Pr. CIT Vs DLF Home Developers Ltd (Delhi High Court)
Delhi High Court held that tribunal rightly deleted disallowance made by AO u/s. 14A of the Income Tax Act read with rule 8D of the Income Tax Rules as assessee had sufficient interest-free funds available with it to make investment.
Facts- The present writ is preferred by the revenue on the sole issue contesting that the Tribunal has erred in deleting the disallowance amounting to Rs. 80,66,72,112/- made by AO under section 14A of the Income Tax Act read with rule 8D of the Income Tax Rules.
Notably, AO applied the provisions of Rule 8D(2)(ii) and (iii). Accordingly, under Rule 8D(2)(ii), Rs. 6,946.01 lakhs was disallowed towards interest expenditure, while Rs. 1,128.93 lakhs was disallowed as administrative expenses that would possibly have been incurred to earn exempt income by taking recourse to Rule 8D(2)(iii) read with Section 14A of the Act. In sum, the total amount disallowed by the AO was Rs. 80,66,72,112/, after deducting the suo motu disallowance made by the respondent/assessee amounting to Rs. 8,21,883/-.
Conclusion- Held that concededly, the interest-free funds available to the respondent/assessee were more than the investments made in the AY in issue. Furthermore, as noted by the Tribunal, the AO had not recorded his dissatisfaction [having regard the accounts of the respondent/assessee] before discarding the suo motu disallowance made by the respondent/assessee and triggering disallowance qua the respondent/assessee. This issue is no longer res integra insofar as this court is concerned.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. This appeal concerns Assessment Year (AY) 2011-12.
2. Via the instant appeal, the appellant/revenue seeks to assail the order dated 19.06.2018 passed by the Income Tax Appellate Tribunal [in short, “Tribunal”].
3. According to Mr Ruchir Bhatia, learned senior standing counsel, who appears on behalf of the appellant/revenue, the sole issue that arises for consideration is: whether the Tribunal has erred in deleting the disallowance amounting to Rs. 80,66,72,1 12/- made by the Assessing Officer (AO) under Section 14A of the Income-tax Act, 1961 [in short, “the Act”] read with Rule 8D of the Income-tax Rules 1962 [in short, “the Rules”]?
4. The record shows that the AO had taken into account the balance sheets of financial years (FY) ending on 31.03.2010 and 31.03.2011. A comparison of the information embedded in the said balance sheets revealed to the AO that the investments made by the respondent/assessee in equity shares at the beginning of the period in issue i.e., FY 2010-11 (AY 2011-12) was Rs. 2,73,331.69 lakhs. It also revealed that at the end of said FY, the investments fell to Rs.1 ,78,239.36 lakhs.
4.1 Based on this, the AO applied the provisions of Rule 8D(2)(ii) and (iii). Accordingly, under Rule 8D(2)(ii), Rs. 6,946.01 lakhs was disallowed towards interest expenditure, while Rs. 1,128.93 lakhs was disallowed as administrative expenses that would possibly have been incurred to earn exempt income by taking recourse to Rule 8D(2)(iii) read with Section 14A of the Act. In sum, the total amount disallowed by the AO was Rs. 80,66,72,112/, after deducting the suo motu disallowance made by the respondent/assessee amounting to Rs. 8,21,883/-.
5. The record discloses that the respondent/assessee carried the matter, in appeal, to the Commissioner of Income Tax (Appeals) [in short, “CIT(A)”]. The CIT(A) deleted the disallowance made under Rule 8D (2) (ii) amounting to Rs. 6,946.01 lakhs while retaining the disallowance made by the AO amounting to Rs. 1,128.93 lakhs under Rule 8D(2)(i ii) made towards administrative expenses that would possibly have been incurred to earn exempt income. The reason given by the CIT(A) for retaining the disallowance under Rule 8D(2)(iii) is incorporated in paragraph 7.2 of the order.
5.1 For convenience, the same is extracted hereafter:
“7.2 The Assessing Officer, has further made the addition of Rs.. 1128.93 lacs under Rule 8D (2) (iii) of the Income Tax Rules for the administrative expenses incurred for earning the exempt income. I am not in agreement with the appellant’s argument that they have not incurred any administrative expenditure on the investment activity. The appellant contended that there is no proximate nexus between earning of dividend income and the expenditure incurred by it. The administrative expenditure has been incurred under different heads but no administrative expenditure has been allocated to the investment portfolio. In my view, there cannot be a concept of free lunch and making or selling the investments cannot be in the nature of any passive activity involving no input. In-fact, in my view
a) making of investment
b) maintaining or continuing with any investment in a particular share/mutual funds etc. and
c) even the time when to exit from one investment to another,
all these activities are well coordinated and well informed management decisions, involving not only inputs from various sources but it also involves acumen of senior management functionaries whether they sit in Subsidiary company or Holding company. There are incidental administrative expenses on collecting the information, research etc. which helps; in arriving at particular investment decisions and these expenses, relating to earning of the income are embedded in the indirect expenses. The investments made being conscious decisions and having deployment of the funds brings into picture the expenditure by way of cost of funds “invested”.”
[Emphasis is ours]
6. Both parties preferred appeals against the orders passed by the CIT(A).
7. Via the impugned order dated 19.06.2018, the Tribunal allowed the appeal preferred by the respondent/assessee and dismissed the appeal instituted by the appellant/revenue. It is against this backdrop that the appellant/revenue has preferred the instant appeal.
8. The Tribunal ruled in favour of the respondent/assessee, and thus, deleted the entire addition made by the AO, as noticed above, amounting to Rs. 80,66,72,112/-. The Tribunal has, broadly, given the following reasons for deleting the addition made by AO under Section 14A read with Rule 8D of the Income-tax Rules, 1962:
(i) First, AO has not disputed the claim made by the respondent/assessee that it had interest-free funds to make investments in the AY in issue.
(ii) Second, the AO had not recorded his dissatisfaction or given reasons concerning the incorrectness of the computation made by the respondent/assessee under Section 14A.
(iii) Third, AO has not recorded his dissatisfaction as to the incorrectness of the claim of the respondent/assessee that it has not it had not incurred any expenditure towards earning interest-free income.
9. In other words, the Tribunal concluded that the respondent/assessee had sufficient interest-free funds available with it to make investments in the AY in issue, insofar as the first aspect is concerned. In support of this conclusion, the Tribunal relied on the judgment of the Bombay High Court rendered in CIT-2, Mumbai v. HDFC Bank Ltd., (2014) 49 com 335 (Bombay).
10. As regards the second reason, the Tribunal relied on the judgment of the Supreme Court rendered in Godrej & Boyce Manufacture Company v. DCIT (2017) 81 taxmann.com 111 (SC) and HT Media Limited v. Pr. CIT, (2017) 85 taxmann.com 113 (Delhi).
11. Mr Bhatia submits that the Tribunal reached an incorrect conclusion. According to him, the AO, having regard to the huge investment made by the respondent/assessee, had rightly taken recourse to Rule 8D to make a disallowance amounting to Rs. 80,66,72,112/ for the reason that this was expenditure incurred concerning income that does not form part of the total income under the Act. It is in this context that Mr Bhatia states that the CIT(A) also erred in law, which is why the appellant/revenue was in appeal before the Tribunal.
12. Ms Kavita Jha, learned counsel, who appears on behalf of the respondent/assessee, on the other hand, has brought to our notice (something which is not in dispute) that, in the AY in issue, the total exempt-dividend income earned by the respondent/assessee was Rs. 71,71,43,933/-.
12.1 It is pointed out by Ms Jha that out of the aforementioned amount, Rs. 70,52,50,000/- was received by the respondent/assessee from its 100% subsidiary namely DLF Commercial Developers Limited (SEZ Div). The balance amount, Ms Jha points out, was received from the following companies:
