Case Law Details
DCIT Vs Universal Industrial Fund Ltd. (ITAT Kolkata)
Interest expense incurred in the business of money lending was Rs.2,0276,317/-. In the course of its business of financing, the assessee borrows and lends monies. The assessee pays interest on the borrowed funds and earns interest on the loans advanced. Therefore, both the interest income and the interest payment are intrinsically linked. There is complete inter lacing of funds and therefore, for ascertaining the tax effect, netting off of interest paid with interest received is necessary. It is for this reason that the net interest is reflected in the profit and loss account. In the circumstances, the Assessing Officer should also have considered the interest on net basis. After setting off interest expense against the interest income, the assessee was let with negative figure of Rs.6,08,163/-which had been suo moto disallowed by the assessee in its entirety. Therefore, we are of the view that in these circumstances no further interest disallowance should be made. Respectfully following the judgment of coordinate Bench Kolkata in the case of DCIT Vs Trade Apartments Limited (ITA No.1277/Kol/2011) for Assessment Year 2008-09 wherein on exactly similar facts and circumstances the coordinate Bench held that the ‘net’ interest expenditure is to be considered for the purposes of disallowance under Section 14A and where after setting off interest earned against the interest expenditure no further interest expense remains then disallowance cannot be made u/s 14A of the Income-tax Act, 1961.
FULL TEXT OF THE ITAT JUDGMENT
The captioned appeal filed by the Revenue, pertaining to Assessment Year 2009-1 0,is directed against the order passed by the ld Commissioner of Income Tax (Appeals)-2,Kolkata in Appeal No.393/CIT(A)-2/6(4)/14-15 dated, 17.12.2015,which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3)of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’), dated 13.12.2011.
2. The Revenue has raised the following grounds of appeal:
“1) That the ld. CIT(A), Kolkata was erred in holding that the expenses to be restricted to the extent of expenses claimed for deduction and not more. But he calculation was made following the provision of section 14A read with Rule 8D.
2) That the department shall crave to add or alter any ground on or before the date of hearing.”
3. The brief facts qua the issue are that during the assessment year under consideration, the assessee earned dividend of Rs.1,38,21,353/- which was claimed as exempt income. The expenses disallowable for earning dividend income as per section 14A applying Rule 8D of the IT Rules was computed by the AO as follows:
4. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before ld. CIT(A), who has deleted the addition of Rs.1,33,24,914/, made by the AO. During the appellate proceedings, the assessee submitted before the CIT(A) that the assessee was engaged in the business of loan financing. During the year, the assessee had paid interest of Rs.2,02,76,317/- on the loans obtained and received interest of Rs.1,96,68,154/- on loans advanced in the course of business. Apart from the interest income, the assessee had also earned dividend of Rs.1,38,21,353/-. In the return of income filed u/s 139, the assessee suo moto invoked Rule 8D and disallowed a sum of Rs.7,31,043/- u/s 14A of the I.T. Act, 1961. The said disallowance comprised of interest of Rs.6,08,163/-and administrative expenses of Rs.1,22,880/-. After netting off the interest expenses with the interest income earned in the business of money lending, the net result was interest outgo of Rs.6,08,163/- which was entirely disallowed by the assessee u/s 14A of the Act. In addition to the foregoing the entire administrative expenses of Rs.1,22,880/- which was incurred during the year and debited to P&L A/c was also suo moto disallowed by the assessee. The Assessing Officer however in his impugned order completely ignored the facts of the case and mechanically invoked Rule 8D in computing disallowance of Rs.1,33,24,914/- u/s 14A in the most arbitrary and presumptuous manner. The Assessing Officer neither considered the disallowance suo moto offered by the assessee nor did he point out any infirmity or defect in the basis & manner of disallowance made by the assessee. The assessee submitted before the CIT(A) that the Assessing Officer computed disallowance of Rs.1,06,93,683/- with reference to interest u/s 14A r.w.r. 8D(2)(ii). While computing the disallowance, the Assessing Officer wrongfully ignored the interest income of Rs.1,96,68,154/- earned during the year and considered only the gross interest payment of Rs.2,02,94,822/- for the purposes of computing interest disallowance under Rule 8D(2)(ii). The assessee submits that such action of the Assessing Officer was grossly unjustified and bad in law.
5. After going through the submissions of the assessee, the ld CIT(A) held that during the year, the assessee company earned exempted dividend income of Rs.1,38,21,353/- and suo moto disallowed expenses of Rs.7,31,043/- u/s 14A of the Act in the computation of income. The disallowances comprised of – (i) interest expenses over interest earned, i.e. net interest expenses of Rs.6,08,163/- and (ii) entire administrative expenses debited of Rs.1,22,880/-. The AO, without recording his ‘satisfaction’ as to why he is not satisfied with the correctness of the claim of the assessee, computed the disallowance u/s 14A, applying the methods prescribed in Rule 8D. The ld CIT(A) noted that only ‘net’ interest expenditure is to be considered for the purposes of disallowances u/s 14A and where after setting off interest earned against interest expenditure no further interest expense remains then disallowance cannot be made u/s 14A. The ld CIT(A) observed that on the issue of disallowance of administrative expenses, the jurisdictional Tribunal in the case of DCIT Vs. M/s Trade Apartments Ltd (ITA No.1277/Kol/2011, dated 30/03/2012, had held that the expenses to be restricted to the extent of expenses claimed for deduction and not more. In this case, the assessee company had suo moto disallowed net interest expenditure and entire administrative expenses debited in the Profit &Loss Account. Therefore, ld CIT(A) held that no further disallowances should be made and this way he deleted the addition Rs.1,33,24,914/-.
6. Not being satisfied with the order of CIT(A), the Revenue is in appeal before us. The ld counsel for the assessee has defended the order passed by the ld CIT(A).On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.
7. Having heard the rival submission and perused the material available on record, we note that the interest expense incurred in the business of money lending was Rs.2,0276,317/-. In the course of its business of financing, the assessee borrows and lends monies. The assessee pays interest on the borrowed funds and earns interest on the loans advanced. Therefore, both the interest income and the interest payment are intrinsically linked. There is complete inter lacing of funds and therefore, for ascertaining the tax effect, netting off of interest paid with interest received is necessary. It is for this reason that the net interest is reflected in the profit and loss account. In the circumstances, the Assessing Officer should also have considered the interest on net basis. After setting off interest expense against the interest income, the assessee was let with negative figure of Rs.6,08,163/-which had been suo moto disallowed by the assessee in its entirety. Therefore, we are of the view that in these circumstances no further interest disallowance should be made. Respectfully following the judgment of coordinate Bench Kolkata in the case of DCIT Vs Trade Apartments Limited (ITA No.1277/Kol/2011) for Assessment Year 2008-09 wherein on exactly similar facts and circumstances the coordinate Bench held that the ‘net’ interest expenditure is to be considered for the purposes of disallowance u/s 14A and where after setting off interest earned against the interest expenditure no further interest expense remains then disallowance cannot be made u/s 14A of the Income-tax Act, 1961.
Considering the factual position explained above, we do not find any infirmity in the order passed by the ld CIT(A), therefore, we confirm the order passed by the ld CIT(A).
8. In the result, the appeal filed by the Revenue is dismissed.
Source- DCIT Vs Universal Industrial Fund Ltd. (ITAT Kolkata); ITA No.299/Kol/2016; 15/12/2017; 2009-10
