Overview
The people of the largest democracy in India, expected in the Union Budget 2018 to introduce some amendments to section 14A of the Income Tax Act, 1961 (Act), to reduce tax litigations on account of section 14A and to bring in certainty and clarity in the disallowance under Section 14A.
Section 14A of the Act (read with Rule 8D of the Income Tax Rules, 1962) is considered to be unfruitful litigation since the past decade.
Some of the prime factors to be considered in this relation are, whether an Assessee can claim that investments have been made entirely from Owned Funds, which are non‐interest bearing and hence no disallowance under section 14A of the Act is justified. Is mere presence of Owned Funds in excess of Investments on the Balance Sheet enough? If the assessee had furnished details that it had surplus own funds to make investments in shares and mutual funds and it had not used borrowed funds for such purpose, was disallowance of interest expenses under section 14A to be deleted?
Honorable Mumbai Tribunal in the case of Bennett Coleman & Co. Ltd. Vs ACIT (Mumbai) [2018] 89 taxmann.com 415 (Mumbai – Trib.) is the welcome decision, which lays down that when the assessee had claimed it had all the sufficient funds to cover investments in tax free securities which was corroborated by the financial audited report for various assessment years and the entire interest expenditure on borrowing fund was incurred in connection with the operating revenue which had been offered to tax and, no disallowance is required to be made under section 14A.
Further, the above citation also contains a second ground pertaining to section 50(B) slump sale, which is not dealt with this article.
Brief Facts
The assessee a company of the ‘Times Group’ is present in all media spectrums spanning across the print, internet, television, radio, outdoor etc. either directly or through subsidiaries.
During the A.Y. 2008-09 assessee earned an exempt dividend income of Rs.15.68 crores from investments in shares and securities and earned long term capital gain of Rs.51.22 crores on sale of equity shares and equity oriented mutual funds.
The assessee had surplus own fund wherein the share capital was Rs.32 Crores, reserves and surplus of Rs. 3,973 Cr and depreciation reserve of Rs. 843 Crores, further it had the investments in tax free income yielding and securities/investments to the tune of Rs. 3,123 Cr as on 31.3.2008 meaning thereby that the assessee has surplus funds to the extent of Rs. 1,725 Crores
The AO contented that the assessee has incurred interest expenditure and has not given exact details of the sources of the investments in shares and mutual funds and it could not be ruled out that part of the interest incurred had a proximate connection with the investments in tax free securities. Therefore, after giving show cause notice, the AO calculated the disallowance under section 8D(2)(ii) at Rs 8,21 lakhs and under section 8D(2)(iii) at 0.5% of the average investments at Rs. 966 lakhs, totaling to 1,787 lakhs
Further matter carried to Ld. CIT (A) and the Ld. CIT (A) has confirmed the same.
Key question for consideration
Whether disallowance under section 14A was warranted when the assessee had surplus has own funds to make tax-free investment
Arguments of the Appellant:
The company was not having any borrowing till 31 March 2006 and the assessee had surplus own fund as per audited balance sheet, the comparative chart of assessee own funds vis a vis investments right from 31 March 2006 to 31 March 2008 was submitted before the AO stating that assessee has sufficient interest free own funds to make investments in tax free income yielding securities.
Assessee has not incurred any expenses in relation either making of investments or earing of exempt income.
The company over the last few years has been on a rapid growth path. The potential of steep growth in print business encourage the management to embark on a detailed expansion plan.
The company has made additions of Rs.510 crores to its fixed assets and its turnover has also increased and the capital borrowing has come down to very nominal level.
During the A.Y. 2008-09 the company has incurred an interest expense of Rs.23.04 crores, out of which Rs.20.77 crores pertained to aforesaid borrowings and the balance pertained to statutory interest payments and interest on deposits.
So far as other expenses are concerned, the assessee has carried out investments activities and said expenditure has to be allocated to the exempt income on the basis of total income in respect of which assessee himself disallowed Rs.1,18,11,210/- under section 14A read with rule 8D(2)(iii).
Before invoking rule 8D the AO has not recorded any objective satisfaction that how the interest on borrowing was includable for disallowance as well as how the claim of disallowance of Rs.1,18,11,210/- made by the assessee at the time of filing the return was incorrect.
Judicial pronouncements relied upon:
- Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. [2009] 178 Taxman 135/313 ITR 340 (Bom.).
- Hon’ble Bombay High Court in the case of CIT Vs. HDFC Bank Ltd. [2014] 49 taxmann.com 335/226 Taxman 132 (Mag.)/366 ITR 505.
Arguments of the Revenue:
The Ld. D.R. submitted that there was no actual evidence on record that for each investment by the assessee, it had sufficient funds available and no working capital or other loans were utilized for investments in securities.
The Ld. D.R. submitted that assessee did not establish that no interest bearing funds or OD has been utilised. He also submitted that the assessee has not produced day to day cash flow statement to corroborate its averments. Thus, the comparison of share capital plus reserves vis-a-vis investments cannot lead to conclusion that the investments were made out of interest free funds.
Important observations of the Hon’ble Mumbai ITAT:
Assessee has produced the chart showing the summary of source and application of funds which was also available before the AO andfor the sake of better understanding of the facts:
It is clear from the records that the assessee has replied to show cause notice issued by the AO and furnished details before the lower authorities by means of above chart that the own funds over the years were sufficient to cover the investments in the shares and securities yielding exempt income.
The borrowings of the assessee company have been utilised for other business requirements and not for making the investments as such.
The entire interest expenditure on borrowing fund was incurred in connection with the operating revenue which has been offered to tax. Therefore, no disallowance is required to be made under section 14A of the Act.
Merit in the contention of the AR that no objective satisfaction has been recorded by the AO before invoking the provisions of section14A of the Act and the assessee is supported by the decision of the Hon’ble Jurisdictional Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 194 Taxman 203/328 ITR 81 (Bom.)
Further, the assessee had sufficient own funds and is squarel covered by the ratio laid down by the decision of the Hon’ble Bombay High Court in the case of Reliance Utilities & Power Ltd.(supra):
Conclusion
Following, the ratio laid down by the Hon’ble Bombay High Court inclined to set aside the order of CIT (A) on this issue and direct the AO to delete the disallowance as made under section 14A of the Act.
Key takeaways Appraisal of factual position
If the own funds are sufficient to meet the amount of investment yielding the exempt income, then a presumption would arise that the investment was made out of the own funds available with the assessee:
Also the following are the decisions in favour of the Assessee
- Reliance Utilities & Power Ltd (2009)(313 ITR 340)(Bom HC)
- UTI Bank Ltd. (2013) (215 Taxman 8) (Mag.)(Guj. HC)
- BNP Paribas (2013)(214 Taxman 548) (Bom. HC)
- HDFC Bank Ltd. (2014)(366 ITR 505) (Bom HC)
- Dhampur Sugar Mills Ltd.(2015) (370 ITR 187)(All HC)
- SBI DHFL Ltd (2015)(376 ITR 296)(Bom HC)
- Karnataka State Industrial & Infrastructure Development Corpn Ltd (2016)(237 Taxman 240)(Kar HC)
- Yes Bank Ltd. (2015)(68 SOT 291)(Mum ITAT)
- Bandekar Brothers (P.) Ltd (2015)(155 ITD 1171)(Panji ITAT)
- Yes Bank Ltd. (2015)(68 SOT 291) (Mum ITAT),
- Ferani Hotels Pvt Ltd (TS-715-ITAT-2014(Mum))
Controversy has always arisen as the department always insists to involve section 14A in the light of CBDT Circular No. 5/2014, dated 11-2-2014 which has clarified that all expenses pertaining to an exempt income will be disallowed, notwithstanding the fact that no such income has been earned during the financial year. However, various court have held that Section 14A disallowance couldn’t be kicked in when there was no exempt income earned by assessee.
Further, recently the Delhi High Court PCIT v. IL & FS Energy Development Company Ltd. [2017] 84 taxmann.com 186 (Delhi) had expressed a clear disagreement with the CBDT’s circular and held that where there is no exempt income in relevant year, there cannot be a disallowance of expenditure under section 14A.
In view of the above discussion, the assessee’ s are expecting an amendment with respect to Section 14A of the Act to clarify that disallowance under Section 14A shall be restricted to the extent of exempt income earned during the financial year.
Right from the introduction of section 14A of the Act, has always been a matter of controversy and litigation, be its applicability or computation of disallowance. the assessee’ s are further expecting an amendment from the Central board of Direct Taxes on bringing some certainty in this provision.
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