Case Law Details
Brief Facts of the Case and Question of Law
Brief Facts:
These are cross appeals filed by the assessee and the revenue directed against two separate orders of Learned CIT (A) – II Lucknow both dated 07.01.2013 for A.Y. 2008 – 09 and 2009 – 10. All these appeals were heard together and are being disposed by this common order for the sake of convenience. In its appeals for both years, there was only one grievance of the assessee regarding disallowance u/s 14A sustained by the CIT (A) for Rs. 431,73,167 in A.Y. 2008 – 09 and Rs. 311,81,24,742 in A.Y. 2009 – 10.
Question of Law:
Whether the assessee’s contention is found acceptable relating to Section 14A applicable with Rule 8D.
CONTENTION OF THE ASSESSEE
The contention of the assessee was that the in these two years, no objective satisfaction was recorded by the A.O. as required for invoking Rule 8D and therefore, the disallowance u/s 14A read with Rule 8D is not proper and it should be deleted.
The assessee also submitted that this issue was covered in favour of the assessee by the tribunal order in the case of U.P. Electronics Corporation Ltd vs. DCIT in ITA No. 538/LKW/2012 dated 23.01.2015, EIH Associated Hotels Ltd. vs. DCIT in ITA No. 503/MDS/2012 dated 17.07.2013,MSA Securities Services Pvt. Ltd. vs.ACIT reported in 58 SOT 44 (Chennai) (URO) and also placed on tribunal order in the case of Rainy Investments Pvt. Ltd. vs. ACIT reported in 56 SOT 61 (Mumbai) (URO).
CONTENTION OF THE REVENUE
The Revenue supported the orders of the authorities as mentioned below:
The assessee has invested interest bearing borrowed funds in DISCOMS as Share Capital. It contended that the assessee has submitted all the interest paid by the assessee that relates to and is directly attributable to the transmission and distribution of electricity business of the assessee. Thereafter, a categorical finding is given by the A.O. that from the submissions made and on the basis of material available, the assessee’s contention was not found acceptable and section 14A is applicable with Rule 8D. Thereafter, he worked out disallowance of Rs. 527,58,286/- out of interest expenditure and Rs.431,73,167/- out of administrative expenditure totaled Rs. 959,31,453/-. After making similar observations in the assessment order for A.Y. 2009 – 10, the A.O. worked out disallowance of Rs. 273,51,72,921/- out of interest expenditure and Rs. 38,29,51,821/- out of administrative expenditure total Rs.311,81,24,742/-.
It was contended that when the balance sheets of the assessee company was examined, it was found that , investment as on 31.03.2008 is at Rs. 6352.82 crores and own fund as on this date is Rs. 18765.71 crores. Hence, if the decision is taken on a gross basis by presuming that the investment is out of own funds if the same is more than investment, it may be said that no disallowance is called for out of interest expenditure but after insertion of Rule 8D, it cannot be done.
It was further contended that a clear and categorical finding is given by the A.O. in the assessment order for both years that that from the submissions made and on the basis of material available.Thus the assessee’s contention is not found acceptable and section 14A is applicable with Rule 8D. Hence, it was submitted that no expenditure was incurred by the assessee in relation to income which does not form part of the total income under the Act is complied with and therefore, Rule 8D can be invoked in the present case.
In the present case, a claim is made that interest expenditure is incurred for taxable business, but no evidence is brought on record to establish this contention and in the absence of evidence, it cannot be accepted.
The revenue further contended by stating various tribunal orders cited by the assessee.
The first tribunal order: In the case of U.P. Electronics Corporation Ltd. vs. DCIT, it was held by the tribunal that invocation of Rule 8D without recording objective satisfaction by the A.O. is not proper. But in the present case, a categorical finding is given by the A.O. in the assessment order that from the submissions made and on the basis of material available, the assessee’s contention is not found acceptable and section 14A is applicable with Rule 8D.This amounts to recording of objective satisfaction by the A.O. in the facts of the present case and hence, this tribunal order does not render any help to the assessee in the present case.
The second tribunal order : In the case of EIH Associated Hotels Ltd. vs. DCIT ,the investments were made in wholly owned subsidiary company and under this fact, it was held by the tribunal that investments made in a wholly owned subsidiary company is not to be reckoned for disallowance u/s 14A. In the present case, the investment is not made in wholly owned subsidiary company and therefore, this tribunal order also does not render any help to the assessee in the present case.
The third tribunal order: In the case of MSA Securities Services Pvt. Ltd. vs. ACIT, the amount of Rs. 47.51 Crores was lying as share application money on which, there cannot be any income, whether exempt or otherwise and hence this investment cannot be considered to invoke section 14A. Revenue’s attention was drawn only to this highlighted portion of this tribunal order, and hence, it’s confined to that extent only. Since, in the present case, the investments are in shares and not share application money, this tribunal order also does not render any help to the assessee in the present case.
The fourth tribunal order: In the case of Rainy Investments Pvt. Ltd. vs. ACIT, the dispute is regarding disallowance u/s 14A in respect of investment lying as share application money and thus this tribunal order also does not render any help to the assessee in the present case.
Moreover, in the tribunal order rendered in the case of U. P. Electronics Corporation Ltd. vs. DCIT on which reliance was placed by the assessee, reference is made to a judgment of Hon’ble Bombay High Court rendered in the case of Godrej & Boyce Manufacturing Co.Ltd. vs. DCIT as reported in 328 ITR 81(Bombay). In this case, the A.Y. involved was 2002 – 03 and the A.O. invoked Rule 8D. It was held by the Hon’ble Bombay High Court that Rule 8D cannot be invoked up to A.Y. 2007 – 08 and it can be invoked only from AY 2008 – 09. In spite of this, it was held that the restoring of the matter back by the tribunal to the A.O. for fresh decision was justified.
It was further contended that after considering the mandate of judgment of the Hon’ble Bombay High Court that even in a situation where Rule 8D was invoked before the same was inserted in the Income Tax Rules, restoring the matter to AO by the tribunal for reconsideration is justified, it cannot be said and held that merely because objective satisfaction was not recorded by the A.O., the disallowance should be deleted and the matter should not be restored to the A.O. In other words, it can be held that the invocation of Rule 8D is irregular but it cannot be said to be illegal. But since, in the facts of the present case where it was found that objective satisfaction was recorded by the A.O., the provisions of Rule 8D were rightly invoked.
THE REVENUE’S APPEAL FOR A.Y. 2008 – 09 IN ITA NO.135/LKW/2013.
The CIT (A) has erred in law and on facts in restricting the disallowance to Rs. 431, 73,167/- as against Rs. 959, 31,453/- made by the A.O. u/s 14A of the Act read with Rule 8D of the Income Tax Rules, 1962. This action of the Ld. CIT (A) is in sharp contradiction of his own observation that he has made in his order at Para 5(3) that –“There is no anomaly in computation of disallowable expenditure in accordance with prescribed formula under Rule 8D.
The revenue supported the assessment order and the assessee supported the order of CIT (A). It was submitted that this issue is covered in favour of the assessee by the tribunal order in the case of ACIT vs. Madhyanchal Vidyut Vitaran Nigam Ltd. in ITA No. 505/LKW/2012 & 01/LKW/2013 dated 27.02.2015,
It was held that disallowance of Rs. 527, 58,286/- has been made by the A.O. as per calculation in assessment order. For this, he has considered interest expenditure of Rs.68, 18, 27,353/-, investment for exempt income at Rs. 369, 31, 83,936/- and average total assets at Rs. 4772, 92, 57,437/-. A specific finding is given by CIT (A) that “There is no anomaly in computation of disallowable expenditure in accordance with prescribed formula under Rule 8D “, It was failed to understand the basis of deleting the disallowance out of interest expenditure as per Rule 8D. Hence, on this issue, the orders of CIT (A) was reversed and restore that of the A.O. Accordingly, ground of the revenue was allowed.
HELD BY ITAT, LUCKNOW
After hearing the rival contentions, ITAT held that In the combined result, both appeals of the assessee and appeal of the revenue for A.Y. 2009 – 10 are dismissed and the remaining appeal of the revenue for A.Y. 2008 – 09 is partly allowed
