No Section14A read with Rule 8D Disallowance in Absence of Exempt Income

DCIT Vs Dcom Systems Limited (ITAT Ahmedabad)

The case of DCIT vs. Dcom Systems Limited, as heard by the Income Tax Appellate Tribunal (ITAT) in Ahmedabad, revolves around an appeal filed by the Revenue against the Commissioner of Income Tax (Appeals)-1, Ahmedabad. The dispute pertains to the assessment order for the Assessment Year 2014-15 under section 143(3) of the Income Tax Act, 1961.

Facts of the Case: Dcom Systems Limited, engaged in the manufacturing and trading of metal equipment, filed its income tax return for the Assessment Year 2014-15, declaring a loss of Rs. 53,01,335/-. The return underwent scrutiny assessment, resulting in the disallowance of interest expenses amounting to Rs. 2,61,90,163/ and a further disallowance of Rs. 29,85,830/- under section 14A read with Rule 8D. The total assessed income was determined as Rs. 2,38,16,658/-.

The appellant, aggrieved by the assessment, filed an appeal before the Commissioner of Income Tax (Appeals), challenging the disallowances made by the Assessing Officer.

Commissioner of Income Tax (Appeals) Decision:

i. Disallowance of Interest Expenses (Section 36(1)(iii)): The Commissioner of Income Tax (Appeals) considered the appellant’s submission that the advances made to Jaihind Projects Ltd. (JPL) were in the nature of share investment, not loans. The appellant argued that the funds given to JPL were for business expediency, as required by lending banks, and were interest-free. The Commissioner, after considering various judicial pronouncements, found that the disallowance under section 36(1)(iii) was not justified. The disallowance was restricted to Rs. 16,05,213/-, and the balance was directed to be deleted.

ii. Disallowance under Section 14A read with Rule 8D: The Commissioner observed that the appellant had not earned any exempt income from investments during the year. Relying on judicial precedents, including the decision in CIT vs. Corrtech Energy Pvt. Ltd., the Commissioner held that disallowance under section 14A read with Rule 8D cannot be made when no exempt income is earned. The disallowance of Rs. 29,85,830/- was deleted.

Appeal before the Income Tax Appellate Tribunal:

The Revenue appealed the Commissioner’s decision before the Income Tax Appellate Tribunal, raising two grounds:

i. Disagreement with the restricted disallowance of interest expenses.

ii. Disagreement with the deletion of the disallowance under section 14A read with Rule 8D.

Income Tax Appellate Tribunal Decision:

The Income Tax Appellate Tribunal considered the arguments presented by the Revenue and the findings of the Commissioner. The Tribunal noted that the appellant had interest-free funds exceeding the advances made, and the disallowance under section 36(1)(iii) was limited to Rs. 16,05,213/-. The Tribunal found no infirmity in the Commissioner’s order in this regard.

Regarding the disallowance under section 14A read with Rule 8D, the Tribunal concurred with the Commissioner’s decision, emphasizing that no exempt income was earned from investments. The Tribunal dismissed the appeal filed by the Revenue.

Conclusion:

The case of DCIT vs. Dcom Systems Limited highlights the importance of establishing a nexus between interest-bearing funds and advances when making disallowances under section 36(1)(iii). Additionally, it underscores that disallowances under section 14A read with Rule 8D should be based on the presence of exempt income. The Tribunal’s decision reflects a thorough consideration of the facts and applicable legal principles, resulting in the dismissal of the Revenue’s appeal

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal is filed by the Revenue as against the appellate order dated 30.05.2017 passed by the Commissioner of Income Tax (Appeals)-1, Ahmedabad arising out of the assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year 2014-15.

2. The brief facts of the case is that the assessee is a company engaged in the business of manufacturing and trading of metal equipments. For the Assessment Year 2014-15, the assessee filed its Return of Income on 30.11.2014 declaring a loss of Rs.53,01,335/-. The return was taken up for scrutiny assessment and interest expenses of Rs. 2,61,90,163/- was disallowed, since the above interest expenses incurred were other than the business purposes and not allowable u/s. 36(1)(iii) of the Act. The Ld. A.O. also made disallowance u/s. 14A r.w. Rule 8D of Rs. 29,85,830/-and assessed the total income as Rs.2,38,16,658/-.

3. Aggrieved against the same, the assessee filed an appeal before Commissioner of Income Tax (Appeals). After considering various submissions and judicial precedents, the Ld. CIT(A) restricted the disallowance u/s. 36(1)(iii) to the extent of Rs. 16,05,213/- by observing as follows:

“…After considering facts of the case and various judicial pronouncements as argued by A.R of the appellant(supra), the utilization of funds, interest free loans and advances given and availability of interest-free funds with the appellant it can be seen that the appellant has given total advances of Rs.26,15,95,884/-. It is also seen that total interest free funds available comes to Rs. 28,40,84,158/- against which the interest free advances are Rs.26,15,95,884/- only which is less than the amount of interest free funds available. The appellant has stated that amount given as advances (as above) to Jaihind Projects Ltd (JPL) are in the nature of share investment and not in the nature of loans and advances The appellant company has made strategic investment in JPL and as per the terms of lenders and the Corporate Debt Restructuring Package approved by the CDR cell which is govered by Reserve Bank of India. The funds given to Jaihind Projects Ltd (JPL) were as per the requirement of lending banks to infuse funds by promoters in the JPL Accordingly, the same was for business expediency to give the funds to JPL by the Appellant without interest. Further, the Appellant contended that the amount was not in the nature of loans and advances but the same is to be converted into equity investment and in view of this it was not be disallowed under section 36(1)(ii) of the Act.

In view of the above submission of the appellant and also on the facts, as the A.O. has not established as to how the advances made to subsidiary company Jaihind Projects Ltd (JPL), is made out of the interest bearing funds. It is seen that total interest free funds available comes to Rs.28,40,84,158/- against which the interest free advances are Rs 26,15,95,884/- only which is less than the amount of funds available. It can be safely held as has been held in by Hon’ble Gujarat High Court in case of Gujarat Narmada Valley Fertilizers Co. Ltd. that if the company is having own funds far excess than advance to the sister concern and without establishing the nexus by the assessing officer the disallowance of interest u/s 36(1)(iii) is not justified. Hon’ble Supreme Court held in case of S.A. Builders that interest free advance given for commercial expediency, the interest is not disallowable In the case of the advance made to subsidiary company Jaihind Projects Ltd (JPL), the appellant has fulfilled both the conditions – the advances given are from the interest free funds and are given for commercial expediency/business purposes. In view of the above facts and the various judicial pronouncements(supra), the submission by the appellant seems to be acceptable for the reasons discussed as above. However, in the cases sr nos. 2 to 7 of the table on page 16 of this order in the cases of Tolani Projects Pvt. Ltd, Hiranand Thakor Das, Gunjan Suresh Aswani, Manghan Das Thaoomal, Sushila N. Aswani have been made for non-business purposes and interest has not been charged. Therefore, addition to the extent of Rs.16,05,213/- added by the A.O. u/s. 36(1)(iii) of the Act is confirmed. Accordingly, the disallowance of interest u/s. 36(1)(iii) is restricted to Rs. 16,05,213/- and the balance addition of Rs. 2,45,84,950/- is directed to be deleted. The ground of the appellant is partly allowed.”

3.1. Regarding the ^2nd issue namely disallowance u/s. 14A r.w. Rule 8D of Rs. 29,85,830/-, the Ld. CIT(A) deleted the entire addition since there is no exempt income earned by the assessee during the year by observing as follows:

“5. I have carefully considered the assessment order and the submission filed by the appellant. It is noticed that Assessing Officer has made disallowance by invoking provisions of section 14A read with Rule 8D and same is worked out as under:-

5.1. The Assessing Officer has observed that appellant has made investment to the tune of Rs. 58,90,44,892/- as on 31/03/2014 hence, following the decision of Hon’ble Bombay High Court in case of Godrej & Boyce mfg. Co. Ltd., disallowance u/s 14A r.w. Rule 8D is required to be made. He has further observed that appellant must have incurred administrative expenditure which is attributable to investment portfolio. He has relied upon decision of Delhi special bench in case Cheminvest Ltd. and observed that for the purpose of disallowance u/s 14A, there is no requirement that actual income need to be earned. On the other hand, appellant has argued that since no exempt income is earned from investment made by it, following decision of Hon’ble Gujarat High Court in case of CIT Vs Corttech Energy Pvt. Ltd. (45 Taxmann.com 116), no disallowance should be made. It was argued that it has sufficient interest free own funds to cover above investments hence proportionate disallowance of interest expenditure cannot be made. So far as disallowance of administrative expenditure, appellant has contended that entire expenditure is incurred for the purpose of its business hence such disallowance of presumptive basis cannot be made.

5.2. On careful consideration of observation of Assessing Officer and contention of appellant, it is observed that during the year under consideration, appellant has not earned any exempt income from investments made by it which is apparent from audited annual accounts as well as computation of total income as submitted before Assessing Officer as well as in appellate proceedings. The Hon’ble Gujarat High court in the case of CIT Vs. Corrtech Energy Pvt. Limited (45 Taxmann.com 116), on identical issue of disallowance u/s 14A when no dividend income is earned by assessee, has held as under:

“4 Counsel for the Revenue submitted that the Assessing Officer as well as CIT(Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 2009­2010 Since in the present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that sub-section(1) of section 14A provides that for the purpose of computing total income under chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed as under

7. We do not find any merit in this submission. The judgment of this court in Abhishek Industries Ltd (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application.”

14. We do not find any question of law arising. Tax Appeal is therefore dismissed”

5.3. Further, Hon’ble Ahmedabad ITAT in case of Shah Alloys Ltd [2315/Ahd/2010], dated 27/03/2015 following the decision of Corrtech Energy Pvt. Ltd. (referred supra), held as under:

“The Authorized Representative of the assessee has relied on the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Corrtech Energy (P) Ltd, reported in (2014) 272 CTR 262 (Guj.)(HC), wherein it has been held that where the assessee has not made any claim for exemption of any income from payment of tax, no disallowance could be made us 14A of the Act. The Departmental Representative has not disputed the submission of the assessee that during the assessment years under consideration the assessee has not claimed any income as exempt from tax in its Return of Income filed. Therefore, respectfully following the decision of Hon’ble Gujarat High Court in the case of Corrtech Energy (P) Ltd (supra), we delete the disallowance of expenditure made u/s 14A read with Rule 8D of Rs. 1,60,45,775/- in the Assessment Year 2007-08 and Rs. 2,04,30,869/- in the Assessment Year 2008-09. Thus, this ground of appeal of the assessee is allowed in both the years under appeal.”

5.4. Further, Hon’ble Delhi High Court in case of Holcim India Pvt. Ltd. (ITA No. 486/2014 & ITA No. 299/2014), Hon’ble Allahabad High Court in the case of CIT v/s. Sivam Motors Pvt. Ltd. in I.T. Appeal No.88 of 2014 dated 5.5.2014 on identical facts decided the issue in favour of assessee. Recently, Hon’ble Madras High Court in the case of Redington (India) Ltd. v Additional Commissioner of Income-tax, Co. Range-V, Chennai T.C.A. NO. 520 OF 2016 [2017] 77 taxmann.com 257 (Madras) has held as under:

“15. The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC) The language of s. 14A (1) should be read in that context and such that it advances the scheme of the Act rather than distort it.

16. In conclusion, we are of the view that the provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum i.e. in the absence of exempt income. The questions of law are answered in favour of the assessee and against the department and the appeal allowed. No costs.”

5.5. Considering the facts of appellant’s case as discussed herein above along with decisions referred supra, it is held that disallowance u/s 14A r.w. Rule 8D cannot be made as appellant has not earned any exempt income. In the nutshell, disallowance u/s 14A made by Assessing Officer for Rs.29,85,830/- is deleted. In the result, this ground of appeal is allowed.”

4. Aggrieved against the same, the Revenue is in appeal before us raising the following Grounds of Appeal:

(a) That the ld. CIT(A) has erred in law & facts in restricting the addition of Rs.2,61,90,163/- to Rs. 16,05,213/- made by the Assessing Officer on account of disallowance of interest expenses.

(b) That the ld.CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 29,85,830/- made by the Assessing Officer u/s 14A rows. 8D of the 1.T. Act.

5. None appeared on behalf of the assessee in spite of service of notices. Today is the 42nd time of hearing of the above appeal. In earlier occasions, Ld. A.R. Mr. V.K. Parikh has withdrawn his Letter of Authority as he is unable to contact the assessee as well as the briefing Counsel. It is thereafter notices were served through Income Tax Department by affixture, however none appeared on behalf of the assessee. So with the materials available on record, we proceed to hear the appeal with the assistance of Ld. Sr. D.R.

6. Ld. Sr. D.R. Ms. Neeju Gupta appearing for the Revenue supported the order passed by the Assessing Officer. The Ld. CIT(A) erred in restricting the interest disallowance made u/s. 36(1)(iii) and deleting disallowance made u/s. 14A r.w. Rule 8D of the Act. However the Ld. D.R. could not place any material contrary on record or distinguish the findings arrived by Ld. CIT(A).

7. We have given our thoughtful consideration and perused the materials available on record. It is undisputed fact that the assessee had interest free funds of Rs. 28,40,84,158/- against which it has advanced money to the extent of Rs. 26,15,95,884/-which is less than the interest free funds available with the assessee. The Ld. A.O. has ignored the fact that the amount given as advances to Jaihind Projects Ltd. (JPL) in the nature of share investment and not in the nature of loans and advances. The assessee company has made strategic investment in JPL and as per the terms of lenders and the Corporate Debt Restructuring Package approved by the CDR cell which is governed by Reserve Bank of India, the assessee made further share investment. However the Ld. A.O. only considered that amount invested is to be disallowed. The Ld. CIT(A) held that the funds given to JPL were as per the requirement of lending banks to infuse funds by promoters in the JPL which is business expediency to give the funds to JPL without interest. The above investments were converted into equity shares, in view of the same, the disallowance made u/s. 36(1)(iii) of the Act is not justified relying upon Gujarat High Court judgment in the case of Gujarat Narmada Valley Fertilizers Co. Ltd. and Supreme Court judgment in the case of S.A. Builders. However the Ld. CIT(A) has agreed with the remaining interest payments are for non-business purposes and thereby confirmed the disallowance made u/s. 36(1)(iii) of the Act of Rs. 16,05,213/-. We do not find any infirmity in the above finding of the Ld. CIT(A) and the Revenue could not place any material on record in substantiating its ground before us. Therefore Ground No. 1 raised by the Revenue is hereby dismissed.

8. Regarding the ^2nd ground, it is an admitted fact that the assessee has not received any dividend income against the investments made by it. Therefore the Ld. CIT(A) following Jurisdictional High Court judgment in the case of CIT vs. Corrtech Energy Pvt. Ltd. 45 com 116 held that no disallowance u/s. 14A should be made and deleted the addition made by the A.O. It is further seen that the Ld. CIT(A) has followed Co-ordinate Bench of this Tribunal following Gujarat High Court Judgment of Corrtech Energy Pvt. Ltd. as well as other High Court judgments on this issue. We do not find any infirmity in the order passed by the Ld. CIT(A). Thus this Ground No. 2 raised by the Revenue is devoid of merits and the same is rejected.

9. In the result, the appeal filed by the Revenue is hereby dismissed.

Order pronounced in the open court on 10-11-2023