(2) and 142(1) of the Act. Ld. Assessing Officer observed that assessee has earned dividend of Rs.2,79,91,788/- from subsidiary as well as other companies and suo motu disallowance made by the assessee u/s.14A of the Act is at Rs.43,46,293/-. Ld. Assessing Officer after proper recording of satisfaction has computed the disallowance u/s.14A of the Act at Rs.1,62,59,888/-. Against the said disallowances, the assessee preferred appeal before ld.CIT(A) but could not succeed. Now the assessee is in appeal before this Tribunal.
5. Ld. Counsel for the assessee submitted that ld. Assessing Officer has ignored the actual book value of investments and erred in adding back the provisions for diminution in value of investments made in accordance with the applicable Accounting Standards. Further, referring to the judgment of Special Bench decision in the case of ACIT v. Vireet Investment Pvt. Ltd. ([2017] 165 ITD 27 he submitted that ld. Assessing Officer failed to consider that 14A disallowance is to be made only in respect of investments yielding exempt income. Further, he submitted that in some of the impugned assessment years the disallowance made by the Assessing Officer has even exceeded the dividend income. Lastly, he submitted that investments made in the subsidiary companies were excluded by the appellant but have wrongly been considered by the Assessing Officer in the computation of disallowance u/s.14A of the Act.
6. On the other hand, ld. DR supported the order of ld.CIT(A).
7. We have heard both the sides and perused the record placed before us. We notice that disallowance u/s.14A of the Act has been computed in a different manner by the assessee as well as by the Assessing Officer so much so that the assessee has offered suo motu disallowance at Rs.43,46,293/- but ld. Assessing Officer has taken the average value of investments and applied Rule 8D of the Income Tax Rules, 1962. Further, investment in subsidiary companies have also been included by the ld. Assessing Officer for calculating the disallowance u/s.14A of the Act. We find that ld. Assessing Officer on proper examination of suo motu disallowance made by assessee and audited financial statements has recorded proper satisfaction prior to computing disallowance u/s.14A of the Act applying Rule 8D of the I.T. Rules.
8. We also find that Special Bench in the case of ACIT v. Vireet Investment Pvt. Ltd. (supra) also held that investments yielding exempt income are to be considered for disallowance u/s.14A of the Act. We further note that ld. Assessing Officer has erred in adding back the provisions for diminution the value of investments made in accordance with the applicable Accounting Standards which are part of the respective notes to Audited balance sheet because the Accounting Standards itself allow the assessee to reduce the value of investments considering the provision for diminution in value of investments. Considering the overall facts and circumstances and the submissions filed by the assessee as well as settled judicial precedents, we are of the considered view that the issue of disallowance u/s.14A of the Act is restored to the file of Jurisdictional Assessing Officer for afresh calculation of the disallowance considering the following :
(1) Provision for diminution in value of investments made in accordance with the applicable Accounting Standards are not required to be added back to the book value of investments shown in the audited balance sheet.
(2) For calculating the 0.50% of the average value of investments as per Rule 8D(iii) of I.T. Rules, ld. Assessing Officer shall only include the investments yielding exempt income and here it is made clear that if the investments have not yielded exempt income this year, but can give rise to exempt dividend income in subsequent years such investments are also required to be included in the value of average investments.
(3) Disallowance u/s.14A should not exceed the exempt income earned during the year.
(4) Average value of Investments made in subsidiary/holding/group companies to be included since the dividend income earned (if any) therefrom is also exempt from tax.
9. With the above directions and once again reiterating that disallowance should not exceed the exempt income earned during the year and also that benefit of disallowance suo motu offered by the assessee u/s.14A of the Act for the respective assessment years is to be given, we restore this common issue of disallowance u/s.14A of the Act to the file of ld. Jurisdictional Assessing Officer for statistical purposes.
10. Next issue for our consideration is interest u/s.244A of the Act at Rs.5,58,768/- added by the Assessing Officer for A.Y. 2014-15.
11. We have heard the rival submissions and perused the record. We note that ld. Assessing Officer as per the ITS information observed that assessee has received interest u/s.244A of the Income Tax Rules, 1962 during F.Y. 2013-14 to the extent of Rs.5,58,768/- but the same has not been accounted in the profit and loss account nor considered in the computation of income.
12. Before this Tribunal, the assessee submitted that the interest was never received by the appellant and it was adjusted against the dues for other assessment years and is therefore not taxable. This submission of ld. Counsel for the assessee does not have any merit because admittedly assessee has received the refund and it has been adjusted against the dues for other assessment years and therefore once the refund is generated, i.e. prior to getting adjusted, the interest u/s.244A of the Act has been calculated by the Assessing Officer as per the provisions of Income Tax Act, 1961 and therefore even though the refund has been adjusted against the dues for other assessment years, the interest income u/s.244A of the Act at Rs.5,58,768/- deserves to be added to the income of the assessee. Ld.CIT(A) made no error in confirming the action of the Assessing Officer. This ground of appeal raised by the assessee for A.Y. 2014- 15 is dismissed.
13. Similar ground has also been raised by the assessee for A.Y. 2012-13 but the same has not been pressed by the assessee, therefore, the same is dismissed as ‘not pressed’.
14. Next common issue raised for A.Ys. 2012-13 and 2013-14 is regarding the withdrawal of TDS u/s.199 read with Rule 37BA of the Act and the assessee has raised Additional Ground No.4 in A.Y. 2012-13 and Ground No.2 in A.Y. 2013-14.
15. Facts in brief are that ld. Assessing Officer disallowed TDS credit of Rs.21,64,800/- and Rs.11,96,921/- for A.Yrs. 2012-13 and 2013-14. Before this Tribunal, ld. Counsel for the assessee has stated that the assessee is holding 60% shares and the other members of Dempo family are holding 40% shares and has sold the equity of VS Dempo Company Pvt. Ltd. to Sesa Goa and Sesa Sterlite Ltd. and Rs.49.20 crore of the sale consideration was withheld and paid subsequently with interest. During the year under consideration, Rs.5,41,20,000/- and Rs.2,99,23,014/- respectively were paid by Sesa Sterlite Ltd. after deducting 10% TDS for business purposes. Neither the amount was received by the appellant which subsequently made 40% onward payment to other sellers who have offered the same to tax but since TDS was deducted in appellant’s hands when only 60% of the interest was taxable ld. Assessing Officer erred in disallowing the alleged TDS u/s.199 r.w.s Rule 37BA of the Act by ignoring that the other sellers have already offered if to tax. We however notice that ld.CIT(A) has not adjudicated this ground on merit since it was outside the scope of appellate proceedings. Now the assessee placing reliance on the judgment of Hon’ble Bombay High Court in the case of CIT Vs. M/s. Pruthvi Brokers & Shareholders Pvt. Ltd. ([2012] 349 ITR 336 has submitted that ld.CIT(A) should have allowed the appellant to raise his additional ground and decide it on merits of the case. We find that facts coming out of the said ground is the short grant of credit for tax deducted at source. Facts about the deduction of tax at source during the year is not in dispute and that the claim has been disallowed to the extent for income not offered to tax which as per the assessee, the other sellers have already offered to tax. Considering the facts of the present case, we deem it appropriate to restore this issue to the file of ld. Jurisdictional Assessing Officer for denovo adjudication and after making necessary verification that 40% of the amount paid by Sesa Sterlite Ltd. have been offered to tax by the respective sellers, may decide to grant the TDS to the assessee under Rule 37BA(2) of the Act and decide in accordance with law. This issue is allowed for statistical purposes.
16. Last issue for consideration is Ground No. 3 in A.Y. 2012-13 which is against the addition for interest receivable at Rs.17,42,466/- on the loans advanced to Shantidurga Transport Company Pvt. Ltd.
17. Brief facts are that during A.Y. 2012-13 Shantidurga Transport Company Pvt. Ltd. deducted tax at Rs.6,90,411/- on the interest payable at Rs.69,04,110/- but infact interest of only Rs.51,61,644/- was paid to the appellant in the assessment year which is only offered to tax. The remaining interest along with principal loan has not been released even after lapse of six years due to various Civil and Criminal cases.
18. Ld. Counsel for the assessee contended that based on real income theory, notional interest income not receivable on the sticky loans ought not to be taxed.
19. On the other hand, ld. DR supported the order of ld.CIT(A).
20. We have heard both the sides and perused the record. We find that the assessee has claimed TDS at Rs.6,90,411/- against the corresponding income of Rs.69,04,110/-. Now the assessee is contending that it has received interest of Rs.51,61,644/- and only this amount deserves to be taxed. This contention of ld. Counsel for the assessee is devoid of any merit because it will defeat the very purpose of Mercantile System of Accounting where as per the accrual concept assessee has to account for the income as well as expenses. If such submission of ld. Counsel for the assessee is allowed then it will be very difficult to assess the income of a particular assessee because it may come with the plea that it has made sales for ‘X amount but did not release the total amount therefore sales should be taken at the lower figure and the arguments will go on and on for the other expenses/income part. The litigations are part of the business and if the assessee has faced such litigation and finally it is not able to recover its interest income then there is mechanism of writing off such income against the expenses in the year when such proceedings conclude. However, during the year when there is less payment of interest the dispute has been subsequently taken up, this plea of the assessee of not offering to tax the interest income of Rs.69,04,110/- as against Rs.51,61,644/- offered in the return is not sustainable. Finding of ld.CIT(A) needs no interference and ground of appeal No.3 raised by the assessee for A.Y. 2012-13 stands dismissed.
21. Remaining grounds for the impugned assessment years are either general or consequential in nature or they have not been pressed by the assessee and therefore they are dismissed as Infructuous.
22. In the result, all the appeals of the assessee are partly allowed for statistical purposes.
Order pronounced on 26th October 2026 under Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963.
