Case Law Details
ACIT Vs Punj Lloyd Ltd. (ITAT Delhi)
No requirement of law that the assessee should establish nexus between interest free funds and investment which yields exempt income
On perusal of Balance Sheet, AO found that the assessee company made investments in unquoted trade instruments in the shares of subsidiaries, joint ventures and SPVs. The investment included shares of domestic subsidiaries as well as overseas subsidiaries of the assessee company. AO required the assessee to show cause why disallowance u/s 14A r.w. Rule 8D be not made. Assessee replied that the assessee has not earned any exempt income during the year. No expenditure was incurred in relation to investment income which is exempt from tax. The expenditure claimed in P & L account has been incurred wholly and exclusively for the purposes of business. Company has invested in shares out of own funds and not out of interest bearing borrowed funds. Hence, disallowance is not warranted. Moreover, the assessee has already added back Rs. 4,44,270/- on account of section 14A in return/computation of income. However, the explanation was not acceptable to the AO and AO computed disallowance of Rs.10,47,30,878/- being interest expenses under section 14A r.w. Rule 8D and added it to the income of the assessee.
Before the CIT(A)
Assessee contended that the AO did not counter the submission of the assessee that no expense has been incurred and claimed for earning exempt income. The disallowance is made on the assumption that the provision of section 14A r.w. Rule 8D is automatic and mandatory even though no expenses have been incurred in relation to earning exempt income.
CIT(A)’s decision
Relying on Bombay high court decision in CIT Vs Reliance utilities & power Ltd wherein it was held that it is presumed that investments would be out of interest free funds generated or available with the company, if the interest income free funds were sufficient to meet the investment, CIT(A) directed the AO to delete the impugned disallowance observing as under:-
- there was sufficient own funds available with the appellant to make investment in shares on which no interest was being paid,
- interest bearing funds were utilized only for the purpose of business,
Before the Tribunal
While the Revenue contended that the assessee did not establish nexus between interest free funds and investment yielding exempt income and that finding of the CIT(A) is contrary to Rule 8D(ii) and (iii) of the Income Tax Rules, 1962, the assessee relied on the Apex Courts decisions in Maxopp Investment Ltd. vs. CIT (2018) 91 taxmann.com 154(SC) and South Indian Bank Ltd. vs. CIT (2021) 130 taxmann.com 178 (SC).
Tribunal’s decision
Tribunal noted that it is not in dispute that the assessee on its own made disallowance of Rs. 4,44,270/- u/s 14A. AO has not recorded his satisfaction regarding correctness of self disallowance made by the assessee u/s 14A as is mandatory in terms of 14A(2) to invoke and take recourse to Rule 8D. In such a scenario Hon’ble Delhi High Court held in Pr. CIT vs. Keshav Power Ltd. (2019) 112 taxmann.com 323 (Del) that disallowance is not sustainable. Revenue’s SLP stands dismissed reported in (2020) 268 Taxman 331 (SC). Similar is the view expressed by the Hon’ble Bombay High Court in Pr. CIT vs. Reliance Capital Asset Management Ltd. (2017) 251 Taxman 68 (Bom), SLP against which has been dismissed by the Hon’ble Supreme Court reported in (2018) 259 Taxman 83 (SC CIT(A) recorded the finding that sufficient own funds were available with the assessee to make investment in shares on which no interest was being paid and that interest bearing funds were utilised only for purposes of business. The said finding could not be controverted by bringing on record any material by the Dept. If that be so, the decision of SC in South Indian Bank Ltd. squarely applies to the facts of the assessee’s case wherein it is held that if interest free funds available with the assessee exceeded their investment in tax free securities, investments would be presumed to be made out of assessee’s own funds and no disallowance is warranted. Tribunal also ruled that there is no requirement of law either under section 14A or Rule 8D that the assessee should establish nexus between interest free funds and investment which yields exempt income.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal filed by the Revenue is directed against the order dated 04.06.2019 of the Ld. Commissioner of Income Tax (Appeals)-29, New Delhi (“CIT(A)”) pertaining to Assessment year (“AY”) 2015-16.
2. The Revenue has taken the following grounds of appeal:-
“1. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in deleting the disallowance of Rs. 10,47,30,878/- made u/s 14A r.w Rule 8D without appreciating that the assessee did not establish the nexus between interest free funds and investment yielding exempt income.
2. On the facts and in the circumstances of the case the finding of Ld. CIT(A) is contrary to Rule 8D (ii) & (iii) of the Income Tax Rules.”
3. Briefly stated, the assessee company is engaged in the business of engineering, procurement, construction and project management services. The assessee filed its return for AY 2015-16 on 28.11.2015 declaring loss of Rs. 875,39,91,399/-. Initially the case was selected for limited scrutiny through CASS but later on converted to complete scrutiny. Statutory notice(s) were issued/served in response to which requisite details were furnished which have been examined and placed on record by the Ld. Assessing Officer (AO).
3.1 On perusal of Balance Sheet as on 31.03.2015 the Ld. AO found that the assessee made investments in unquoted Trade instruments in the shares of subsidiaries, joint ventures and SPVs. The investment included shares of domestic subsidiaries as well as overseas subsidiaries of the assessee company. The aggregate of investment in shares of domestic subsidiary companies whose dividend is exempt from tax was found to be Rs. 147.48 crore as on 31.03.2015 and Rs. 147.48 crores as on 31.03.2014 also.
3.2 During assessment proceedings the Ld. AO required the assessee to show cause why disallowance under section 14A r.w. Rule 8D be not made. The assessee replied on 6.12.2018 that the assessee has not earned any exempt income during the year. No expenditure was incurred in relation to investment income which is exempt from tax. The expenditure claimed in P & L account has been incurred wholly and exclusively for the purposes of business. Moreover, the company has invested in shares out of own funds and not out of interest bearing borrowed funds. Hence, disallowance under section 14A r.w. Rule 8D is not warranted. Moreover, the assessee has already added back Rs. 4,44,270/- on account of section 14A in return/computation of income.
3.3 The explanation was not acceptable to the Ld. AO. For the reasons stated by him, the Ld. AO computed disallowance of Rs.10,47,30,878/-being interest expenses under section 14A r.w. Rule 8D and added it to the income of the assessee. Accordingly, the Ld. AO computed loss of Rs. 8,64,92,60,521/- as against claim of Rs. 8,75,39,399/- as per return in his assessment order dated 28.12.2018 under section 143(3) of the Act.
4. Aggrieved by the impugned disallowance under section 14A r.w. Rule 8D, the assessee appealed before the Ld. CIT(A). It was contended before him that the Ld. AO did not counter the submission of the assessee that no expense has been incurred and claimed for earning exempt income. The disallowance is made on the assumption that the provision of section 14A r.w. Rule 8D is automatic and mandatory even though no expenses have been incurred in relation to earning exempt income. The Ld. CIT(A) directed the Ld. AO to delete the impugned disallowance observing as under:-
“4.1. I have considered the facts and circumstances of the case, submission of the appellant and perused the order of the AO. On perusal of the details/documents as well as copy of balance sheet filed by the appellant, I find that there was sufficient own funds available with the appellant to make investment in shares on which no interest was being paid, further, the interest bearing funds were utilized only for the purpose of business, therefore, in view of the various case laws relied upon by the appellant in this regard including the decision laid by the hon’ble Bombay high court in the case of Commissioner of Income tax vs. Reliance utilities & power limited in which it is held that it is presumed that investments would be out of interest free funds generated or available with the company, if the interest income free funds were sufficient to meet the investment. Under these circumstances, I find merit in the argument of the appellant, therefore, the AO is d\directed to delete the addition made.”
5. The Revenue is dissatisfied and is in appeal before the Tribunal and both the grounds relate thereto.
6. The Ld. DR placed reliance on the order of the Ld. AO and submitted that the assessee did not establish nexus between interest free funds and investment yielding exempt income and that finding of the Ld. CIT(A) is contrary to Rule 8D(ii) and (iii) of the Income Tax Rules, 1962.
7. The Ld. AR, on the other hand, supported the order of the Ld. CIT(A) and relied on the decision of Hon’ble Supreme Court in Maxopp Investment Ltd. vs. CIT (2018) 91 com 154(SC) and South Indian Bank Ltd. vs. CIT (2021) 130 taxmann.com 178 (SC).
8. We have considered carefully the submission of the parties and perused the records. It is not in dispute that the assessee on its own made disallowance of Rs. 4,44,270/- under section 14A of the Act. It is observed that the Ld. AO has not recorded his satisfaction regarding correctness of self disallowance made by the assessee under section 14A as is mandatory in terms of sub-section (2) of section 14A to invoke and take recourse to Rule 8D. In such a scenario Hon’ble Delhi High Court held in Pr. CIT vs. Keshav Power Ltd. (2019) 112 com 323 (Del) that disallowance is not sustainable. The Revenue filed SLP before the Hon’ble Supreme Court against the order (supra) of the Hon’ble Delhi High Court which stands dismissed reported in (2020) 268 Taxman 331 (SC). Similar is the view expressed by the Hon’ble Bombay High Court in Pr. CIT vs. Reliance Capital Asset Management Ltd. (2017) 251 Taxman 68 (Bom), SLP against which has been dismissed by the Hon’ble Supreme Court reported in (2018) 259 Taxman 83 (SC). Moreover, the Ld. CIT(A) recorded the finding that sufficient own funds were available with the assessee to make investment in shares on which no interest was being paid and that interest bearing funds were utilised only for purposes of business. The above finding could not be controverted by bringing on record any material by the Ld. DR. If that be so, the decision of Hon’ble Supreme Court in South Indian Bank Ltd. (supra) squarely applies to the facts of the assessee’s case wherein it is held that if interest free funds available with the assessee exceeded their investment in tax free securities, investments would be presumed to be made out of assessee’s own funds and no disallowance is warranted. It may be stated that there is no requirement of law either under section 14A or Rule 8D that the assessee should establish nexus between interest free funds and investment which yields exempt income.
9. For the reasons set out above, we endorse the findings of the Ld. CIT(A) and reject the appeal of the Revenue.
10. In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on 30th October, 2023.
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