Case Law Details
DCIT Vs Hero Moto Corp. Ltd (ITAT Delhi)
In so far as the interest aspect is concerned, it is vivid from the assessee’s balance sheet that total investments at the end of the year stand at Rs.167.74 crore. The assessee’s capital along with reserve and surpluses stand at Rs.448.33 crore. This shows that the assessee’s Shareholders’ funds is far in excess of the investment made in securities yielding exempt income. The Hon’ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), has held that if there are interest free funds available with the assessee sufficient to meet its investment and, at the same time, loan has been raised, it can be presumed that the investments were from interest free funds and, resultantly, no disallowance of interest can be made. Recently, the Hon’ble Bombay High Court in CIT vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom), has held that no disallowance of interest can be made u/s 14A if the assessee’s own capital is more than the investments fetching exempt income. Similar view has been taken by the Hon’ble Gujarat High Court in the case of CIT vs. Suzlon Energy Ltd. (2013) 354 ITR 630 (Guj). In view of the above judgments, it is patent that the disallowance u/s 14A on account of interest was not rightly made by the AO.
FULL TEXT OF THE ITAT JUDGEMENT
These two cross appeals – one by the assessee and the other by the Revenue – arise out of the order passed by the CIT(A) on 23.7.2013 in relation to the assessment years 2000-01.
2. The only issue raised by the Revenue in its appeal is against restricting the addition u/s 14A of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) from Rs.1,43,06,087/- to Rs.26.21 lac. The assessee is also aggrieved against the sustenance of addition u/s 14A to the level upheld in the first appeal.
3. Briefly stated, the facts of the case are that this is second round of proceedings. The assessee filed its return declaring total income of Rs.239.92 crore. The case was processed u/s 143(1). Thereafter, notice u/s 148 was issued on 30.3.2006, pursuant to which assessment was completed u/s 143(3) read with section 147, making addition, inter alia, u/s 14A @ 25% of the exempt income. The assessee challenged the assessment order before the ld. CIT(A), inter alia, against the initiation of reassessment. The ld. CIT(A) vide his order dated 5.2.2008 rejected the assessee’s claim of the alleged invalid initiation of reassessment u/s 147. He, however, restricted the disallowance u/s 14A of the Act from 25% to 10% of exempt income. Though, both the assessee as well as the Revenue preferred their respective appeals against the CIT(A)’s order, but the Revenue did not challenge the relief allowed by the ld. CIT(A) on section 14A disallowance. The Tribunal vide its order dated 16.4.2010 2010 remitted the question of disallowance u/s 14A to the file of the AO. The assessee chose not to press the ground about reopening of assessment u/s 148 before the tribunal, as a result of which the ground was dismissed as ‘Not pressed’.
4. Pursuant to the Tribunal order, the AO took up the instant proceedings. The AO computed disallowance u/s 14A at Rs.1.43 crore by applying Rule 8D of the Income-tax Rules, 1962. Such disallowance was made up of two figures, namely, disallowance of interest at Rs.79 lac and disallowance of other expenses @ 0.5% of the average value of investments at Rs.64 lac. In the first appeal, the assessee once again challenged the initiation of re-assessment proceedings u/s 147, which ground came to be dismissed by the ld. CIT(A) on the reason that the assessee had not pressed this issue before the Tribunal. As regards the computation of disallowance u/s 14A, the ld. CIT(A) held that the provisions of rule 8D were not applicable to the year under consideration. He further held that the AO should have restricted the addition to 10% of exempt income, being the amount of disallowance sustained by the ld. CIT(A) during the first round of proceedings against which only the assessee challenged the disallowance before the Tribunal and the Revenue accepted this disallowance. He further observed that out of total expenses of Rs.1942.45 crore debited to the Profit & Loss Account, only a sum of Rs.80.23 crore could be said to have some relation with the exempt income. By apportioning this expenditure of Rs.80.23 crore in the ratio of Dividend income (Rs.7.43 crore) to the Total turnover of the assessee company (Rs.2269 crore), he sustained the disallowance at Rs.26,21,424/-. Both sides are in appeal against the impugned order to the extent it is prejudicial to their respective interests.
5. We have heard the rival submissions and perused the relevant material on record. One of the issues in the assessee’s appeal is against the error in the jurisdiction of the AO to initiate proceedings u/s 147 in view of the bar contained in the proviso to section 14A of the Act. The ld. AR vehemently argued that the AO ought not to have initiated re-assessment proceedings and made disallowance u/s 14A vide his order passed u/s 147. In our considered opinion, it is too late in the day for the assessee to come up against the initiation of re-assessment proceedings during the second round of assessment, after having not pressed this ground about the invalid initiation of re-assessment u/s 147 before the Tribunal in the first round. It is apparent from the Tribunal order in the first round, a copy of which is available on record, that the assessee did not press the issue of reopening of assessment u/s 148. Relevant finding in this regard is contained in para 7.21 of the Tribunal order. Once the assessee did not press the issue of initiation of re-assessment proceedings before the Tribunal and allowed the decision to be taken on all issues on merits, we now cannot unsettle the earlier tribunal order by entertaining any ground about the initiation of re-assessment. The ld. AR fairly admitted that the order of the tribunal in the first round has been accepted by the assessee. In this view of the matter, we cannot permit the assessee to raise the ground against the initiation of reassessment once again, after having not pressed the same in the first round before the tribunal. This ground is, therefore, not allowed.
6. Coming to the issue of disallowance u/s 14A on merits, we find that the AO was not correct in applying the provisions of Rule 8D for computing disallowance u/s 14A. Our view is fortified by the judgment of the Hon’ble jurisdictional High Court in the case of Maxopp Investments Ltd. Vs. CIT (2012) 347 ITR 272 (Del) in which it has been held that the provisions of Rule 8D can apply only from the assessment year 2008-09 and in the earlier periods, the disallowance is required to be made on a reasonable and acceptable method of apportionment.
7. It can be seen that the AO has made total disallowance u/s 14A at Rs.1.43 crore comprising of two amounts, namely, Rs.79 lac towards interest and Rs.64 lac towards expenses at ½% of the average value of investments.
8. In so far as the interest aspect is concerned, it is vivid from the assessee’s balance sheet that total investments at the end of the year stand at Rs.167.74 crore. The assessee’s capital along with reserve and surpluses stand at Rs.448.33 crore. This shows that the assessee’s Shareholders’ funds is far in excess of the investment made in securities yielding exempt income. The Hon’ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), has held that if there are interest free funds available with the assessee sufficient to meet its investment and, at the same time, loan has been raised, it can be presumed that the investments were from interest free funds and, resultantly, no disallowance of interest can be made. Recently, the Hon’ble Bombay High Court in CIT vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom), has held that no disallowance of interest can be made u/s 14A if the assessee’s own capital is more than the investments fetching exempt income. Similar view has been taken by the Hon’ble Gujarat High Court in the case of CIT vs. Suzlon Energy Ltd. (2013) 354 ITR 630 (Guj). In view of the above judgments, it is patent that the disallowance u/s 14A on account of interest was not rightly made by the AO.
9. Coming to the remaining disallowance towards expenses incurred for earning exempt income, we find that the AO made addition at Rs.64 lac by applying the mandate of Rule 8D(2) (iii). On the other hand, the ld. CIT(A) bifurcated total expenses into those exclusively relating to the manufacturing activity and those which are common to both manufacturing activity and exempt income. Such amount of common expenses was determined by the ld. CIT(A) at Rs.80.23 crore. The ld. DR could not point out any deficiency in computing the base amount of expenses at Rs.80.23 crore.
10. As regards the apportionment of expenses, we are satisfied that the ld. CIT(A) was not justified in allocating Rs.26.21 lac towards exempt income by apportioning such total expenditure of Rs.80.23 crore in the ratio of dividend income to the total turnover of the company. There can be no comparison between dividend income on the one hand and total turnover on the other, which contains only a part as income. On the contrary, a valid base for apportionment is exempt income to taxable income. The Delhi Benches of the Tribunal in ACIT vs. HT Media Ltd. (ITA Nos.2508, 2507/Del/2013) has also approved the apportionment of common expenses in the ratio of exempt income to total income. To this extent, the impugned order is set aside and the matter is sent back to the AO . We direct the AO to compute disallowance u/s 14A by apportioning total expenses of Rs.80.23 crore in the ratio of exempt income to total income. However, it is made clear that the total disallowance should not exceed 10% of the exempt income, being the amount of disallowance sustained in the first appeal in the original round, against which the Revenue did not choose to prefer any appeal.
11. In the result, the appeal of the Revenue is partly allowed for statistical purposes and that of the assessee is dismissed.
The order pronounced in the open court on 18.03.2015.
