IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH `B' : NEW DELHI)
BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER
and
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.772/Del./2013
(Assessment Year : 2009-10)
DCIT, Circle 3 (1), vs. M/s. Cosmos International Ltd.,
New Delhi. 1, Aradhana Colony, Sector 13,
R.K. Puram,
New Delhi.
(PAN : AACCC7895A)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Ved Jain, Advocate and
Shri Venktesh Mohan, CA
REVENUE BY : Ms. Parwinder Kaur, Senior DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
This appeal filed by the revenue emanates from the order of CIT (Appeals)-
VI, New Delhi dated 23.11.2012 for the Assessment Year 2009-10.
2. The assessee is a company filed return of income declaring income at
Rs.1,36,18,360/-. The assessment was finalized by making disallowance u/s 14A of
the Income-tax Act, 1961 of Rs.19,59,692/- by applying Rule 8D being o.5% of the
average investment. The assessee filed the appeal and the CIT (A) granted the
relief by holding as under :-
"5. I have carefully considered the submissions made by the ld.
AR and have gone through the assessment order. It is an admitted
2 ITA No.772/Del./2013
fact that the appellant company during the relevant assessment year
has not earned either any exempt income or claimed any
expenditure for earning any exempt income. It is seen that during
the relevant assessment year the appellant company has shown
investment of Rs.2 crore which were actually invested in the
assessment year 2008-09. For convenience the details of investment
of Rs.2 crore as reflected in Schedule V of the audited balance sheet
are given below :
S.No. Date Investments Amount
1 12.10.2007 Sundaram BNP Paribas Carpex Rs. 50,00,000/-
opportunity fund
2 12.10.2007 Tata Infrastructure Fund Rs. 50,00,000/-
3 12.10.2007 Reliance Diversified Power Fund Rs. 50,00,000/-
4 06.11.2007 Sundaram BNP Paribas Carpex Rs. 25,00,000/-
opportunity fund
5 12.10.2007 Tata Infrastructure Fund Rs. 25,00,000/-
Total Rs.2,00,00,000/-
From the above chart it is clear that all the investments in
various Growth Oriented fund were made by the appellant company
in the assessment year 2008-09 and no new investment has been
made by the appellant company in the relevant assessment year
2009-10. The appellant company has also not claimed any exempt
income in its return of income. From further verification it is noted
that the invest et of Rs.2 crore were made by the appellant company
in the A.Y. 2008-09 from its own fund and no interest expenditure
has been incurred for making investment in these mutual funds. It is
further noted that the AO has not controverted the claim of the
appellant company regarding incurring of no interest expenditure.
It would be worthwhile to mention that Sub-section (2) of
section 14A provide that the Assessing Officer shall determine the
amount of expenditure incurred in relation to such income which
does not form part of the total income under the I.T.Act., in
accordance with such method as may be prescribed, if he, having
regard to the accounts of the assessee, is not satisfied with the
correctness of the claim of the assessee in respect of such
expenditure in relation to income which does not form part of the
total income under this Act. Further, the Central Board of Direct
3 ITA No.772/Del./2013
Taxes (CBOT) vide Notification No. 45/200S, dated March 24th,
2008 prescribed the method for determining the expenditure to be
disallowed under section 14A in relation to income not forming part
of the total income ~y inserting Rule-8D in the Income-tax Rules.
However, Rule-8D is not applicable in an automatic manner.
Rule 8D would be applied to determine the amount of disallowance
under section 14A, where the Assessing Officer, having regard to
the accounts of the assessee, is not satisfied with- (a) the correctness
of the claim of disallowance of expenditure made by the assessee;
or (b) the claim made by the assessee that no expenditure has been
incurred, in relation to income which does not form part of the total
income under the Act for such previous year.
If the AO is not satisfied with the correctness of claim of
disallowance of expenditure made by the assessee or the claim
made by the assessee that no expenditure has been incurred in
relation to income which does not fall part of the total income under
the Act for such a previous year, he shall determine the amount of
expenditure in relation to such Income In accordance with the
provisions of sub-rule (2).
The objective behind the section 14A was that expenditure
which has a bearing on exempt income should not be considered in
the computation of total income as otherwise this would result in
double advantage to the assessee. So in a nutshell, the conditions
for the invocation of rule 80 read with section 14A are as follows:
i. The AO should be satisfied that the claim of expenditure in
relation to tax free income has not been correctly made by the
assessee having regard to his accounts.
ii. The AO Should be recording his satisfaction a how the
assessee's calculation is incorrect.
iii. Even where the assessee's claim that no expenditure has been
incurred in relation to income which does not form part of total
income, the assessing officer will have to verify the correctness of
such claim.
iv. In case, the assessing .officer is not satisfied with the claim
of the assessee, then on the basis of objective criteria and after
giving the assessee a reasonable opportunity, he shall have to reject
the claim and state the reasons for doing so.
4 ITA No.772/Del./2013
Having doing so, the assessing officer will have to determine
the amount of expenditure incurred in relation to income which
does not form part of the total income under the said Act. He is
required to do so on the basis of a reasonable and acceptable
method of apportionment.
Now adverting to the present case it is seen that the AO has
applied rule 80 read with section 14A without establishing any
nexus between the borrowed funds and the investment made. The
AO has further relied upon the decisions of the Hon'ble Spl. Bench
ITAT Delhi in the case of Cheminvest Ltd. vs. ITO. A perusal of
the aforesaid case reveals that in the aforesaid case there was no
dispute about the fact that interest bearing funds were used for
making investment. As discussed earlier, in the present case of the
appellant, no interest bearing funds were used by the appellant
company for making investment, hence the facts of the present case
are clearly distinguishable from the facts of the Cheminvest Ltd.
(Supra) . Therefore, in my opinion the AO has erred in invoking
rule 80 in the present case without establishing any nexus between
the borrowed funds and the investment. In the case of CIT vs. Hero
Cycle Ltd. (supra) the Hon'ble Punjab & Haryana High Court has
held that where there is no exempt income claimed provisions of
section 14A cannot be invoked. Therefore, the addition made by the
AO is directed to be deleted."
3. Now, the revenue is in appeal by taking the following grounds of appeal :-
"01. Whether the Ld. CIT(A) has erred on facts and in law in
deleting the addition of Rs.19,59,692/- on account of disallowance u/s
14A ignoring the facts that -
(a) Assessee has incurred interest expenses and no bifurcation for
the same was submitted during the assessment proceedings.
(b) The Hon'ble ITAT in the case of M/s. Cheminvest Ltd. has
held that disallowance u/s 14A can be made even if no exempt
income has been earned or received by the assessee. .
02. The appellant craves leave for reserving the right to forego any
ground(s) of appeal at any time before appeal."
4. While pleading on behalf of the revenue, ld. DR submitted that the assessee
has incurred interest expenses and no bifurcation was provided during the
5 ITA No.772/Del./2013
assessment proceedings. In view of this fact, the Assessing Officer rightly applied
the Rule 8D by making the disallowance as the Assessing Officer was not satisfied
with the correctness of the claim of expenditure made by the assessee. He further
submitted that CIT (A) was not justified in observing that disallowance u/s 14A of
the Act cannot be made when there is no exempted income. He submitted that
when there is expenditure which has incurred to earn the exempted income there
may be an income or may not be an income for the year under consideration then
also disallowance has to be made as it will effect the correct taxable income for the
year under consideration. The expenditure can be allowed only when it has been
incurred wholly and exclusively for the business purpose. Once any expenditure
has been incurred to earn the exempted income, the income may not have been
realized during that year, however, the expenditure deserves to be disallowed by
applying the provisions of Rule 8D as it is related to the earning of exempted
income in the year or in future years.
5. On the other hand, ld. AR relied on the order of CIT (A) and pleaded that the
assessee was having own funds of more than Rs.7.7 crores which is evident from
page 3 of the paper book. He also pleaded that the assessee has made an investment
of Rs.2 crores in the mutual funds in the earlier years. There is no new investment
in the year under consideration. Same figure has been continuing as on 31.03.2009
which is also evident form page 3 of the paper book. No borrowed funds have been
utilized for earning exempted income. The investments were made in the preceding
years out of the assessee's own funds. It was also pleaded that net current assets of
the assessee was Rs.36.03 crores and borrowed funds were of Rs.32.15 crores on
6 ITA No.772/Del./2013
the opening day. On the closing day of the year, the borrowed funds reduced to
Rs.22.45 crores. This fact shows that the borrowed funds have been utilized for the
purpose of business only. Further, the borrowed funds from the bank were against
hypothecation of the current assets and as such were directly utilized for that
purpose. Since there was no change in the investment and also there was no income
received which is exempted from income. All these facts show that no
disallowance was deserved to be made as per Rule 8D. There was no dividend
income. There was no long term capital gain. No bank/financial institutions have
levied any charge or dues as recorded by Assessing Officer. The observations of
Assessing Officer that assessee has earned huge amount of dividend is also not
correct. The CIT (A) has correctly appreciated the fact and granted the relief to the
assessee. He also relied on the following decisions of Hon'ble High Courts :-
(i) CIT vs. Suzlon Energy Limited (2013) 354 ITR 630 wherein
Hon'ble Gujarat High Court has explicitly approved the decision of
ITAT by holding that disallowance u/s 14A is not justified where the
assessee's own funds far exceeds the investment made;
(ii) CIT vs. Winsome Textile Industries Ltd. 319 ITR 204 for the
proposition that section 14A does not have any application where the
assessee does not make any claim for exemption and where
investments are out of own funds;
(iii) ITAT, Ahmedabad decision dated 10.05.2013 in the case of DCIT vs.
Gujarat Narmada Valley Fertilizer Co. Ltd. 2013-TIOL-405-ITAT-
MUM and ITAT, Mumbai decision in the case of Shopper's Stop Ltd.
7 ITA No.772/Del./2013
vs. ACIT 2011-TIOL-581-ITAT-MUM for the proposition that
section 14A cannot be invoked where the assessee's own funds far
exceeds the investment made;
(iv) ITAT, Ahmedabad decision dated 05.12.2012 in the case of DCIT vs.
Jay Chemical Industries Ltd. in ITA No.97/Ahd/2012;
(v) ITAT, Mumbai Bench in the case of ITO vs. Strides Arcolab Ltd.
138 ITD 323 (Mum);
(vi) Hon'ble Bombay High Court decision in the case of CIT vs. Reliance
Utilities and Power Ltd. 313 ITR 340;
(vii) Hon'ble Punjab & Haryana High Court in the case of CIT vs. Hero
Cycles Ltd. 323 ITR 518 (P&H) for the proposition that the
disallowance u/s 14A is not permissible where there is no nexus
between expenditure incurred and income generated.
(viii) ITAT, Chennai dated 07.11.2013 in the case of DCIT vs. M/s. Allied
Investments Housing P. Ltd. in ITA No.305/Mds/2013 wherein the
disallowance made u/s 14A was deleted for the reasons that the
assessee did not make any fresh investment during the year which
could generate income in forthcoming years. The assessee incurred
interest expenditure under five major heads and none of which is
directly related to earning of exemption income and the Assessing
Officer has not pointed out any direct nexus between the interest
expenditure and exempt income;
8 ITA No.772/Del./2013
(ix) Hon'ble Gujarat High Court decision in the case of CIT vs. Corrtech
Energy (P.) Ltd. [2014] 45 taxmann.com 116 (Gujarat); and
(x) Hon'ble Allahabad High Court decision in the case of CIT vs. Shivam
Motors judgment dated 05.05.2014.
6. We have heard both the sides on the issue. Before us, the assessment year
under consideration is 2009-10 wherein the Rule 8D is applicable. The reliance
placed on by ld. AR on the following decisions is not applicable to the assessee's
case as these decisions are for the period prior to Rule 8D came into operation :-
(i) DCIT vs. Gujarat Narmada Valley Fertilizer Co. Ltd. 2013-TIOL-
405-ITAT-MUM Assessment Year 2001-02 & 200-03;
(ii) ITAT, Mumbai decision in the case of Shopper's Stop Ltd. vs. ACIT
2011-TIOL-581-ITAT-MUM Assessment Year 2006-07 & 2007-
08;
(iii) ITAT, Mumbai Bench in the case of ITO vs. Strides Arcolab Ltd.
138 ITD 323 (Mum) Assessment Year 1996-97;
(iv) CIT vs. Reliance Utiliies and Power Ltd. 313 ITR 340 Assessment
Year 1999-2000;
(v) CIT vs. Hero Cycles Ltd. 323 ITR 518 (P&H) Assessment Year
2004-05;
(vi) CIT vs. Lakhani Marketing Judgment dated 02.04.2014 of Hon'ble
Punjab & Haryana High Court Assessment Year 2001-02.
However, there are some decisions of ITAT which have been relied upon by the ld.
AR for the years where Rule 8D is applicable. After hearing both the sides, we hold
9 ITA No.772/Del./2013
that the Assessing Officer has not determined the claim of the assessee regarding
expenses whether there were any expenditure related to the earning of the exempted
income. Rule 8D can be applied where the Assessing Officer is not satisfied with
the claim of the assessee that no expenditure has been incurred to earn the exempted
income. In this case, the Assessing Officer has not fulfilled the onus of recording
the findings with regard to the expenditure incurred towards the income to be
earned which is exempted from the tax. In view of this, we hold that the CIT (A)
was justified in granting the relief to the assessee by holding that when there is no
nexus between the borrowed fund and investment made then no disallowance needs
to be made as no interest bearing fund utilized by the assessee for making the
investment. Therefore, we uphold the order of the CIT (A).
7. In the result, the appeal of the revenue stands dismissed.
Order pronounced in open court on this 28th day of August, 2014.
Sd/- sd/-
(I.C. SUDHIR) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 28th day of August , 2014
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)-VI, New Delhi.
5.CIT(ITAT), New Delhi.
AR, ITAT
NEW DELHI.
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