ACIT Vs Bajaj Resources Ltd (ITAT Delhi)
Conclusion: Disallowance could not be made on interest for earning exempt income under section 14A as assessee had available, non-interest-bearing funds larger than the investments made in tax- free securities.
Held: During the course of scrutiny assessment proceedings, AO noticed that assessee had claimed exemption in respect of dividend income of Rs. 62,07,50,000/- and profit in LLP of Rs. 198 crores. AO found that no expenditure in relation to exempt income was disallowed by assessee u/s 14A. Assessee had sufficient own interest free funds to make investments and, therefore, there was no question of investment made out of borrowed funds. Assessee further contended that though it had incurred interest cost of Rs. 31 lakhs but had also earned interest income of Rs. 589.63 lakhs and further earned income of Rs. 136.09 lakhs as short term capital gain. It was held that if investments in securities was made out of common funds and assessee had available, non-interest-bearing funds larger than the investments made in tax- free securities then in such cases, disallowance under Section 14A could not be made. Thus, there could not be any disallowance of interest for earning exempt income.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal by the Revenue is preferred against order of the Commissioner of Income Tax [Appeals] – 1, Hyderabad dated 18.12.2017 pertaining to Assessment Year 2014-15.
2. The grievances of the Revenue read as under:
“Whether on the facts and in the circumstances of the case and in law the ld. CIT(A) has erred in deleting the addition made on account of disallowance u/s 14A in accordance with Rule 8D of the I.T. Rules amounting to Rs. 6,85,74,900/-.
2. Whether on the facts and in the circumstances of the case and in law the ld. CIT(A) has erred in accepting the assessee’s submission that no exempt income has been earned.”
3. The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules.
4. Briefly stated, the facts of the case are that the assessee company is engaged in the business of Ownership of FMCG product brands activities for development of brands and inter-corporate deposits. Return of income for the year under consideration was filed on 29.09.2014 admitting a total income of Rs 5,34,90,940/- under normal provisions and Rs 2,97,66,150/- under the provisions of sec 11 5JB of the Income-tax Act, 1961 [hereinafter referred to as ‘The Act’]. The return was selected for scrutiny assessment and accordingly, notices were issued and duly served on the assessee.
5. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed exemption in respect of dividend income of Rs. 62,07,50,000/- and profit in LLP of Rs. 198 crores. The Assessing Officer found that no expenditure in relation to exempt income was disallowed by the assessee u/s 14A of the Act.
6. On perusal of the financial statements of the assessee, the Assessing Officer noticed that total non-current investments was Rs. 55,147.09 lakhs as on 31.03.2013 and Rs. 39,396.25 lakhs as on 31 .03.2014 whereas reserves and surplus were to the extent of Rs. 27,923.94 lakhs as on 31.03.2013. The Assessing Officer also noticed that the assessee has claimed interest expenditure of Rs. 797.31 lakhs and administrative expenses in its P & L A/c.
7. Show cause notice was issued to the assessee asking it to explain as to why no disallowance of expenditure was made in relation to exempt income. In response to the show cause notice, the assessee filed detailed reply contending that it has incurred no expenditure for earning exempt income claiming that the investments have been made in group companies as strategic investment.
8. It was strongly contended that the assessee has sufficient own interest free funds to make investments and, therefore, there is no question of investment made out of borrowed funds. It was further pointed out that though the assessee has incurred interest cost of Rs. 31 lakhs but has also earned interest income of Rs. 589.63 lakhs and further earned income of Rs. 136.09 lakhs as short term capital gain.
After considering the detailed submissions made by the assessee and after analysing the financial statements, the Assessing Officer, in his wisdom, observed as under:
“The main plank of the argument of the assessee in this regard is that none of the investments was made out of interest-bearing borrowed funds but from the capital, reserves/surplus and interest free borrowings and therefore, provisions of Sec.l4A do not apply to the exempt income claimed by the assessee in the return of income. In support of its claim, the assessee has also submitted year-wise investments and the flow of the funds right from F.Y.2007-08 along with the financials for the respective years. For instance, during the F.Y.2009-10, the assessee has made investment in golden shore investing Ltd., and the source of the investment was claimed to be available capital and reserves /surplus. It was also claimed that the amount of Rs.50.8 Crores borrowed from PNB during that year was specifically utilized for the purpose of distribution of dividend and not for making investment in Golden Shore Investing Ltd, This contention of the assessee is not well founded. On perusal of the ledger account of the loan and the dividend account, the dividend payout was on 02- 01-2010 whereas the loan amount was transferred from PNB loan account on 13-01-2010. Similarly, during the F.Y.2012-13, the assessee has made sizeable investments and also borrowed funds in that year. The claim of the assessee in this year is also that the borrowed funds were utilized for making advances to the associate concern for which interest income has been earned. In this year also, the investments advances were made out of common pool of funds and therefore, it is not correct to say investments yielding exempt income were made only out of interest free funds.”
10. After referring to some judicial decisions, the Assessing Officer concluded as under:
“In view of the above, various contentions raised by the assessee are not legally ten..’ and proportionate interest expenditure in relation to exempt income is worked out as per the formula provided in clause (ii) of rule 8D as under:
a) The expenditure in relation to income which does not form part of the total income as per Rule 8D(2)(ii) shall be the aggregate of following amounts, namely-
A*B/C where;
