DCIT Vs Century Plyboards (I) Ltd. (ITAT Kolkata)
In the facts of the present case, we find that the out of the turnover of Rs.15,314.87 lacs, sales worth Rs.14,024.34 lacs was made by the eligible unit to its depots across India. These inter-unit transactions were reported in Form 3CEB filed along with the return of income wherein the auditor had certified the same to be at arm’s length. We note that the AO did not dispute the arm’s length value of these goods transacted by the eligible unit with it depots. We also note that the AO also did not deem it fit to refer these specified domestic transactions for transfer pricing scrutiny. Hence, when the AO had not disputed the arm’s length value of the transactions covered u/s 80IA(8),then his action of disputing the profitability of such eligible unit and holding it to be excessive, was clearly unsustainable in law as well as on facts.
Moreover, we note that during the appellate proceedings the ld. CIT(A) in exercise of his co-terminus powers had initiated suo-moto enquiry in terms of Section 250(4) into the arm’s length value of the prices at which the goods were transferred by the eligible Assam Unit to the depots. Before the ld. CIT(A), the appellant had furnished invoice-wise and date-wise break-up of transfers made out of the eligible Unit to the depots along with comparative details of sales made to unrelated third parties [Pages 129 to 130 of paper-book]. It is noted that the rates at which the different products were supplied to depots was comparable with that the rates at which the same product was sold to third parties. We further note that the rates at which the eligible Assam Unit recognized the supplies in its books to Units/Depots was in conformity with the valuation Rules set out in Rule 7 of the Central Excise Valuation (determination of price of excisable goods) Rules, 2000. On perusal of the said Rule 7, we note that where the goods are supplied to related parties, then even in terms of the excise laws, irrespective of the transacted value, the excise duty is payable by the manufacturing unit at the “market value” of the product prevailing at the point of destination on the date of removal of the goods. From the audit report issued Central Excise Audit for the relevant financial year 2013-14, it is noted that the Central Excise Department did not dispute the invoice rates at which the goods were transferred by the eligible Assam Unit to its depots, which also showed that the goods were cleared by the eligible Assam Unit at ‘market value’. We therefore note that, even on merits, the inter-unit transactions conducted by the eligible unit covered u/s 80IA(8) & (10), were at arm’s length and did not yield any more than ordinary profits to attract the rigors of Section 80IA(10) of the Act and enable the AO to estimate the profits of the eligible unit.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The appeal and cross objections are preferred by the Revenue and the assessee (as captioned in the cause list above) against the order of the Ld. CIT(Appeals) – 23, Kolkata [in short, hereinafter ‘ld. CIT(A)’] dated 08-07-2019 for the Assessment Year 2014-15.
2. Ground Nos. 1 to 4 of the Revenue’s appeal are directed against the disallowance of Rs.34,29,000/- made by the AO u/s 14A of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) read with Rule 8D of the Income Tax Rules, 19621 (hereinafter referred to as the “Rules”). Briefly stated, in the facts of present case, the assessee is a company engaged in the business of manufacturing and trading of plywood, ply boards and allied products. The return of income for the year under consideration was filed by it on 28-11-2014 declaring total income of Rs.7,06,37,830/- under the normal provisions of the Act and Book Profit of Rs.64,65,80,087/- under section 115JB of the Act. In the said return, dividend income of Rs.4,89,391/- was claimed to be exempt u/s 10(34) of the Act by the assessee. In relation thereto, the assessee disallowed, demat charges of Rs.9,844/- and administrative expenses of Rs.4,89,391/- being amount equivalent to the sum of dividend income earned during the year; u/s 14A of the Act. This disallowance of Rs.4,99,235/-offered by the assessee was not acceptable to the AO. The AO instead applied Rule 8D and worked out the disallowance in terms of Rule 8D(2)(ii) & (iii) at Rs.29.31 lacs and Rs.4.98 lacs respectively. Accordingly the AO disallowed further sum of Rs.34.29 lacs u/s 14A of the Act read with Rule 8D. Aggrieved by this disallowance, the assessee preferred an appeal before the ld. CIT(A). On appeal the ld. CIT(A) deleted the disallowance. Aggrieved by the impugned order of ld. CIT(A), the Revenue is now in appeal before us. The grounds of appeal preferred by the Revenue on this issue are as under:
“(1) The Ld. CIT(A)-23, Kolkata has erred in law and facts by deleting the addition of Rs.31,29,000/- made by the Assessing Officer u/s. 14A read with Rule 8D of Income Tax Act Rules 1962.
(2) The Ld. CIT(A)-23,Kolkata has erred in law by holding that adjustment u/s. 14A cannot be made while computing book profit u/s. 115JB by misinterpreting clause (f) to Explanation 1 of sub- section 115JB.
(3) The Ld. CIT (A)-23, Kolkata has erred in law and facts by observing in the order that the Assessing Officer has failed to record his satisfaction without referring to the Books of account for disallowing u/s. 14A, while the Assessing Officer has recorded his dissatisfaction while disallowing an amount of Rs. 34, 29,000/-u/s. 14A read with Rule 8D in the assessment order.
(4) The Ld. CIT(A)-23, Kolkata has erred in law and facts by not taking any cognizance to Circular No. 5 of CBDT of 2014 and also by not following the principle laid down the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. Relating to disallowance u/s 14A read with Rule 8D.”
3. At the time of hearing, the ld. CIT, DR primarily relied upon the order of the AO. The ld. AR for the assessee, on the other hand, strongly supported the impugned order of the ld. CIT(A) giving relief to the assessee on the issue of disallowance made by the AO under section 14A read with Rule 8D. He contended that the own funds available with the assessee during the financial year 2013-14 were sufficient to make the corresponding investments, and hence no interest bearing borrowed funds were utilized for making such investment. In support of this contention, the Ld. AR of the assessee relied on the decision of the Hon’ble Bombay High Court in the case of Reliance Utilities & Power Limited reported in 313 ITR 340 as well as in the case of CIT Vs HDFC Bank Limited reported in 383 ITR 529.
4. As regards the relief allowed by the ld. CIT(A) under Rule 8D(2)(iii) to the extent of restricting the disallowance to the amount of exempt dividend income actually earned by the assessee during the year, the ld. AR for the assessee contended that this issue is squarely covered by the decision of the Hon’ble Delhi High Court in the case of Joint Investment Limited Vs CIT, ITA 117/2015 dated 25.02.2015, wherein it was held that the disallowance under section 14A cannot exceed the actual amount of exempt income earned by the assessee. He further relied on the decision of the coordinate Bench of this Tribunal in the case of Patrex Vyapar Limited Vs ITO in ITA No. 1921/Kol./2017 dated 02.01.2019.
5. We have considered the rival submissions and also perused the relevant material available on record. First we will deal with the merit of the disallowance made by AO applying Rule 8D(2)(ii) on account of interest expenses. The Ld. AR of the assessee contended that own funds available with the assessee during the financial year 2013-14 were sufficient to make the corresponding investments, and hence no interest bearing borrowed funds were utilized for making such investment, so no disallowance was warranted on this issue. For appreciating this fact let us have a look at the balance sheet of the assessee as on 31.03.2014, which is placed at Page 19 & 20 of paper-book, it is noted that the assessee’s own funds of the assessee in the form of share capital and free reserves stood at Rs.29,140.79 lacs and the investments as on 31.03.2014 was Rs.991.45 lacs. Taking note of the aforesaid fact, the interest disallowance of Rs.29.31 lacs made by the AO u/s 14A by applying Rule 8D(2)(ii) was deleted by the ld. CIT(A) on the premise that the actual investment capable of yielding exempt income made by the assessee was sufficiently covered by the own funds of the assessee in the form of share capital and free reserves. In such a scenario, we note that the Hon’ble Bombay High Court in the case of CIT Vs Reliance Utilities & Power Limited (supra) has held that, what would be relevant to see in this context is the financial position of the assessee during the year under consideration as reflected in the relevant balance-sheet and if it is found that the assessee had sufficient interest-free funds of its own to meet its investment, then it could be presumed that the investments were made from the interest-free funds available with the assessee and not from the interest bearing borrowed funds so as to warrant disallowance under section 14A of the Act. This decision rendered in the case of Reliance Utilities & Power Limited (supra) was subsequently followed with approval by the Hon’ble Bombay High Court in the case of HDFC Bank Limited (supra) where it was held that, where both interest-free funds and interest bearing funds (mixed funds) are available to an assessee and the interest-free funds are more than the investments made by the assessee, then the presumption that can be drawn is that the investment in the tax-free securities would have been made out of the interest-free funds available with the assessee. In the facts of the present case, we note that the interest-free funds of its own available with the assessee in the form of share capital and free reserves were substantially more than the corresponding investments made to earn the interest free income and therefore we are of the view that the interest disallowance made by the AO u/s 14A read with Rule 8D(2)(ii), was rightly deleted by the ld. CIT(A).
6. It is further noted that this issue relating to disallowance u/s 14A read with Rule 8D(2)(ii) on account of interest was involved in assessee’s own case for A.Y. 2010-11.This Tribunal in their order dated 31.07.2017 in ITA No.1873/Kol/2014 noted that there was sufficient own funds available with the assessee to make the investments and, therefore upheld the ld. CIT(A)’s deleting the said interest disallowance. Identical view was expressed by this Tribunal to delete similar interest disallowance made in assessee’s own case for A.Ys. 2011-12 & 2012-13 in the order dated 25.01.2018 passed in ITA Nos. 1634 & 1635/Kol/2016. Therefore, we uphold the impugned order of the ld. CIT(A) deleting the disallowance made by the Assessing Officer on account of interest under section 14A read with Rule 8D(2)(ii).
7. As regards the disallowance of Rs.4.98 lacs made by the AO on account of common administrative expenses under section 14A read with Rule 8D(2)(iii), it is observed that the same was restricted by the ld. CIT(A) to the extent of exempt dividend income actually earned by the assessee during the year under consideration by following, the decision of the Hon’ble Delhi High Court in the case of Joint Investment Limited –vs.- CIT (372 ITR 694). It is noted that the aforementioned judgment of the Hon’ble Delhi High Court has been followed by this Tribunal in the case of Patrex Vyapar Limited Vs ITO (supra) wherein this Tribunal restricted the disallowance of Rs.8,81,839/- made by AO u/s 14 read with Rule 8D to Rs.72,000/- i.e., the dividend actually earned during the year. Hence, we do not see any reason to interfere with the impugned order of the ld. CIT(A) restricting the disallowance made on account of the common administrative expenses to the amount of exempt dividend income actually earned by the assessee during the year under consideration.
8. With regard to disallowance u/s 14A of the Act read with Rule 8D while computing the book profits u/s 115JB of the Act, we note that there is no enabling provision in clause (f) of Explanation 1 to Section 115JB for making any adjustment in respect of expenditure disallowed as per Rule 8D. It is noted that clause (f) of the said Explanation 1 requires adjustment of ‘the amount of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) section 11 or section 12 apply’. The aforesaid expression is similar to the expression used in Section 14A(1) of the Act. Section 115JB however being a deeming provision, the clauses contained therein has to be strictly construed. Accordingly, it is only the provisions of Section 14A(1) that can be imported into clause (f) of Section 115JB of the Act. The scope of clause (f) cannot be enlarged in order to bring within its ambit the provisions of Sub-Section (2) & (3) of Section 14A of the Act and therefore the disallowance made by applying Rule 8D cannot also be imported. The Special Bench of this Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. (165 ITD 27) has held that the computation mechanism provided under Rule 8D of the Rules cannot be applied for computing addition in terms of clause (f) of Explanation 1,for arriving at the book profit u/s 115JB of the Act. Identical view has also been expressed by the coordinate Benches of this Tribunal in the following cases:
