Case Law Details
M/s. Bhoruka Investment Ltd. Vs. D.C.I.T. (ITAT Kolkata)
As far as dis allowance of interest expenses under Rule 8D(2)(ii) of the Rules is concerned, it is clear from the summarized balance sheet of the assessee from the financial years 2008-09 to 2011-12 that the assessee had non-interest bearing funds sufficient to cover the investments made in shares. It has been held by the Hon’ble Bombay High Court in the case of CIT vs Reliance Utilities and Power Ltd. (2009) 313 TR 340 (Bom) and CIT vs HDFC Bank Ltd (2014) 49 taxmann.com 335 (Bom) that where interest free funds and overdraft and loans taken are available with an assessee, then a presumption would arise that the investments would be out of the interest free funds generated or available with the assessee, if the interest free funds were sufficient to meet the investments. The aforesaid view has been followed by the Hon’ble Calcutta High Court in the case of Principal CIT vs Rasoi Ltd. In ITAT o.109 of 2016 in GA No. 633 of 2016 judgment dated 15.02.2017. In view of the aforesaid legal position and the view of the fact that the assessee had enough own funds which was more than the investments which yielded tax free income there can be no dis allowance of interest expenses in terms of Rule 8D(2)(ii) of the Rule.
Full Text of the ITAT Order is as follows:-
ITA No. 129/Kol/2016 is an appeal by the Assessee while ITA No. 329/Kol/2016 is an appeal by the revenue. Both these appeals are directed against the order dated 07.12.2015 of. C.I.T.(A)-5, Kolkata relating to A.Y. 2012-13.
2. Ground Nos. 1 to 6 raised by the assessee in its appeal and ground no.1 raised by the revenue in its appeal can be conveniently taken up together. These grounds relate to dis allowance u/s 14A of the Income Tax Act, 1961 (Act). They read as follows :
Ground No. 1 to 6 in Assessee ’s appeal:
“1. That the learned Commissioner of Income Tax (Appeals) erred in sustaining a dis allowance of Rs. 4,32,847/- out of a total dis allowance of Rs. 43,79,995 made in the assessment under section 14A of the Income Tax Act read with Rule 8D. The sustaining of dis allowance of Rs. 4,32,847/- is without any basis and on the facts and in the circumstances the entire dis allowance made by the assessing officer should be deleted.
2. That the consistent case of the appellant since beginning is that no borrowed funds have been used for acquiring any investment in shares and all the investments have been acquired out of own funds and also that no expenditure has been incurred for earning any dividend income or any other exempt income not includible in the total income and therefore the question of any dis allowance u/s 14A does not arise.
3. That the assessing officer erred in straightway proceeding to apply Rule 8D as if the dis allowance under Rule 8D is automatic. either any interest nor any other expenditure has been incurred by appellant in relation to the exempt income and the assessing officer erred in assuming otherwise.
4. That there is no proximate relationship/ nexus between the expenditure disallowed and the exempt income justifying any dis allowance u/s 14A read with Rule 8D and the entire dis allowance sustained by the Commissioner of Income Tax (Appeals) should be deleted.
5. That in any event the sustaining of dis allowance of Rs. 4,32,847/- is excessive.
6. That Demat charges of Rs 3266/- has already been separately added in the Return of income filed and therefore the same dis allowance once again u/s 14A is not justified.
By the Revenue
“1. On the fact and circumstances of the case, the Ld. CIT(A) erred in law in restricted the addition to Rs. 4,32,847/- instead of Rs. 43,79,995/- dis allowance u/s. 14A made by the AO, on a wrong appreciation of facts ignoring the provisions of section 14A of the IT Act, 1961, read with rule 8D and over rule a plethora of the judicial pronouncement like Godrej & Boyce Mfg. Co. Ltd. vs. DCIT, Range 10(2), Mumbai reported [2010] 194 Taxman 203 (Bombay) / [2010] 328 ITR 81 [Bombay] / [2010] 234 CTR 19 Bombay, “A” Bench of Chennai ITAT in the case of Shiva Industries & Holidays Pvt. Ltd. vs. ACIT (IT Appeal No. 1917 of 2011) and “K” Bench of Mumbai ITAT in the case of Stream International Services Pvt. Ltd. vs. ACIT (IT Appeal No. 8997 of 2010) and the Circular issued by CBDT vide No. 5 of 2014.”
3. The Assessee is a company. It is engaged in the business of construction and dealing in shares. The assessee earned dividend income of Rs. 22,16,243/- and the same was claimed as exempt u/ s 10(34) of the Income Tax Act, 1961 (Act). Similarly the assessee earned capital gain on sale of shares at Rs. 60,84,416/- which was claimed as exempt u/s 10(38) of the Act. In terms of section 14A of the Act, the assessee was obliged to disallow expenses which was debited in the profit and loss account and claimed as deduction while computing income from business and from the total income. The assessee did not make any dis allowance u/s 14A of the Act. The AO disallowed a sum of Rs. 43,79,995/- which was worked out by the AO as follows :-
“2.5. Hence, in view of above submission and confession on the part of the assessee the allowance u/s. 14A with reference to the Clauses- (i), (ii) and (iii) to sub-rule (2) of Rule-8D is warranted in the case of assessee and the dis allowable amount is worked out on the on the basis of balance sheets dated 31-03-2011 and 31-03-2012, in following manner:
(i) The amount of expenditure directly relating to income which does not form part of total income = Rs. 3,266/ – [Demat Charges of Rs. 3,266/-]
(ii) In a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :-
A X B/C = 75,34,709 X 7,10,33,364/ 16,06,38,299 = Rs. 33,31,806/-
A = Rs. 75,34,709/- (in his case, total interest on loan paid Rs. 92,17,120/- – interest received on loan & advance being NBFC of Rs. 31,12,422/-) = amount of expenditure by Way of interest incurred during the previous year but not separable;
B= Rs. 7,10,33,364/- – (Opening Value of Investment Rs. 7,17,70,153/- and Closing value of Investment Rs. 7,02,96,574/- in this case)= the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on first day and last day of the previous year.
C= Rs. 16,06,38,299/- (Opening Value of Assets Rs. 15,79,85,669/- and Closing value of Assets Rs. 16,32,90,929/- in this case)= the average of total assets as appearing in the balance sheet of the assessee, on the first day and last day of the previous year.
(iii) An amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. In this case 1/2 % or 0.5% of Rs.7,10,33,364/- i.e., Rs.3,55, 167/-.
2.6. Thus the dis allowable expenses is determined at Rs. 43,79,995/- (Rs. 6,93,022/- + Rs. 33,31,806/- + Rs. 3,55,167/-) to add back with the total income of the assessee.· Simultaneously, the said dis allowance is also a subject matter of addition by virtue of clause-(f) under Explanation [1] to the section 1 15JB for determining the MAT amount payable by the assessee.”
4. Before CIT(A) the assessee pointed out that with regard to dis allowance of interest expenses of Rs. 33,31,806/- under Rule 8D(2)(ii) of Income Tax Rules, 1962 (Rules), the assessee had own interest free funds and therefore no part of the interest expenses which are debited in the profit and loss account can said to have been used for the purpose of making investments which yielded exempt income. The assessee therefore pleaded that no dis allowance of interest expenses should be made. On the above plea the assessee gave the following computation of own funds based on the balance sheet for the financial year 2007-08 to 2011-12.
5. It can be seen from the aforesaid chart that the investments during the previous year in shares by the assessee was a sum of Rs. 7,02,96,574/- and non interest bearing funds of the assessee was Rs. 10,44,47,811/- which was in excess of the investment in
6. The CIT(A) was of the view that the AO was not right in coming to the conclusion that borrowed funds of interest was paid and was utilized for making He however sustained addition on account of interest expenses to the extent there was a difference between the interest paid by the assessee which was quantified by him at Rs.75.35 lakhs and interest income earned by the assessee which was Rs.74.60 lakhs. Addition of Rs.33,31,,806/- made by the AO was therefore directed by CIT(A) to be restricted to the difference of interest expenses and interest income referred to above.
7. As far as dis allowance of other expenses in terms of Rule 8D(2)(iii) of the Rules is concerned, the assessee pleaded that 0.5% of the average value of investment should be worked out by taking only the investments which yielded tax free exempt income and not the entire investments. The details of the investments which yielded tax free dividend income was given by the assessee as follows :-
8. On the above submission the CIT(A) was of the view that the same is not acceptable and he therefore upheld the dis allowance made by the AO.
9. Thus the dis allowance made by the AO was restricted to the following sum by CIT(A) :-
“2.7. As regards the amount of interest to be disallowed for the purpose of Rule 8D(2)(ii) I restrict the same to the net interest expense being equal to the difference of Rs. 75,34,709/- and Rs. 74,60,295/-, being equal to Rs. 74,414/- . Thus, the total dis allowance upheld by me as detailed above comes to Rs. 4,32,847/- (Rs. 3,366 + 74,414 + 3,55,167/-.”
10. Aggrieved by the relief granted by CIT(A) the revenue has raised ground no. 1 in its appeal. Aggrieved by the order of CIT(A) in not deleting the dis allowance of interest expenses in full and in not accepting the plea of the Assessee that while working the average value of the investments for the purpose of Rule 8D(2)(iii) of the Rules, only investments which yield dividend income should be considered and not deleting the addition of Rs. 3,266/- which was the demat charges which was already shown by the assessee in its computation of income, the assessee has raised ground 1 to 6 before the tribunal.
11. We have heard the rival submissions. The ld. Counsel for the assessee reiterated the submissions as were made before CIT(A) besides referring to a certain decided cases. The ld. DR relied on the order of the AO.
12. We have carefully considered the rival submissions. As far as dis allowance of Rs. 3,266/- being demat charges is concerned it is clear from page-7 of the order of AO which is the computation of total income by the AO that a sum of Rs. 3,266/- has already been added to the profit as per profit and loss account. Making the addition of the very same sum as dis allowance u/s 14A of the Act would be a double addition and therefore the addition of Rs. 3,266/- is directed to be deleted.
13. As far as dis allowance of interest expenses under Rule 8D(2)(ii) of the Rules is concerned, it is clear from the summarized balance sheet of the assessee from the financial years 2008-09 to 2011-12 that the assessee had non-interest bearing funds sufficient to cover the investments made in shares. It has been held by the Hon’ble Bombay High Court in the case of CIT vs Reliance Utilities and Power Ltd. (2009) 313 TR 340 (Bom) and CIT vs HDFC Bank Ltd (2014) 49 taxmann.com 335 (Bom) that where interest free funds and overdraft and loans taken are available with an assessee, then a presumption would arise that the investments would be out of the interest free funds generated or available with the assessee, if the interest free funds were sufficient to meet the investments. The aforesaid view has been followed by the Hon’ble Calcutta High Court in the case of Principal CIT vs Rasoi Ltd. In ITAT o.109 of 2016 in GA No. 633 of 2016 judgment dated 15.02.2017. In view of the aforesaid legal position and the view of the fact that the assessee had enough own funds which was more than the investments which yielded tax free income there can be no dis allowance of interest expenses in terms of Rule 8D(2)(ii) of the Rule.
14. As far as Rule 8D(2)(iii) of the Rules is concerned it has been held by the Hon’ble ITAT Kolkata Bench in the case of DCIT vs REI Agro Ltd. In ITA No. 1811/Kol/2012 dated 14.05.2013 that it is only the investment which yielded tax free income that should be considered for working out the average value of investment while applying the Rule 8D(2)(iii) of the Rules. This order of the tribunal has been confirmed by the decision of Hon’ble Calcutta High Court in G.A. No. 3022 of 2013 Judgement dated 23.12.2013. In view of the aforesaid legal position we are of the view that the order of the CIT(A) on this issue cannot be sustained. It has also been held by the Hon’ble Delhi High Court in the case of Cheminvest Ltd vs CIT (2015) 378 ITR 33 (Del) that when there is no exempt income then there can be no question of dis allowance u/s 14A of the Act. In the light of the judicial pronouncements, we are of the view that the plea of the assessee to exclude investments which had not yielded any exempt dividend income during the previous year while working out the average value of investments for the purpose of applying Rule 8D(2)(iii) of the Rules, should be accepted. We hold and direct accordingly.
15. For the reasons given above we allow ground nos. 1 to 6 raised by the assessee in part and dismiss ground no. 1 raised by the revenue.
16. The next issue that arises for consideration in these appeals is the issue of taking deemed dividend u/s 2 (22)(e) of the Act. The relevant grounds of appeal of the assessee are 7 to 13 and grounds of appeal of the revenue is ground no.2 in its appeal. These grounds read as follows :-
Grounds of appeal of the Assessee:
“7. That the learned Assessing Officer erred in arbitrarily invoking the provisions of section 2(22) (e) of the Income Tax Act, 1961 even when the said provisions are not applicable. in case of the appellant and on the facts and circumstances the Commissioner of Income Tax (Appeals) erred in sustaining the said action of the Assessing Officer.
8. That TCI Bhoruka Projects Ltd is a company in which the public are substantially interested and is listed with Kolkata Stock Exchange and Bangalore Stock Exchange and therefore provisions of section 2(22)( e) are not applicable on the facts and in the circumstances.
9. Bhoruka Investment Ltd held 12.75% of the Share capital of TCI Bhoruka Projects Ltd as on 31.12.12 but held only for a part of the year.
10. Appellant had a running current account with TCI Bhoruka Projects Ltd. and for most part of the year there was a debit balance in the name of TCI Bhoruka Projects Ltd in the books of the appellant and only for a few days towards the end of the year there was a credit balance. On the facts and in the circumstances the said credit balance should not be treated as an advance/loan.
11. The transactions with TCI Bhoruka Projects Ltd., debit as well as credit, have been carried out in the ordinary course of the business of Bhoruka Projects Ltd. which is also a substantial part of the business.
12. That on the facts and in the circumstances the learned Commissioner of Income Tax (Appeals) erred in sustaining the dis allowance of Rs. 12,08,616/- being 12.75% of Rs. 94,79,3401- in case of Bhoruka Projects Ltd u/s 2(22) (e) of the Income Tax Act.
13. That in any event the dis allowance of Rs. 12,08,616/- u/s 2(22)(e) is excessive.”
By the Revenue
“2. On the fact and circumstances of the case, the Ld. CIT(A) erred in law in deleting the addition of Rs. 10,21,302/- and restricted the addition to Rs. 12,08,816/- instead of Rs. 94,79,340/- under the head Deemed Dividend u/s. 2(22)(e) made by the AO, on a wrong appreciation of facts ignoring the provisions of law.”
17. The assessee had taken a loan of Rs. 94,79,346/- from a company TCI Bhoruka Projects Limited. The assessee also took a loan of Rs. 10,21,302/- from a company by name Transcorp Enterprises Ltd. It is not in dispute that the assessee held 41.33% of shares in Transcorp Enterprises Ltd and 12.75% in TCI Bhoruka Projects Ltd. In terms of section 2(22)(e) of the Act any loan or advance from a company by which the assessee is a beneficial shareholder, holding not less than 10% of the voting power of the lending company, such loan or advance has to be construed as dividend and taxed in the hands of the assessee i.e. recipient of the loan or advance, to the extent the lending company possesses accumulated profits. The AO held that the loan received from the aforesaid two companies are to be construed as deemed dividend and accordingly brought the same to tax as deemed dividend.
18. On appeal by the assessee the CIT(A) reduced the quantum of deemed dividend in respect of loan from TCI Bhoruka Projects Ltd of Rs.12,08,616/- (to the extent of accumulated profits of TCI Bhoruka Projects Ltd.) and deleted the addition made on account of deemed dividend in respect of loans from Transcorp Enterprises Ltd. On the ground that the loan and advance given by Transcorp Enterprises Ltd., in the ordinary course of its principal business of money lending.
19. Aggrieved by the orders of CIT(A) in allowing relief to the assessee the revenue has raised ground no. 2 before the Tribunal. Aggrieved by the order of CIT(A) in not deleting the entire addition of the deemed dividend in respect of loans received from TCI Bhoruka Projects Ltd., the Assessee has raised Grounds No. 7 to 13 in its appeal.
20. It is the case of the Assessee that as far as TSI Bhoruka Projects Ltd., is concerned, the said companies shares are listed in the Calcutta Stock Exchange and the provisions of Sec.2(22)(e) of the Act does not apply to a company in which the public are substantially interested. Sec.2(18)(b)(A) of the Act lays down that shares of a company which is not a private company, if they are listed in a recognized stock exchange, they are to be regarded as Company in which public are substantially interested. The loan or advance which a company is substantially interested is outside the purview of section 2(22)(e) of the Act. As far as loan from Transcorp Enterprises Ltd., is concerned, the ld. Counsel for the assessee brought to our notice that one of the exceptions u/.s 2(22)(e) is that if loans and advances are made to a shareholder by a company in the ordinary course of its business where lending of money is substantial part of the business of the lending company then such loan or advance is outside the purview of section 2(22)(e) of the Act. In this regard the ld. Counsel drew our attention to page 119 of the paper book which shows the summarized balance sheet of Transcorp Enterprises Ld. For financial year 2008-09 to 2011-12. The same is as follows :-
21. The ld. Counsel for the assessee pointed out to the aforesaid chart and highlighted that 80% of the assets are loans and advances and that would be sufficient to conclude that the substantial part of the business of the assessee is lending and the sum in question has been give as a loan in the ordinary course of business .
22. We have given a very careful consideration to the rival submissions. The ld. Counsel has filed before us the evidence in the form of a computer print out of the list of companies listed in the Calcutta Stock Exchange and the assessee’s name figures as a listed company in Calcutta Stock Exchange which is a recognized stock exchange. Though trading in shares of the assessee company remains suspended for non payment of fees to the stock exchange, the fact remains that the assesee’s shares have not been delisted in Calcutta Stock Exchange. In these circumstances it has been construed that TCI Borukha Projects Ltd is a company in which public or substantially interested and therefore the payment of loan or advance by TCI Borukha Projects Ltd., even to a beneficiary shareholder having not less than 10% of the voting power is outside the provision of section 2(22)(e) of the Act. Therefore we hold that no part of the loan given by TCI Boruka Projects Ltd., can be taxed as deemed dividend u/s 2(22)(e) of the Act in the hands of the assessee.
23. As far as loans or advance by Transcorp Enterprises Ltd is concerned it is clear from page 119 of the paper book Vol.I which we have extracted in the earlier part of this order that substantial part of the business of this company is lending of money. It is not disputed that the lending of money to the assessee is in the ordinary course of the business of Transcorp Enterprises Ltd. In such circumstances no part of the advance or loan can be construed as deemed dividend within the meaning of section 2(22)(e) of the Act. We therefore are of the view that CIT(A) was fully justified in giving relief to the assessee in this regard. On the question as to what can be regarded as substantial part of business of the assessee, the ld. Counsel for the assessee placed reliance on the decision of the Honorable Calcutta High Court in the case of CIT vs Shree Balaji Glass Manufacturing Pvt. Ltd 386 ITR 128(Cal). The said decision supports the plea of the assessee with regard to determination of the question with regard to what is substantial part of business of an assessee, viz., looking at the composition of the deployment of funds towards loans and advances to the total funds available. Thus ground No. 2 raised by the revenue is dismissed while ground nos. 7 to 13 raised by the assessee are allowed.
24. In the result the appeal by the assessee is allowed and the appeal by the revenue is dismissed.
Order pronounced in the Court on 29.11.2017.
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