Referred Sections:
Section 143(3) of the Income Tax Act, 1961.
Section 14A of the Income Tax Act
Section 80IC of Income Tax Act, 1961
Sub-section (2),
Sub-section (3),
Sub section 93).
Section 14A r.w.r. 8D of Income Tax
Referred Cases / Judgments:
Pr. CIT vs. Nirma Credit & Capital (P.) Ltd. (supra),
DCIT vs. Asset Pvt. Ltd. (supra),
DCIT vs. Machino Finance Limited (supra)
DCIT vs. Trade Apartment Limited (supra),
Pandian Chemicals Ltd. Vs. CIT [262 ITR 278 (SC)],
DCIT vs. Himachal Exicom Communication.
DCIT vs. Himachal Exicom Communications to support his claim.
CIT Vs. Sterling Food has held that there must be for the application
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH: `A': NEW DELHI)
BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER
AND
SHRI ANADEE NATH MISSHRA, ACCOUNTANT MEMBER
ITA No:- 4657/Del/2016
(Assessment Year: 2012-13)
A.G. Industries Pvt. Ltd., ACIT, Circle-1(1),
House No. 26, Anandlok, Vs New Delhi
New Delhi
PAN-AAACA0885C
APPELLANT RESPONDENT
Appellant by Sh. Ashwani Kumar, C.A.
Respondent by Sh. Sanjay Kapoor, Sr. DR
ORDER
PER ANADEE NATH MISSHRA, AM
[A]. This appeal has been filed by the assessee against the order
dated 24.06.2016 passed by Learned Commissioner of Income
Tax(Appeals)-I, New Delhi [in short "Ld.CIT(A)"] pertaining to
assessment year 2012-13. The Assessee has raised following grounds
of appeal:-
1. That order passed u/s 250(6) of the Income Tax Act, 1961 is against
law and facts on the file in as much as the Ld. Commissioner of
Income Tax (Appeals) was not justified to arbitrarily uphold
disallowance u/s 14A read with Rule 8D amounting to Rs.
7,24,291/- pertaining to the taxable unit of the appellant and Rs.
6,48,149/- pertaining to exempted Haridwar unit (Total Rs.
13,72,440/-).
2. That the Ld. Commissioner of Income Tax (Appeals) was further not
justified to uphold action of the Ld. Assessing Officer in disallowance
of deduction u/s 80-IC amounting to Rs. 28,81,388/-.
ITA No: - 4657/Del/2016
3. That the Ld. Commissioner of Income Tax (Appeals) was further not
justified in upholding the action of the Ld. Assessing Officer in not
allowing deductions u/s 80-IC on disallowed amount of Rs.
6,48,149/- u/s 14A.
[B]. Assessment order dated 27.3.2015 was passed by the AO under
section 143(3) of the Income Tax Act, 1961. In this assessment order,
the Assessing Officer made a further disallowance of Rs. 13,72,440/-
under section 14A of the Income Tax Act r.w.r. 8D Income Tax Rules in
addition to suo moto disallowance of Rs. 01,18,44,660/- made by the
assessee under section 14A. Further the Assessing Officer disallowed
an amount of Rs. 28,81,388/- out of deduction under section 80IC of
Income Tax Act, 1961 amounting to Rs. 32,49,88,100/- claimed by the
assessee. The relevant portions of the assessment order as reproduced
below for ease of reference:-
Disallowance u/s 14A read with Rule 8D
During the year assessee has earned exempt income/Dividend
income of Rs.2,33,42,646/- and made disallowance of Rs.
1,18,44,660/- on account of expenditure incurred in relation to the
said income u/s 14A. Out of this disallowances of Rs. 50,86,500/-
has been made in Taxable Units and Rs. 67,58,160/- in Exempt
Unit. In this connection the assessee has submitted detailed
working of disallowances u/s 14A made as per computation of
income. Submission / calculation of the assessee is analyzed in
light of the method prescribed as per Rule-8D of the I.T. Rules, in
the following table.
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ITA No: - 4657/Del/2016
4] Disallowances on account of excess claim of deduction u/s 80 IC
As per form 10 CCB the assessee has claimed deduction u/s 80 IC in
Haridwar Unit to the tune of Rs. 32,49,88,100/-. The said deduction has
been claimed on profit and gains of Rs.36,22,45,554/-. The said profit and
gains include other income (interest) of Rs. 28,81,388/-. The assessee was
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ITA No: - 4657/Del/2016
asked to explain that why deductions u/s 80 IC should not be disallowed
on other income (interest) of Haridwar Unit.
Assessee vide letter dated 16.03.2015 submitted that the assessee
has earned interest at Rs. 2881388/-from the FDRs etc which are
prepared for margin money etc. Otherwise also, it is pertinent to
mention that the assessee has paid huge Finance Cost (i.e. Interest)
for the said Eligible unit. The interest earned is less than the interest
Paid and the assessee could have shown the Net Interest after set
off the same within the interest head. It is also not out of place to
mention here that the interest income earned would have not been
there had the funds not invested and were utilized directly for the
eligible business and would have reduced the Finance Cost (Interest
paid).Therefore, the Interest Earned is actually, in view of the above
discussions, is part and parcel of the income derived from the
eligible Unit only. It is a matter of presentation only. Notwithstanding
anything contrary to here in above, had there been no Interest
expenses and only Interest Income, it can be said that the assessee
had earned Interest purely on investments.
The explanation of the assessee is not acceptable. Section 80IC of the
Income Tax Act, 1961 provides that,
"(1) Where the gross total income of an assessee includes any profits and
gain derived by an undertaking or an enterprise from any business
referred to in sub-section (2), there shall, in accordance with and subject to
the provisions of this section, be allowed, in computing the total income of
the assessee, a deduction from such profits and gains, as specified in sub-
section (3).
(3) The deduction referred to in sub-section (1) shall be-(i) in the case of any
undertaking or enterprise referred to in sub-clauses (i) and (iii) of clause (a)
of sub-clauses (i) and (iii) of clause (B), of sub-section (@), one hundred
percent of such profits and gains for ten assessment years commencing
with the initial assessment year;
(ii) in the case of any undertaking or enterprise referred to in sub-clauses
(ii) of clause (a) of sub-clauses (ii) of clause (b) of sub-section (2), one
hundred percent of such profits and gains for five assessment years
commencing with the initial assessment year and thereafter twenty- five
percent of profit and gains.
As per above, it is established that the deduction u/s 80IC of IT' Act, 1961
shall be allowed on the profits and gains from business. However the
interest income earned shall be taxed under `Income from Other Sources'.
Hence, it is clear that interest from fixed deposits is not entitled for
deduction u/s 80IC of the Act. Reliance is placed in the case of Pandian
Chemicals Ltd. Vs. CIT [262 ITR 278 (SC)], wherein the apex court held that
`Derivation of interest on profits on deposit with the Electricity Board could
not be said to be flowing directly from the industrial undertaking and,
therefore, deduction under section 80HH could not be allowed in respect
thereof."
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ITA No: - 4657/Del/2016
In view of the above facts, it is clear that the assessee is not entitled for
deduction u/s 80 IC of IT Act on interest income from fixed deposits of Rs.
28,81,388/- and the same is being disallowed.
(Addition: Rs. 28,81,388/-)
In view of above discussions I am satisfied that assessee has furnished
inaccurate particulars and concealed his income. Therefore, penalty
proceedings u/s 271(1) (c) is initiated separately."
[C] The assessee filed appeal before the learned CIT(A), who
confirmed both the aforesaid additions. The relevant portions of the
aforesaid impugned appellate order dated 24.6.2016 are reproduced as
under for the ease of reference:-
"I have considered the submission of the appellant and
observation of the AO made in the assessment order on the issue It is
seen that the AO has disallowed Rs. 1,32,17,100/- as expenses
pertaining to earning exempt income as against 1,18,44,660/-
disallowed by the appellant in the computation of income. The
appellant has calculated the cost of interest incurred by reducing the
amount of interest income earned by the appellant from the gross
interest expenses While working out disallowance the appellant has
taken the net interest expenses after reducing the interest earned by it
from the interest expenses whereas the AO has taken the interest cost
as gross interest expenditure incurred by the appellant for working out
disallowance under rule 8D On going through the provisions of Rule 8D,
it is seen that for working out disallowance the amount of interest
expenditure incurred by the appellant during the previous year has to
be taken for working out disallowance The provision of Rule 8D (2) (ii) is
reproduce hereunder: -
"In a case where the assessee has incurred expenditure by way of
interest during the previous year which is not directly attributable to
any particular income or receipt, an amount computed in accordance
with the following formula, namely: -
AX B
C
Where A= amount of expenditure by way of interest other than the
amount of interest included in clause (i) incurred during the
previous year;
B= the average of value of investment, income from which does
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ITA No: - 4657/Del/2016
not or shall not form part of the total income as appearing in the
balance sheet of the assessee on the first day and the last day of
the previous year:
C= the average of total assets as appearing in the balance sheet
of the assessee on the first day and the last day of the previous
year "
The provision of Rule 8D (2)(ii) talks about interest expenditure
incurred by the assessee and it nowhere says that net interest
expenditure has to be taken for calculation, therefore, the contention of
the appellant that for working out disallowance under rule 8D, the
interest cost to the assessee has to be taken is not correct. The various
case laws relied upon by the appellant does not deal with the issue
involved here, therefore, the same are not applicable to the facts of the
appellant's case Hence, the disallowance worked out by the AO under
Rule 8D (2)(ii) taking the gross interest expenditure for working out
disallowance of interest expenses pertaining to earning exempt income
is correct and no interference is called for. Therefore, this ground of
appeal is rejected."
7. Ground No. 2 vide this ground of appeal the appellant has challenged
disallowance of deduction u/s 80 1C of Rs 28,81.388/- claimed by the
appellant on the interest income received. The observation made by the
Assessing Officer is reproduced hereunder -
"........... As per Form 10 CCS the assessee has claimed deduction u/s 80IC
in Haridwar Unit to the tune of Rs.32,49,88,100/-. The said deduction has
been claimed on profit and gains of Rs. 36,22,45,554/-. The said profit
and gains include other income (interest) of Rs.28,81,388/- The assessee
was asked to explain that why deduction u/s 80IC should not be
disallowed on other income (interest) of Haridwar Unit. Assessee vide
letter dated 16.03.2015 submitted that the assessee has earned interest
at Rs. 28,81,388/- from the FDRs etc which are prepared for margin
money etc , otherwise also, It is pertinent to mention that the assessee has
paid huge Interest for the said Eligible unit. The interest earned is less
than the interest Paid The assessee could have shown the Net Interest
after set off the same within the Interest head. It is also not out of place to
mention here that the Interest income earned would have not been there
had the funds not invested and were utilized directly for the eligible
business and would have reduced the Finance Cost (Interest paid)
Therefore, the Interest Earned is actually, in view of the above
discussions, is part and parcel of the income derived from the eligible Unit
only It is a matter of presentation only Notwithstanding anything contrary
here in above, had there been no Interest expenses and only Interest
Income, it can be said that the assessee had earned Interest purely on
investments.
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ITA No: - 4657/Del/2016
The explanation of the assessee is not acceptable. Section 80 IC of the IT
Act, 1961 provides that,
"(1) Where the gross total income of an assessee includes any profits and
gain derived by an undertaking or an enterprise from any business
referred to in subsection (2) there shall, in accordance with and subject to
the provisions of the is section be allowed, in computing the total income
of the assessee, a deduction from such profits and gains, as specified in
sub section 93).
(3) The deduction referred to in sub-section (1) shall be (i) in the case of
any undertaking or enterprise referred to in sub-clauses (i) and (Hi) of
clause (a) of sub-clauses (i) and (iii) of clause (B) of (2) one hundred
percent of such profits and gains for ten assessment years commencing
with the initial assessment year.
(ii) In the case of any undertaking or enterprise referred to in sub-clauses
(ii) of clause (a) of sub-clauses (ii) of clause (b) of sub-section (2) one
hundred percent of such profits and gains for five assessment years
commencing with the initial assessment year and thereafter twenty-five
percent of profit and gains.
As per above, it is established that the deduction u/s 80 1C of IT Act,
1961 shall be allowed on the profits and gains from business However the
interest income earned shall be taxed under Income from Other Sources'
Hence, it is clear that interest from fixed deposits is not entitled for
deduction u/s 80 1C of the Act. Reliance is placed in the case of Pandian
Chemicals Ltd. vs CIT [262 ITR 278(SC)], wherein the apex court held that
Derivation of interest on profits on 'deposit with the Electricity Board could
not be said to be flowing directly from the industrial undertaking and,
therefore, deduction u/s 80 HH could not be allowed in respect thereof"
In view of the above facts, it is clear that the assessee is not entitled for
deduction u/s 80 1C of IT Act on interest income from fixed deposits of
Rs.28,81,388/- and the same is being disallowed."
Submission of the appellant
Disallowance of deduction claimed under section 80-1C amounting to
Rs 28.81.388/- on account of Interest Income earned at Exempted Unit,
Haridwar It is respectfully submitted that the assessee has earned interest
at Rs. 28,81,388/- from the FDRs etc which were prepared for margin
money etc., in other words for the purposes of the industrial business of the
exempted unit only. It is pertinent to mention that the assessee has paid
huge Interest for the said Eligible unit The interest earned is less than the
interest Paid. The assessee could have shown the Net Interest after set off
the same within the Interest head.
It is also not out of place to mention here that the Interest income earned
would have not been there had the funds not invested and were utilized
directly for the eligible business and would have reduced the Finance Cost
(Interest paid).
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ITA No: - 4657/Del/2016
Therefore the Interest Earned is actually, in view of the above discussions,
is part and parcel of the income derived from the eligible Unit only. It is a
matter of presentation only
Notwithstanding anything contrary here in above, had there been no
Interest expenses and only Interest Income, it can be said that the
assessee had earned Interest purely on investments. Reliance is placed on
the following judicial pronouncements:
DCIT vs. Himachal Exicom Communication .....on May,
2007
Bench: I Bansal, R Sharma
ORDER
1. This is an appeal filed by the revenue against the order of CIT
(Appeals) dated 23-1 -2006 for the assessment year 2001 -02. in the
matter of order passed under Section 143(3) of the Income Tax Act, 1961
wherein following grounds of appeal have been raised.
On the facts and in the circumstances of the case and in law, the CIT
(Appeals) erred in
i. allowing deduction under Section 80-IB of the Income Tax Act, on
interest income on margin money deposited with bank for opening letter
of credit and obtaining bank guarantees for business.
ii. the appellant craves leave to add, to alter, or amend any ground of
the appeal raised above at the time of the hearing.
2. Rival contentions have been heard and record perused Brief facts in
this case are that the assessee-company is engaged in the manufacture
of telecommunication equipments. The assessee claimed deduction
under Section 80-IB of the Act @ 30% of the eligible profits. During the
course of assessment under Section 143(3) the assessing officer
observed that assessee is claiming; deduction on the basis of profit as
per profit and loss account whereas deduction under Section 80-IA of
the Act is available on the eligible profit only i.e. the profit from
manufacturing activity of eligible unit. The assessing officer assessed
interest income on FDRs with banks against margin money and
corporate loans, as "income from other sources" instead of eligible
business profits claimed by the assessee Accordingly, deduction under
Section 80- IB was declined on the interest income.
3. By the impugned order, CIT (Appeals) allowed assessees claim of
interest income by observing that assessee was required to invest in
FDRs for margin money not for the sake of earning income from
investment of surplus funds but as a mandatory requirement in order to
obtain orders for sale. It could not have fluctuated tenders without filing
bank guarantee and without these bank guarantees, it could not have
obtained any orders. Accordingly, he held that these FDRs were
purchased out of business compulsion and were inextricably linked
with the assessees business activities. The interest income of Rs 34.91
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ITA No: - 4657/Del/2016
lakhs was thus held to qualify for inclusion in the profits of the business
for the purpose of computing deduction under Section 80-IB of the Act.
4. Aggrieved by the above order of the CIT (Appeals), the revenue is in
appeal before us It was contended by the learned Sr. DR Shri. R.L
Meena that by no stretch of imagination interest earned on bank
deposits can be said to have derived from industrial undertaking so as
to qualify for special deduction under Section 80-IB of the Act Fie relied
on the proposition laid down by Hon'ble Supreme Court in case of CIT v.
Sterling Foods, wherein the Hon'ble Supreme Court has held that "there
must be, for the application of the words derived from a direct nexus
between the profits and gains and industrial undertaking" As per
learned DR in the present case, the earning of interest was incidental to
the business of the assessee, therefore, CIT (Appeals) was not at all
justified in treating such interest income, as directly flowing from the
industrial undertaking for allowing claim of deduction under Section 80-
IB of the Act.
4. On the other hand, learned AR Shri. R.S. Singhvi vehemently
argued that assessee-company was exclusively engaged in the
business of telecommunication equipments as an industrial
undertaking and the entire income was covered for the statutory
deduction under Section 80-IBof the Act As per learned AR. deposit to
the bank was given as a business compulsion and not as per a sweet
will of the assessee. and the same was meant for obtaining bank
guarantee, LCs etc. without which it is not possible to think of carrying
on of manufacturing and sale of telecommunication equipment the
business He further contended that in the grounds of appeal, the
revenue has not disputed the findings of CIT (Appeals) about the
interest as business income There was no dispute that assessee was
an industrial undertaking, entire income was covered for statutory
deduction under Section 80-IB, and receipts of interest on FDRs
purchased out of borrowed funds as a matter of business compulsion
and expediency, is in the nature of business, the benefit of deduction
under Section 80-IB should have been allowed. He draw our attention
to the language of Section 80-IB which reads as "where the gross total
income of the assessee includes any profit and gains derived from any
business referred to in Subsection (3) to (ii), (iiA) and (OB)...."Mr. Singhvi
further contended that on identical facts, benefit under Section 80-IB
has been allowed in the preceding year, therefore, revenue cannot be
allowed to change its stand, without there being change in the facts
and circumstances during the year under consideration. He further
submitted that even otherwise there is no infirmity in the order of CIT
(Appeals), as benefit of netting is to be allowed even as per the decision
of Hon'ble Delhi High Court in case of CIT v. Shri Ram Honda Power
Equip. Ltd The purchase of FDRs were out of borrowed funds,
therefore, there is on reason to decline netting of the interest
expenditure out of the interest income while bringing the net interest
income for taxation under the head "Income from other sources" He
further relied on various decisions of the following co-ordinate Benches
wherein bank interest income was considered as inextricably related to
carrying out on business of industrial undertaking and considered for
deduction under Section 80-1A of the Act.
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ITA No: - 4657/Del/2016
1. Assistant Commissioner v. Maxcare Laboratories Ltd. (2005) 92 ITD 11
(Ctk.) The bank interest income was considered as inextricably related to
carrying out on of business of industrial undertaking and considered for
deduction under Section 80-IA.
2. Centex Publication (P.) Ltd. v. Dy. CIT (2003) 133 Taxman 42
(Delhi)(Mag). The interest income was considered as derived from
industrial undertaking and eligible for deduction under Section 80-L
3. Picric Ltd v Jt. CIT The interest on fixed deposit with the bank towards
various credit limits considered as derived from an attributable to
business and benefit was allowed under Section 80HHC
4. Leather age v. ITO (2003) 86 ITD 4822 (Luck) The assessee is a export
oriented unit - Interest on FDR was considered as business income.
5. CIT v. Punit Commercial Ltd (Mum) The assessee is a 100% export
oriented unit - Interest on FDR was considered as business income.
6. CIT v. SSC Shoes Ltd The interest on bank deposit considered as
business income and benefit was allowed under Section 80HHC.
It is therefore, clear that the interest income so earned by the assessee
forms part of the income of that very exempted unit and is eligible for
deduction u/s 80-IC.
"I have considered the submission of the appellant and observation of
the AO made in the assessment order on the issue. It is seen that the
appellant had claimed deduction u/s 80 1C of Rs.32,49,88.100/- on the
profits and gains of the industrial undertaking. The said profits and gains
include other income (interest) of Rs.28.81,388/- received from FDRs The
AO has held that 80 IC deductions shall be allowed only on the profits
and gains from business and interest income earned will be taxed under
the head other sources. The AO has observed that interest has been
received from the fixed deposit prepared by the appellant for margin
money and it has not been derived from the industrial undertaking,
therefore, AO disallowed the claim of deduction. During the course of
appellant proceedings AR of the appellant reiterated his claim of
deduction and relied upon the judgment of ITAT, Delhi in the case of DCIT
vs. Himachal Exicom Communications to support his claim. However, it is
seen that this judgment does not favour the appellant's claim, on the
contrary the judgment supports the AO's view. The Hon'ble Supreme
Court in the case of CIT Vs. Sterling Food has held that there must be for
the application of words derived from a direct nexus between the profits
and gains and industry undertaking. The earning of interest to the
appellant's case was incidental to the business and not inextricably
linked to the industrial undertaking. Therefore, interest income is not
entitled for deduction under Section 80IC. In this regard reliance is placed
on following judicial pronouncement:-
[2015] 56 taxmann.com 415 (Calcutta)/[2015] 231 Taxman 585
(Calcutta)
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ITA No: - 4657/Del/2016
"Section 80-IC of the Income-tax Act, 1961 - Deductions- Special provisions
in respect of certain undertakings or enterprises in certain special
category States (Interest income) - Assessment year 2007-08 - Assessee-
company deposited profits and gains of its undertaking and earned
interest income from those fixed deposits - It claimed deduction under
section 80-IC in respect of said income - Whether interest income earned
by assessee would not be treated as income derived from business of
manufacture or production of any article or thing by assessee's industrial
undertaking for purpose of granting relief under section 80-IC - Held, yes
[Para 20] [in favour of revenue]"
[2015] 62 taxmann.com 252 (Punjab & Haryana) HIGH COURT OF
PUNJAB & HARYANA Commissioner of Income-tax, Patiala vs. H.M. Steels
Ltd.* S.J. VAZIFDAR, Actg. CJ. AND G.S. SANDHAWAL/A, J. IT Appeal No.
352 of 2013 (O & M) AUGUST 4, 2015
"Section 80-IC of the Income-tax Act, 1961 - Deductions - Special provisions
in respect of certain undertakings or enterprises in certain special category
States (Computation of deduction) - Assessment year 2007-08 - Whether
any industrial undertaking or enterprise would be entitled to deduction
under sub-section (1) of section 80-IC only to extent of profits derived from
such an industrial undertaking and not on account of any rebate or
incentive made available to it by Government - Held, yes - Whether,
therefore, assessee was not entitled to benefit of section 80-IC in respect of
sales tax rebate obtained by it - Held, yes [Paras 10 and 15] [In favour of
revenue]"
The facts of the above judicial pronouncements are identical with the
facts of the appellant's case Therefore the ratio of the said judgments is
squarely applicable in the case of appellant. In view of the above judicial
pronouncements the claim of the appellant of deduction under section 80
IC on interest income received from fixed y deposit is not sustainable and
the disallowance is upheld."
[D]. The assessee has filed this present appeal in Income Tax
Appellate Tribunal (ITAT for short) against the aforesaid impugned
order dated 24.06.2016 of the learned CIT(A).
[E]. We take up ground no. 1 of appeal first. At the time of hearing
before us, the learned counsel for the assessee submitted that for the
purposes of computation of disallowance under section 14A of I.T. Act,
the disallowance under Rule 8D of I.T. Rules is to be done by
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ITA No: - 4657/Del/2016
considering the net amount of expenditure by way of interest and not
the gross amount of expenditure by way of interest. For this purpose,
the learned counsel for the assessee relied on the following precedents:-
1. PCIT vs. Nirma Credit & Capital (P.) Ltd. (2017) 85 taxmann.com
72 (Gujarat High Court)
2. Rapid Diagnostic Pvt. Ltd. vs. ITO (2014) 40 CCH 597 (ITAT Delhi).
3. DCIT vs. DLF Assets Pvt. Ltd. (2018) IT No. 167/Del/2016 (ITAT
Delhi)
4. DCIT vs. Adani Gas Ltd. & Anr. (2018) 54 CCH 90 (ITAT
Ahmedabad)
5. DCIT vs. Machino Finance Pvt. Ltd. (2016) ITA No. 312/Kol/2014
(ITAT Kolkata)
6. DCIT vs. Trade Apartment Ltd. (2012) ITA No. 1277/Kol/2011
(ITAT Kolkata)
[F]. However, the learned Departmental Representative submitted
that the disallowance of expenditure is to be done under Rule 8D of I.T.
Rules r.w.s. 14A of I.T. Act by considering gross amount of interest
expenditure. For this purpose, he relied on the orders of the Assessing
Officer and the learned CIT(A). In the case of Pr. CIT vs. Nirma Credit &
Capital (P.) Limited (supra), it was held by Hon'ble Gujarat High Court
that amount of expenditure by way of interest would be interest paid by
assessee on borrowings minus taxable interest earned during the
financial year, for the purposes of applying factors in Clause (ii) of Sub
Rule (2) of Rule 8D where assessee pays interest on borrowings, as also
earns taxable interest on investments. Same view has also taken by
Coordinate Benches of ITAT in the case of DCIT vs. DLF Asset Pvt. Ltd.
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ITA No: - 4657/Del/2016
(supra), DCIT vs. Machino Finance Limited (supra) and DCIT vs. Trade
Apartment Limited (supra), copies of these precedents were filed by the
learned counsel for the assessee, and are placed on record. The
relevant portions from these precedents are reproduced below for the
case of reference:-
From DCIT vs. DLF Asset Pvt. Ltd. (supra)
5. "The decision of Hon'ble High Court in PCIT Vs. Nirma Credit
& Capital (P) Ltd. is brought to our notice and it is so held in the
said decision that for the purpose of applying factors contended in
clause (ii) of sub-rule (2) of rule 8D, prior to its amendment w.e.f.
02.06.2016, amount of expenditure by way of interest would be
the interest paid by the assessee on borrowings minus taxable
interest earned during the financial year. As a matter of fact Ld.
CIT (A) also placed on reliance on the decisions of the ITAT
reported in the case of Income Tax Officer, Ahmedabad Vs.
Karnavati Petrochem Pvt. Ltd. (ITA No.2228/Ahd./2012 A. Y.
2008-09), and of Mumbai Tribunal in case of Morgan Stanley India
Securities Pvt. Ltd. Vs. ACIT ITA No. 5072/Mum/2005 &
6774/Mum./2008 (A. Y. S. 200-02 & 2004-05) and also the
decision of his predecessor in assessee's own case for A. Y. 2008-
09 and 2009-10.
6. No circumstances are brought to our notice to say as to why
the decisions of the Tribunal stated above and also the decision of
Hon'ble Gujarat High Court shall not be made applicable facts of
the present case. We are convinced with the reasoning adopted by
the Ld. CIT(A) in paragraph 7.3 and 7.4 of his order. Consequently
we do not find any illegality or regularity in such finding, and
therefore, while upholding the same dismiss this ground No. 1 of
this appeal."
From DCIT vs. Machino Finance Limited (supra)
10. "We have heard the rival contentions of both the parties and
perused the materials available on record. At the outset we find that the
assessee was having no loan in the previous year and the investment
made was of Rs. 18.31 crores. So it is clear that the investment was
made out of the owned fund in the previous year. The investment and
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ITA No: - 4657/Del/2016
loan in the year under consideration has increased by Rs. 2.98 crores
and 12.25 crores respectively. So at the most the interest pertaining to
the increased investment of Rs. 2.98 crores can proportionately be
disallowed. Besides the above we also find that the AO has failed to
establish whether the borrowed fund was utilized for the investment in
the shares. It is also important to note that the assessee is having both
interest income and interest expenses. In this connection various courts
have decided to take the net of interest amount while making the
disallowance under section 14A read with rule 8D of Income Tax rules
1962. Therefore we are relying in the order of Jurisdictional Tribunal in
the case of DCIT Vs. Trade Apartment Limited ITA no. 1277/ko 1/2011.
The relevant extract is extracted below :
"3. We have heard the rival contentions, perused the material on
record and duly considered factual matrix of the case as also the
applicable legal position.
4. As learned CIT(A) has rightly observed, once there is no net
interest expenditure, as is the case before us - upon setting off
interest credited to profit and loss account, no part of interest
debited can be disallowed as attributable to earning tax free
dividend. The CIT(A) was thus quite justified in deleting the
interest disallowance. We have also noted that entire expenses
incurred by the assessee have been offered for disallowance, and
once that happen, nothing remains for further disallowance u/s.
14A. The disallowance under section 14A can come into play only
out of expenses claimed/or deduction and expenses have been
claimed for deduction, there cannot be any disallowance either.
The conclusions arrived at by the CIT(A) are, therefore, correct and
admit no interference by us. We, approve and confirm the order of
the CIT(A). "
In the instant case the Id. CIT(A) has calculated the disallowance under
section 14A r.w.r. 8D of Income Tax Rules after taking the net interest
expenditure. We find that the view taken by the Id. CIT(A) is supported
with the order of Trade Apartments Limited (Supra). In view of the above
proposition of law, we find no reason to interfere in the order of Id.
CIT(A). Hence this ground of appeal of the revenue is dismissed."
From DCIT vs. Trade Apartment Limited (supra)
4."As learned CIT(A) has rightly observed, once there is no net interest
expenditure, as is the case before us - upon setting off interest credited to
profit and loss account, no part of interest debited can be disallowed as
attributable to earning tax free dividend. The CIT(A) was thus quite
justified in deleting the interest disallowance. We have also noted that
entire expenses incurred by the assessee have been offered for
disallowance, and once that happen, nothing remains for further
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ITA No: - 4657/Del/2016
disallowance u/s. 14A. The disallowance under section 14A can come
into play only out of expenses claimed for deduction and expenses have
been claimed for deduction, there cannot be any disallowance either. The
conclusions arrived at by the CIT(A) are, therefore, correct and admit no
interference by us. We, approve and confirm the order of the CIT(A)."
[F.1]. Respectfully following these precedents in the case of Pr. CIT vs.
Nirma Credit & Capital (P.) Ltd. (supra), DCIT vs. Asset Pvt. Ltd.
(supra), DCIT vs. Machino Finance Limited (supra) and DCIT vs. Trade
Apartment Limited (supra), we decide the issue in dispute in favour of
the assessee and direct the AO to complete disallowance under Rule 8D
of I.T. Rules r.w.s. 14A of the I.T. Act by considering net interest
(interest paid by the assessee on borrowings minus taxable interest
earned during the year) for purpose of Clause (ii) of Sub Rule (2) of Rule
8D.
[G]. As far as second ground of appeal is concerned, the learned
counsel for the assessee relied on the submissions made before the
learned CIT(A) during appellate proceedings before him. These
submissions had already been considered by the learned CIT(A)
relevant portion of which has been reproduced in foregoing paragraph
`C' of this order. We are of the view that the order of learned CIT(A) on
this issue is just and fair and in accordance with law, having regard to
the facts and circumstances of the case. The learned counsel for the
assessee has not brought any further materials for our consideration to
persuade as to take view different from the view taken by the learned
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ITA No: - 4657/Del/2016
CIT(A). The order of the learned CIT(A) is well reasoned, detailed and
speaking order, in which there is no such infirmity which warrants any
interference by us. Therefore, second ground of appeal is dismissed.
[H]. We now come to the third ground of appeal. The relevant portion
of the order of the learned CIT(A) is reproduced as under:-
6. Ground No. 3 pertains to the claim of the appellant that expenses
disallowed u/s 14A for earning exempt income should be considered for
deduction u/s 80 IC of the IT Act, 1961 of Rs.6,48,149/-
Submission of the appellant
" ......... Notwithstanding any thing contrary here in above in the
discussion of Ground No 1. if at all, Your good self takes the view that
the disallowance u/s 14A is to be calculated on Net Interest as
calculated by the id AO, then in that case, the disallowance calculated
by the Ld AO for the exempted unit, is allowed u/s 80-IC. The Ld AO has
arbitrarily and Wrongly not allowed the deduction under section 80-IC on
disallowance under section 14A pertaining to exempted Unit at Rs.
6,48,149/-.
Decision
I have considered the submission of the appellant, it is seen
that expenses disallowed u/s 14A pertains to earning of the
exempt income and such disallowance of expenses has to be made
u/s 14A which has got over riding affects on section 80 IC. These
expenses were pertaining to earning exempt income and same
cannot be considered for deduction u/s 80 IC. Therefore, this
ground of appeal of the appellant is rejected."
[H.1]. We are of the view that the order of learned CIT(A) on this issue is
just and fair and in accordance with law, having regard to the facts and
circumstances of the case the learned counsel for the assessee has also
not brought any further materials for our consideration to persuade as
to take a view different from the view taken by the learned CIT(A). The
order of the learned CIT(A) is well reasoned, detailed and speaking
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ITA No: - 4657/Del/2016
order. No such infirmity in the order of ld. CIT(A) has been brought to
our notice by ld. Counsel of the assessee, warranting any interference
by us. In fact, no specific submissions were made by the ld. Counsel for
the assessee, except that this ground of appeal was consequential to
ground no. 2 of appeal. As no submissions were made on merits of this
ground of appeal, by learned counsel for the assessee; and as we find
no infirmity in the order of ld. CIT(A), we decline to interfere with the
order of the learned CIT(A). Accordingly, third ground of appeal is
dismissed.
[I]. In the result, second and third grounds raised by the assessee in
this appeal are allowed.
[J]. In the result, the appeal is partly allowed. Order pronounced in
open court on 07.11.2019.
Sd/- Sd/-
(H.S. SIDHU) (ANADEE NATH MISSHRA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 07.11.2019
SH
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
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ITA No: - 4657/Del/2016
ITAT NEW DELHI
Draft dictated 04.11.2019
Draft placed before author
Approved Draft comes to the Sr.PS/PS
Order signed and pronounced on
File sent to the Bench Clerk 07.11.2019
Date on which file goes to the AR
Date on which file goes to the Head Clerk.
Date of dispatch of Order.
Date of uploading on the website 07.11.2019
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