Case Law Details
DCIT Vs Jaypee Infra Ventures (ITAT Delhi)
ITAT Delhi held that disallowance u/s 14A of the Act is made in respect of expenses attributable to exempt income and not the taxable income. Further, the disallowance u/s 14A of the Income Tax Act should not exceed the exempt income of that year.
Facts- The assessee company is engaged in the business of design, engineering, software development and consultancy of real estate business. The case was selected for scrutiny assessment under CASS. Statutory notice u/s 143(2) of the Act was issued and duly served upon the assessee. AO while framing the assessment, invoked the provision of section 14A of the Act on the basis that the assessee failed to establish nexus between the investment made and interest free funds available with the assessee. The AO made disallowance u/s 14A of the Act of Rs.17,46,28,410/- and after giving set off of the disallowance made by the assessee itself of Rs.7,77,43,211/- made addition of difference amounting to Rs.9,68,85, 199/-.
Aggrieved against this, the assessee has preferred the appeal before CIT(A), who after considering the submissions, partly allowed the appeal of the assessee , thereby, deleted the disallowance made by invoking the provision of section 14A of the Act.
Aggrieved against the order of Ld.CIT(A), the Revenue preferred appeal before the Tribunal.
Conclusion- PCIT vs Caraf Builders & Constructions (P.) Ltd. has held that the disallowance should not exceed the exempt income of that year.
It is also pointed out that Ld.CIT(A) had directed the AO to reduce the subject amount of interest because disallowance u/s 14A of the Act is made in respect of expenses attributable to exempt income and not the taxable income. Dividend from foreign subsidiary is taxable and not exempt income. This issue is covered in favour of the assessee by the judgement of Hon’ble Jurisdictional High Court in the case of Pr. CIT v. Bharti Overseas (P.) Ltd. We find that Ld.CIT(A) had given direction to the AO for re-computing the disallowance u/s 14A of the Act r.w. Rules 8D of the Rules for reducing the interest attributable to loan related to investment in foreign company whose income is not exempt, reducing the amount of share application money, reducing the interest on foreign subsidiary and investment in non-dividend yielding companies and verify the disallowance made by the assessee itself.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal filed by the Revenue for the assessment year 2013-14 is directed against the order of Ld. CIT(A)-5, New Delhi dated 26.04.2019. The Revenue has raised following grounds of appeal:-
1. “That on the facts and circumstances of the case and in law, the order of Ld. CIT(A) is erroneous and bad in law.
2. That on the facts and circumstances of the Rs. case and in law, the CIT(A) has erred in holding that only the interest expense having direct nexus with the investment must be included for computation of disallowance u/s 14A under Rule 8D(2)(ii) instead of the entire interest expense as taken by the AO.
3. That on the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in holding that the investments made in share application money and domestic subsidiary companies are to be excluded for computation of disallowance u/s 14A read with rule 8D in view of the ratio laid down by the Hon’ble Supreme Court in Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi [(2018) 91 taxmann.com 154 (SC)].
4. That the appellant craves leave to add, alter, amend or forego any ground(s) of the appeal raised above at the time of hearing.”
2. The only effective ground raised by the Revenue in this appeal is against the deletion of addition of Rs.9,68,85, 199/- made by invoking the provision of section 14A of the Income Tax Act, 1961 (“the Act”) and also applying the provisions of Rule 8D of the Income Tax Rules, 1962 (“the Rules”).
3. Facts giving rise to the present appeal are that in this case, the assessee company is engaged in the business of design, engineering, software development and consultancy of real estate business. The assessee filed its return of income declaring loss of Rs.60,47,99,035/- under normal provision and book profit of Rs.190,41,07,999/- was filed by the assessee company electronically on 30.09.20 13. The case was selected for scrutiny assessment under CASS. Statutory notice u/s 143(2) of the Act was issued and duly served upon the assessee. In response thereto, Ld. Authorized Representative (“AR”) of the assessee attended the proceedings. The Assessing Officer (“AO”) while framing the assessment, invoked the provision of section 1 4A of the Act on the basis that the assessee failed to establish nexus between the investment made and interest free funds available with the assessee. The AO made disallowance u/s 14A of the Act of Rs.17,46,28,410/- and after giving set off of the disallowance made by the assessee itself of Rs.7,77,43,21 1/- made addition of difference amounting to Rs.9,68,85, 199/-. The AO also had made other additions related to difference in Form 26AS and Profit & Loss Account amounting to Rs. 63,307/- and disallowance of prior period expenses amounting to Rs.2,80,170/-.
4. Aggrieved against this, the assessee has preferred the appeal before CIT(A), who after considering the submissions, partly allowed the appeal of the assessee , thereby, deleted the disallowance made by invoking the provision of section 14A of the Act and sustained the addition of Rs.2,80, 170/- related to prior period expenses.
5. Aggrieved against the order of Ld.CIT(A), the Revenue preferred appeal before the Tribunal.
6. Apropos to Grounds of appeal, Ld. Sr. DR for the Revenue opposed these submissions and supported the orders of the authorities below.
7. On the other hand, Ld. Counsel for the assessee submitted that the issue is squarely covered by the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case in ITA No.4582/Del/2018 pertaining to Assessment Year 2012-13 order dated 29.05.2023. He further reiterated the submissions as made in the written submissions. The relevant contents of the written submissions are reproduced as under:-
1. “The factsof the matter in brief are as under:
1.1. The assessee e-filed its return of income u/s 139(1) of the Act on 30.09.2013 declaring total Loss at Rs.60,47,99,035/-. Vide assessment order u/s 143(3) dated 30.3.2016, Loss was assessed at Rs.50,75,70,359/- by making certain disallowances including disallowance u/s 14A r.w. Rule 8D of Rs 9,68,85,199/-.
1.2 During the year, the assessee received dividend income of Rs.35,96,24,231/- from its 2 group companies which was claimed as exempt.
1.3 In the return of income, the assessee estimated disallowance u/s 14A without application of Rule 8D at Rs. 7,77,43,211/- as under:
* Out of interest – Rs.6,56,35,840/-
* Out of interest Out of other indirect expenses – Rs. 1,21,07,373/-
1.4. However, Ld. AO computed the disallowance u/s 14A by application of Rule 8D at Rs.17,46,28,410/- and made an addition of Rs.9,68,85,199/- (Rs 17,46,28,410 Rs 7,77,43,211).
* Disallowance of interest [as per Rule 8D(2) (ii)] – Rs. 10,31,33,835/-
* Disallowance of other indirect expenses [as per Rule 8D(2)(iii)]-
Rs. 7,14,94,575/-.
While computing disallowances as per Rule 8D, Ld. AO considered entire amount of interest and entire amount of investments as per the audited financials. (Refer Page 4 of the Assessment Order).
1.5. Before the Ld. CIT(A), based on judicial precedents the assessee filed a revised computation of disallowance u/s 14A by application of Rule 8D at Rs.8,24,87,142/- as under:
* Disallowance of interest u/s Rule 8D(2)(ii) Rs.3,34,28,834/-
* Disallowance of indirect expenses as per Rule 8D(2) (iii)-
Rs.4,90,58,308/-
While computing disallowances as per Rule 8D, the assessee inter alia excluded amount of interest attributable to foreign subsidiary from total interest and from total investments, it excluded investment in said foreign subsidiary, investments in non-dividend yielding companies including investments in share application money. (For Computation, Refer PB Page No. 32).
1.6. Ld. CIT(A), following the order of his predecessor in AY 2012-1 3, directed the Ld. AO to verify the computation of disallowance of the assessee made at Rs.8,24,87,142/- as per Rule 8D after making the exclusions as directed, [Refer Para 5.12 at Page 22 of the CIT(A) order. Department has file appeal against this order of the Ld. CIT(A).
2. Ground wise Submissions in brief are as under:
2.1. At the outset it is submitted that both the grounds involved in this appeal of the department are covered issues in favour of the assessee by the order Dated 29.5.2023 of the Co-ordinate Bench of the Hon’ble Delhi Tribunal in AY 2012-13 in assessee’s own case. In ITA Nos. 4582/DEL-2018 & 4435/DEL- 2018. Copy of the said order of the Tribunal is attached herewith as Annexure-A.
2.2. Ground No.2 of the departmental appeal is against relief allowed by the Ld. CIT(A) in respect of interest attributable to investments in foreign subsidiary while computing disallowance under section 14A read with Rule 8D(ii) as the income therefrom is liable to tax and is not exempt. The specific Ground reads as under:
“That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that only the interest expense having direct nexus with the investments must be included for computation of disallowance u/s 14A under Rule 8D(), instead of the entire interest expense as taken by the A. O.”
2.2.1 At the outset it is submitted that this ground of appeal by the department is incorrect ground as it does not arise from the order of the Ld. CIT(A). Ld. CIT(A) never held that only interest having direct nexus with exempt income must be included while computing disallowance under section 14A. Even, this is not the claim of the assessee. Ld. CIT(A) only directed to reduce the amount of interest on loan attributable to investments in foreign subsidiary where income is taxable and not exempt. As the ground does not lie against the order of the Ld. CIT(A), the same deserves to be rejected. (Refer Para 5.12 at Page 22 of the CIT(A) order).
2.2.2 Even otherwise it is submitted that the Ld. CIT(A) has correctly directed to reduce the subject amount of interest because disallowance under section 1 4A is to be made in respect of expenses attributable to exempt income and not the taxable income. Dividend from foreign subsidiary is taxable and not exempt. This issue is covered in assessee’s favour by multiple decisions including that of jurisdictional High Court at Delhi in the case of Pr. CIT v. Bharti Overseas (P.) Ltd. [2015] 64 taxmann.com 340 (Delhi). This is also evident from the plain reading of Rule 8D(2)(ii).
2.2.3 Moreover, it is submitted that similar ground was also involved in the appeal of the department in AY 2012-13, wherein the appeal of the department has been rejected by the Hon’ble Co-ordinate Bench of the Tribunal vide order dated 29.5.2023 in ITA No. 4435/Del/2018.
[Copy of the said order of the Tribunal is attached as Annexure – ‘A’. Please refer Para 5 & 5.1 at Pages 3 & 4 of the Order]
Based on consistency principle, it is submitted that this ground of appeal by the department deserves to be rejected in this year also. Facts and departmental ground on this issue is similar to AY 2012-13.
2.3. Ground No.3 of the departmental appeal is against the relief allowed by the Ld. CIT(A) while computing disallowance under section 14A read with Rule 8D in respect of:
(i) investments in share application money on which no received and
(ii) on investments in domestic subsidiary companies.
The specific Ground of appeal read as under:
“That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the investment made in share application money and domestic subsidiary companies are to be excluded for computation of disallowance u/s 14A read with rule 8D in view of the ratio laid down by the Hon’ble Supreme Court in Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi [(2018) 91 taxmann.com 154 (SC)]”.
2.3.1 At the outset it is submitted that this ground of appeal so far as it relates to investments in domestic subsidiary companies is incorrect as it does not arise from the order of the Ld. CIT(A). The Ld. CIT(A) directed to reduce the investments in foreign subsidiary and investments in non-dividend yielding companies while computing disallowance u/s 14A read with Rule 8D. Ld. CIT(A) never directed to reduce the investments in domestic subsidiary companies. Such claim though raised in appeal, was not allowed by the Ld. CIT(A) and the assessee is not disputing the same any more. As the ground to this extent does not lie against the order of the Ld. CIT(A), the same deserves to be rejected.
(Refer Para 5.12 at Page 22 of the CIT(A) order)
2.3.2 As regards exclusion of investments in share application money, it is submitted that no exempt income is received and/or receivable on investment in share application money and the same is like investment in non-dividend yielding investments on which section 14A is not applicable. As such the investment in share application money has to be excluded while computing disallowance u/s 14A read with Rule 8D. This issue is also a covered issue in assessee’s favour by multiple decisions of the higher courts including that of jurisdictional High Court at Delhi in the case of PCIT v. Caraf Builders & Constructions (P.) Ltd [2019] 101 taxmann.com 167 (Delhi) [SLP dismissed in PCIT -2 v. Caraf Builders & Constructions [2019] 112 taxmann.com 322 (SC)].
2.3.3 Moreover, it is submitted that similar issue was also involved in the appeal of the assessee in AY 2012-13, wherein the appeal of the assessee has been allowed by the Hon’ble Co-ordinate Bench of the Tribunal vide order dated 29.5.2023 in ITA No. 4582/Del/2018.
[Copy of the said order of the Tribunal is attached as Annexure – ‘A’. Please refer Para 6 & 6.1 at Pages 4 & 5 of the Order]. Based on consistency principle, it is submitted that the claim of the department deserves to be rejected in this year also.
3. In view of the above stated facts and law it is submitted that the order of the Ld. CIT(A) deserves to be confirmed and the appeal of the department deserves to be dismissed.”
8. We have heard Ld. Authorized Representatives of the parties and perused the material available on record. We find that the identical issue came up for consideration before the Co-ordinate Bench of the Tribunal in ITA No.4582/Del/2018 for the AY 20 12-13. The issue in question was decided by the Tribunal in favour of the assessee. Moreover, Hon’ble Delhi High Court in the case of PCIT vs Caraf Builders & Constructions (P.) Ltd. [2019] 101 taxmann.com 167 (Delhi) has held that “the disallowance should not exceed the exempt income of that year”. It is also pointed out that Ld.CIT(A) had directed the AO to reduce the subject amount of interest because disallowance u/s 14A of the Act is made in respect of expenses attributable to exempt income and not the taxable income. Dividend from foreign subsidiary is taxable and not exempt income. This issue is covered in favour of the assessee by the judgement of Hon’ble Jurisdictional High Court in the case of Pr. CIT v. Bharti Overseas (P.) Ltd. [2015] 64 taxmann.com 340 (Delhi). We find that Ld.CIT(A) had given direction to the AO for re-computing the disallowance u/s 14A of the Act r.w. Rules 8D of the Rules for reducing the interest attributable to loan related to investment in foreign company whose income is not exempt, reducing the amount of share application money, reducing the interest on foreign subsidiary and investment in non-dividend yielding companies and verify the disallowance made by the assessee itself.
9. In the light of the above-mentioned binding precedents, we do not see any infirmity into the direction of Ld.CIT(A). Therefore, we do not see any reason to disturb the findings of Ld.CIT(A), the same is hereby affirmed in accordance with Thus, ground raised by the Revenue is dismissed.
10. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open Court on 20th June, 2023.
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