Introduction In a recent pivotal decision by the Income Tax Appellate Tribunal (ITAT) of Delhi, the case between ITO and Mission Holding Pvt. Ltd. highlighted the intricacies of disallowance under section 14A of the Income Tax Act. The crux of the verdict revolves around the treatment of revenue expenses, especially when they aren’t claimed in Profit and Loss accounts.
1. Background of the Case The appeal for the assessment years 2013-14 and 2014-15 revolved around the disallowance under section 14A. These appeals were heard together due to the similarity of issues and were given a consolidated order.
2. Financials and AO’s Stance In the AY 2013-14, receipts from dividend income were shown to be Rs. 1,34,69,000/-. Against this, there was a finance cost of Rs. 1,14,59,958/-, and other expenses amounting to Rs. 5,93,858/-. The Assessing Officer noted that the interest expenses, instead of being claimed as revenue expenditure, had been capitalized. As a result, a hefty disallowance under section 14A amounting to Rs. 37,29,54,271/- was computed.
3. Ld. CIT (A) Observations The Ld. CIT (A) deleted the addition made by the Assessing Officer. The crux of the Ld. CIT (A)’s reasoning was that the interest expenses capitalized by the appellant should not be treated as revenue expenditure for computing disallowance under section 14A of the IT Act.
4. Absence of the Assessee Despite multiple notices, no representation was made on behalf of the assessee. However, it was noted that the only income received during the year by the assessee was a dividend income of Rs. 1,34,69,000/- from investments in shares of Feedback Infra Ltd.
5. ITAT’s Decision Upon careful examination, the ITAT held that if no expenditure has been claimed in the profit and loss account, it cannot be disallowed under section 14A. Thus, there was no reason to deviate from the findings of the Ld. CIT(A).
6. Assessment for Year 2014-15 For the subsequent year, a similar issue arose regarding disallowance under section 14A. The tribunal found no justification in the Assessing Officer’s action to treat the interest expenditure, unclaimed in the profit and loss account, as a revenue expense for disallowance purposes under section 14A.
7. Final Verdict The tribunal dismissed the appeal from the Revenue and allowed the appeal of the assessee, cementing the stance on the treatment of interest expenditure.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal for assessment year 2013-14 has been filed by the Revenue against the order dated 1.8.2018, passed by the Ld. CIT(A)-28 and appeal for assessment year 2014-15 has been filed by the assessee against the order dated 30.11.2017. Since in both the years the issue pertains to disallowance under section 14A therefore the same were heard together and are being disposed of by way of consolidated order.
2. Brief facts qua the issue raised in assessment year 2013-14 are that the Ld. Assessing Officer has noted that assessee has shown receipts from dividend income amounting to Rs. 1,34,69,000/- and as against this, assessee has shown finance cost of Rs. 1,14,59,958/- and other expenses of 5,93,858/- and finally profit of Rs. 14,15,184/- were shown as dividend income claimed as exempt. Ld. Assessing Officer noted that assessee has made long term investment in shares of various companies by taking borrowed funds of which interest of Rs. 35,86,47,745/- was paid. However the assessee instead of claiming it as revenue expenditure has capitalised the cost of interest, i.e., it has not been claimed in the profit and loss account. The Ld. Assessing Officer held that assessee was not justified in capitalization the interest to the cost of investments in shares and such interest paid is purely revenue expenditure. He accordingly treated the entire interest expenses of Rs. 35,86,47,745/- and he computed the disallowance under section 14A at Rs. 37,29,54,271/-.
3. The Ld. CIT (A) has deleted the addition after observing and holding as under:-
“3.2 I have considered the facts of the issues, basis of disallowance made by AO and submissions of the appellant. As can be seen from the assessment order, the interest expenses capitalized by appellant have been treated as revenue expenditure by AO and taken into consideration for computing the disallowance u/s 14A of IT Act. However, the AO has taken the wrong figure i.e. Rs. 35,86,47,745/- for the purpose of computing disallowance u/s 14A of the IT Act whereas the correct figure is Rs. 18,15,36,339/-, as mentioned by appellant in its submission. Further, there was no justification on the part of AO to treat the said interest expenses as revenue expenditure and allowing it as business expenditure when the appellant itself has disallowed it by capitalizing. Moreover, the expenses disallowed by AO cannot exceed to the exempt income shown by appellant in view of the decision of Hon’ble Jurisdictional High Court in the case of Joint Investment Pvt. Ltd vs. CIT. Therefore, there was no logic behind whole of the exercise carried out by AO. As can be seen from the computation of income, the appellant itself has disallowed all the expenses, except Rs. 5,93,858/- as other expenses which are not related to dividend income, therefore, there was no rationale in treating the capital interest expenditure as revenue expenditure. Since the appellant itself has suo motu disallowed the expenses against the dividend income and any disallowance cannot go beyond the exempt income shown by assessee in view of the decision of Jurisdictional High Court, as mentioned above, the disallowance made by AO is unjustified and deserves to be deleted. I, therefore, delete the addition made by him and allow the grounds taken by the appellant.”
4. None appeared on behalf of the assessee despite several notices sent on the address mentioned in the Form 36. Accordingly the appeal is being decided on the facts brought on record as well as written submissions filed by the assessee. The only income which has been received during the year by the assessee is dividend income of Rs. 1,34,69,000/- from the investment held in the shares of Feedback Infra Ltd. As per profit and loss account assessee has shown following revenue and expenses:-
|a) Revenue from operations Dividend Income||Rs. 1,34,69,000|
|Financing Cost||Rs. -1,14,59,958|
|Other Expenses||Rs. – 5,93,858|
|Profit before Tax||Rs. 14,15,184|
|Provisions for Taxes||NIL|
|Profit Transferred to G. Res.||Rs. 14,15,184|
4. Before us Ld. CIT (DR) submitted that the Ld. Assessing Officer had given categorical reasons which are reproduced as under:-
“Reasons for applying section 14A and Rule 8D
1. The dividend of Rs. 1, 34, 69,000/- received during the year from such investments has been claimed by the assessee as exempt / tax free.
2. Interest of Rs.35,86,47,745/- paid and capitalized during the previous year relevant to assessment year 2013-14 and claimed as cost of acquisition, is not allowable as discussed above. Since it is of the nature of Revenue and is subject to disallowance under section 14A read with Rule 8D.
3. The assessee company has huge investments in the form of shares of its sister concern and is earning huge dividend income of Rs. 1,34,69,000/- claimed as exempt u/s 10 (34) / tax free under the provisions of the Act.
4. The assessee company has not been carrying on its main business activity but has been paying huge amount of interest on money borrowed for acquisition of shares. To service its debts the company had been taking further loans and capitalizing the interest paid.
5. The amount of interest paid during the year is not debited to Profit & Loss account probably to escape attention of the assessing authorities and to avoid disallowance u/s 14A read with Rule 8D.
6. The accounts of the assessee company have not been drawn properly and in accordance with well laid down accounting standards.”
Ld. CIT DR submitted that, here in this case even if the dividend income is Rs. 1,34,69,000/-, then same should have been restricted to dividend income if at all the Ld. CIT(A)’s finding is to be followed.
5. First of all on the perusal of material placed on record, it is seen that the assessee has not claimed any interest expenditure in the profit and loss account and once no expenditure has been claimed in the profit and loss account the same could not have been disallowed under section 14A. In the computation of income the assessee has only claimed expenditure of Rs. 5,93,858/- which was disallowed. Thus on these facts we do not find any reason deviate from the findings of the Ld. CIT(A) the same has been confirmed and the appeal of the Revenue is dismissed.
6. In assessment year 20 14-15 assessee has challenged the disallowance under section 14A of Rs. 1,20,88,083/- and against this Assessing Officer has worked out disallowance at Rs. 2,77,58,713/- under Rule 8D. The Ld. CIT (A) has restricted disallowance under section 14A to the extent of exempt income. On the perusal of the assessment order it is seen that assessee has incurred interest expense of Rs. 27,73,927/- which has been capitalised and not claimed as an expenditure which Ld. Assessing Officer has held that same should be treated as revenue expenditure. We do not find any justification by the Assessing Officer to treat the interest expenditure which has not been claimed in the profit and loss account and treat it as revenue expense for the purpose of disallowance under section 14A. Further, Assessing Officer has not given any finding or recorded any satisfaction as to why suo moto disallowance of Rs. 1,20,89,893/- made by the assessee for earning of exempt income of Rs. 1,34,69,000/- is not correct having regard to the nature of expenses debited or incurred. The Ld. CIT (A) has simply restricted the disallowance to the exempt income without any even commenting the suo moto disallowance of the assessee. Accordingly we do not find any justification in making further disallowance to what has been suo moto disallowance made by the assessee. Accordingly grounds raised by the assessee are allowed.
7. In the result, the appeal of the Revenue is dismissed and the appeal of the assessee is allowed.
Order pronounced in the open court on 26th July, 2023.