Income Tax Appellate Tribunal - Hyderabad
Srinivasa Cystine Private Limited, ... vs Ito, Ward-3(1), Hyderabad, Hyderabad on 18 January, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 1846/Hyd/2014
Assessment Year: 2010-11
Srinivasa Cystine Pvt. Ltd., vs. Income Tax Officer,
Hyderabad. Ward - 3(1), Hyderabad.
PAN - AADCS 4063R
(Appellant) (Respondent)
Assessee by : Shri C.V. Narasimham
Revenue by : Smt. Suman Malik
Date of hearing : 03-01-2017
Date of pronouncement : 18-01-2017
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
This appeal filed by the assessee is directed against the order of CIT(A)- IV, Hyderabad, dated 15/09/2014 for AY 2010-11.
2. Briefly the facts of the case are that the assessee company filed its return of income on 29/09/2010 admitting a total income of Rs. Nil after claiming a deduction of Rs. 41,12,784/- u/s 80IA and book profit u/s 115JB at Rs. 5,38,964/-. AO disallowed the deduction u/s 80IA of Rs. 41,12,784/- and Rs. 21,97,594/- u/s 14A and computed the total income at Rs. 63,10,378/-.
3. As regards the claim of deduction u/s 80IA(5) of the Act, the assessee had started operation of windmills, profits from which were eligible for deduction u/s 80IA from AY 2006-07. However, deduction u/s 80IA was claimed for the first time in AY under consideration. The assessee furnished the following details of carried forward loss:
2 ITA No. 1846/H/2014Srinivasa Cystine P. Ltd.
AY Loss b/f Profit/Loss of Loss c/f
year
2006-07 (5,41,25,245) (5,41,25,245)
2007-08 (5,41,25,245) (50,92,470) (5,92,17,715)
2008-09 (5,92,17,715) 30,04,809 (5,62,12,906)
2009-10 (5,62,12,906) 64,42,419 (4,97,70,487)
2010-11 (4,97,70,487) 73,68,143 (4,24,02,344)
The AR of the assessee relied on the decision in the case of Velayudhaswamy Spinning Mills Vs. ACIT, 38 DTR 57 (Mad.) 3.1 The AO held that if the business of operation of windmills was to be considered as the only source of income of the assessee, the result would be as above and the assessee would not have any profit from the windmill business to enable it to claim deduction u/s 80IA.
The AO relying on the decision of the coordinate bench of Hyderabad in the case of Hyderabad Chemicals Supplies Ltd. Vs. ACIT, ITA No. 352/Hyd/2005, held that the assessee did not have any profits during the year for deduction u/s 80IA and disallowed the claim of the assessee.
4. On an appeal before the CIT(A), the AR submitted that the claim of the assessee was supported by the decisions in the case of Velayudhaswamy Spinning Mills Pvt. Ltd. as well as CIT Vs. Anil H Lad, TS-140-HC-KAR[2014]. The AR also submitted that these decisions had been rendered after considering the relevant statutory provisions and that the decision of the High court should prevail over the decision of the jurisdictional Tribunal.
5. The CIT(A) rejected the submissions of the assessee and confirmed the disallowance made by the AO u/s 80IA of the Act.
6. Ld. AR submitted that the issue in dispute is squarely covered by the decision of the coordinate bench of ITAT Hyderabad in the case of M/s Hyderabad Chemical Products Pvt. Ltd., Vs. ACIT in ITA No. 1033/Hyd/2015, dated 10/06/2016 for AY 2008-09, a copy of which has been filed on record.
3 ITA No. 1846/H/2014Srinivasa Cystine P. Ltd.
7. Ld. DR neither controverted the submission of the AR of the assessee nor brought any contrary decision on this issue.
8. Considered the rival submissions and perused the material facts on record. As submitted by the ld. AR of the assessee, the issue in dispute is squarely covered by the decision of the coordinate bench of Hyderabad in the case of M/s Hyderabad Chemical Products Pvt. Ltd. (supra), wherein the coordinate bench has held as under:
"Having regard to the rival submissions and the material on record, we find it necessary to reproduce the relevant provision of the Act for proper appreciation and understanding of the provision of law.
"Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. 80-IA.(1) to (4) .......
(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.
(6) ......"
From a literal reading of the above provision, it is seen that the profits and gains from the business of the assessee shall be computed on a stand alone basis from the initial assessment year or any subsequent assessment year. The initial assessment year has been understood by the Assessing Officer to be the year of commencement of operation of the unit by the assessee, whereas the CBDT vide circular dated 15.2.2016 has clarified the matter as under-
"Subject: Clarification of the term 'initial assessment year in section, 80IA (5) of the Income- tax Act, 1961 Section 801A of the Income-tax Act, i961 ('Act'}, as substituted by the Finance Act, 1999 with effect from 01.04.2000, provides for deduction of an amount equal to 100 % of the profits and gains derived by an undertaking or enterprise from an eligible business (as referred to in sub-section (4) of that section) in accordance with the prescribed provisions. Sub-section (2) of section 801A further provides that the aforesaid deduction can be claimed by the assessee, at his option, for any ten consecutive assessment years out of fifteen years (twenty years in certain cases) beginning from the year in which the undertaking commences operation, begins development or starts providing services etc. as stipulated therein. Sub-section (5) of section 801A further provides as under "Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made".
In the above sub-section, which prescribes the manner of determining the quantum of deduction, a reference has been made to the term 'initial assessment year'. It has been represented that some Assessing Officers are interpreting the term 'initial assessment year' as the year in which the eligible business/ manufacturing activity had commenced and are considering such first year of commencement/operation etc. Itself as the first year for granting deduction, ignoring the clear mandate provided under sub-section (2) which allows 4 ITA No. 1846/H/2014 Srinivasa Cystine P. Ltd.
a choice to the assessee for deciding the year from which it desires to claim deduction out of the applicable slab of fifteen (or twenty) years.
The matter has been examined by the Board. It is abundantly clear from sub-section (2) that an assessee who is eligible to claim deduction u/s MA has the option to choose the initial/ first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen ( or twenty) years, as prescribed under that sub-section. it is hereby clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 801A for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 801A. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity.
The Assessing Officers are, therefore, directed to allow deduction u/s 801A in accordance with this clarification and after being satisfied that all the prescribed conditions applicable in a particular case are duly satisfied. Pending litigation on allowability of deduction u/s 80 IA shall also not be pursued to the extent it relates to interpreting 'initial assessment year' as mentioned in sub-section (5) of that section for which the Standing Counsels/DRs be suitably instructed."
From a reading of the above circular, it is clear that the assessee who is eligible to claim deduction under S.80IA has been given an option to choose initial/first year from which it may desire to claim the deduction for ten consecutive years out of the slab of 15 or 20 years as prescribed under the above sub-section. The term 'initial assessment year' has been held to mean the first year opted to by the assessee for claiming deduction under S.80IA of the Act. Thus, it is clear that the initial assessment year is not the year of operation or commencement of business, as interpreted by the Assessing Officer, but it is the first year in which the assessee has opted to claim the deduction under S.80IA. In view of this clarification of the Board, which clinches the issue in favour of the assessee, and is binding on the Revenue authorities, we accept the contentions of the assessee in this behalf, and direct the Assessing Officer to allow the claim of the assessee, after verifying the records as to the initial assessment year in which the assessee for the first time has claimed the deduction under S.80IA and consider the income of the assessee from the eligible unit from that year alone on a stand alone basis. Assessee's grounds on this issue are accordingly allowed."
As the issue under consideration is materially identical to that of the said case, we direct the AO to adjudicate the issue following the directions given by the coordinate bench in the said case.
9. As regards the issue relates to disallowance of Rs. 21,97,594/- u/s 14A, the AO computed the same as under:
A. Interest expenditure (excluding the interest on Term loan relatable to setting up of windmills) Rs. 24,04,535 B. Average of value of investments Rs.18,98,72,832 C. Average of total assets Rs.36,57,62,756
(i) AXB/C Rs. 23,48,230
(ii) ½% of B Rs. 9,49,364 Total disallowance u/s 14A Rs. 21,97,594 ======== 5 ITA No. 1846/H/2014 Srinivasa Cystine P. Ltd.
10. Before the CIT(A), the AR of the assessee submitted that there was no nexus between the borrowed funds and the investments made and that all the investments had been made in the preceding years out of the own and surplus funds of the assessee. The AR relied on the following decisions:
1. CIT Vs. Hero Cycles [2011] 323 ITR 518 (P&H)
2. CIT Vs. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom.)
3. CIT Vs. Lubi Submersibles Ltd. ACAJ Vol. 35 Part 5 Aug 2011, P.319
4. CIT Vs. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1(SC).
10. The AR also submitted that some of the investments were in companies engaged in the business of hydel and gas based power generation in which the assessee had invested for the purpose of advancement of its business out of commercial expediency and that following the decision in the case of SA Builders Vs. CIT [20070 288 ITR 1 (SC), the expenditure on the investment, if any, could not be disallowed.
11. After considering the submissions of the assessee, the CIT(A) observed that the issue in the present case is not whether the investments were for the purpose of business and, therefore, whether the expenses incurred on the investment allowable as a business expenditure but whether any expenses were incurred by the assessee in relation to exempt income earned by it. The facts and the ratio of the decision in the case of SA Builders, being entirely different from the facts in the present appeal, this decision does not come to the rescue of the assessee. Consequently, the distinction sought to be drawn by the assessee between investments made as investments per se and investments made out of commercial expediency is of no avail for the purpose of section 14A. The CIT(A) further observed that the assessee has also claimed to have made the investments out of its own and surplus funds. The AR has submitted that while the 6 ITA No. 1846/H/2014 Srinivasa Cystine P. Ltd.
investments had increased from Rs. 18.81 crores as on 31/03/2009 to Rs. 19.16 crores as on 31/03/2010, the share capital as on 01/04/2009 was Rs. 29.12. crores.
11.1 The CIT(A) held that it is clear from the facts as narrated above that the assessee had sufficient funds of its own to enable to make the investments without recourse to the borrowed funds. There is also no specific evidence on record that the assessee had utilized the borrowed funds to make the investment in shares. As a result, no nexus has been established between the interest bearing loans and these investments to enable a conclusion that interest expenditure has been incurred for these investments. He, therefore, directed the AO to delete the interest expenses of Rs. 12,48,230/-.
11.2 The CIT(A) observed that the disallowance u/s 14A in the assessee's case has two components: Rs. 12,48,230/- u/s 8D(2)(ii) and Rs. 9,49,364/- u/r 8D(2)(iii). The two components stand on different footings and need to be considered separately. A disallowance u/r 8D(2)(ii) requires that a nexus be established between the interest expenditure and the investments leading to exempt incomes. The disallowance u/r 8D(2)(iii) does not, however, require the establishment of any such nexus. The disallowance u/r8D(2)(iii) is defined in terms of proportion of the investment and not with reference to the quantum or nature of expenses incurred by an assessee. He, therefore, confirmed the disallowance of Rs. 9,49,364/- u/r 8D(2)(iii) on the ground that the submissions of the AR and the decisions relied upon by him are of no relevance.
12. Aggrieved with the CIT(A)'s order the assessee is in appeal before us.
13. Ld. AR submitted that the assessee has not incurred any expenditure in earning the exempt income. In support of this 7 ITA No. 1846/H/2014 Srinivasa Cystine P. Ltd.
proposition, he brought to our knowledge the personnel expenses of the assessee in that year was Rs. 6,21,876/- (refer page 10 of paper book) for the total business. The assessee has an operating income of Rs. 121,61,332/- during that period and the exempt income is only Rs. 9,05,399/-. He further submitted that as per section 14A, AO should first determine the relevant expenditure in relation to the exempt income. The rule '8D cannot be applied without considering the relevant expenditure relating to the exempt income. For this proposition, he relied on the decision of the Hon'ble Delhi High Court in the case Maxopp Investments Ltd., Vs. CIT, [2012] 347 ITR 272 (Delhi), wherein the Hon'ble Court has observed as under:
"28. It was contended that unless and until there was actual expenditure for earning the exempted income, there could not be any disallowance under s. 14A. While we agree that the expression "expenditure incurred" refers to actual expenditure and not to some imagined expenditure we would like to make it clear that the 'actual' expenditure that is in contemplation under s. 14A(1) of the said Act is the 'actual' expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under s. 14A of the said Act.
Scope of sub-ss. (2) and (3) of s. 14A
29. Sub-s. (2) of s. 14A of the said Act provides the manner in which the AO is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the AO is required to determine the amount of such expenditure only if the AO, 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 the said Act. In other words, the requirement of the AO embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the AO returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the AO entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the AO must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-s. (3) is nothing but an offshoot of sub-s. (2) of s. 14A. Sub-s. (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-s. (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-s. (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the AO, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or 8 ITA No. 1846/H/2014 Srinivasa Cystine P. Ltd.
no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-s. (2) of s. 14A of the said Act. It is only if the AO is not satisfied with the correctness of the claim of the assessee, in both cases, that the AO gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in r. 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the AO would have to indicate cogent reasons for the same."
13.1 He further submitted that rule 8D(2)(iii) has to be applied to the investment which had generated income and not on the whole investment. He relied on the decision of ITAT, Kolkotta Bench in the case of Raniganj Co-operative Bank Ltd., Vs. DCIT, [2016] 73 taxmann.com 90 (kol.) wherein the Bench has observed as under:
"18. In the present case, the assessee has taken a stand that no expenditure was incurred to earn exempt income and therefore no expenditure can be disallowed as expenditure incurred in earning exempt dividend income. As per the provisions of Sec.14A(3) of the Act, even in such a situation, the AO has to follow the mandate laid down in Sec.14A(2) of the Act, i.e., he has to examine the claim of the Assessee in the light of the books of accounts of the Assessee. If the AO does not agree with the claim of the Assessee having regard to the books of accounts of the Assessee, then is it mandatory for him to resort to Rule 8D of the Income Tax Rules, 1962 to quantify the disallowance u/s. 14A of the Act? A plain reading of Sec. 14A(2) of the Act shows that the legislature has used the words "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 this Act in accordance with such method as may be prescribed" and therefore the AO has to resort to the provisions of Rule 8D of the Rules, if the claim of the Assessee regarding expenditure incurred in earning exempt income is not accepted by the AO. If such an interpretation is adopted than that would result absurd results, as in the present case, the exempt income is a sum of Rs. 5,60,301/- and the disallowance u/s. 14A of the Act is a sum of Rs. 6,48,411/-. We are of the view that even in a case where the AO rejects the claim of the assessee that no expenses were incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. If Rule 8D of the Rules is blindly by the AO sometimes it will lead to absurd results. The AO examining the claim of the assessee regarding expenditure incurred in earning the exempt income, is bound to take note ofsuch absurdities and refrain from invoking the method of disallowance of expenses as prescribed by Rule 8D(2) of the Rules. It is for this reason that the second part of Sec. 14A(2) of the Act provides as follows, "if the Assessing Officer, 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". In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to Rule 8D(2) can be had by the AO. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just 9 ITA No. 1846/H/2014 Srinivasa Cystine P. Ltd.
conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income. Therefore the expression "shall" occurring in Sec.14A(2) of the Act, viz., "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 this Act in accordance with such method as may be prescribed", should be read as may. The AO, u/s 14A of the Act has the discretion to substitute the computation of disallowance u/s 14A as made by the assessee is under estimation. The satisfaction contemplated u/.s 14A (2) of the Act is not merely restricted to rejecting the claim made by the assessee and the disallowance to be made u/s 14A of the Act but also includes substituting the claim made by the assessee on any other reasonable basis as the AO deems it fit. In such circumstances the correctness of the AO's judgment can be reviewed but it cannot be said that the AO had no jurisdiction to do so and AO ought to resort only to the provision of Rule 8D of the Rules. In other words Rule 8D is not automatic and can be resorted to by the AO only as a measure of last resort.
19.....
20. As far as disallowance of other expenses u/r 8D(2)(iii) of the rules is concerned, shows expenditure on account of staff and office expenses of Rs.14,97,132 and Rs.28,22,543.16 Ps. respectively. A look at Schedule-14 and 15 of schedules to profit and loss account (a copy of which is given as an annexure to this order), ........shows that except salary of Rs.11,72,889, no other expenditure can be said to be attributable to earning of exempt income. In applying the formula prescribed u/r 8D(2)(iii) of the Rules, the AO has included all investments, whether it yielding tax free income or not. It is not in dispute before us that it is only the investments which yield tax free income that has to be considered for applying the formula prescribed in Rule 8D(2)(ii) & (iii) of the rules as has been view held by this Tribunal in several cases. If the formula prescribed by rule 8D(2)(iii) of the Rules is applied by considering the average value of investments of only UTI mutual fund which yielded tax free income then the calculation of disallowance u/r.8D(2)(iii) of the rules would be as follows:
"Average value of Investment, income from which does not form part of total income First day of the previous year 5,633,712.00(Schedule-7(3)of audited Balance Sheet) Last day previous year 10,599,750.00(Schedule-7(3)of audited Balance Sheet) Average of the same (B) 8,116,731.00 8D(2)(iii) One half percent of the average of the value of investment ½% of Rs.8116731/- 40,583.66"
13.2 He further brought to our notice the latest notification of CBDT dated 02/06/2016, wherein it has been mentioned as under:
S.O. 1949(E)- In exercise of the powers conferred by section 295 read with subsection (2) of section 14A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-
1. (1) These rules may be called the Income-tax (14th Amendment) Rules, 2016. (2) They shall come into force on the date of their publication in the Official Gazette.
2. In the Income-tax Rules 1962, in rule 8D,-
(1) for sub-rule (2), the following sub-rule shall be substituted, namely:-
(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely: -10 ITA No. 1846/H/2014
Srinivasa Cystine P. Ltd.
(i) the amount of expenditure directly relating to income which does not form part of total income; and
(ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income:
Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.";
(II) sub-rule (3) shall be omitted.
14. Ld. DR relied on the order of CIT(A).
15. Considered the rival submissions and perused the material facts on record. The assessee is aggrieved because CIT(A) has sustained the disallowance u/r 8D(2)(iii). The mute question before us is whether the investment which has not generated income should also be considered to calculate the quantum of disallowance or the whole investment as per balance sheet should be applied to disallowance as per rule 8D. In our considered view, the view expressed by the coordinate bench of Kolkotta is on the same subject and we agree with the findings that in applying the formula prescribed under rule 8D(2)(iii) of the Rules, the AO has included all investments, whether it yielded any tax free income or not. It is only the investments which yield tax free income that has to be considered for applying the formula prescribed under rule 8D(2)(iii). Similar view was also taken by this Bench in other cases also. Considering this view, we direct the AO to consider only the investments, which yielded the exempt income in the formula under rule 8D(2)(iii) and accordingly, disallow the expenses relating to exempt income.
11 ITA No. 1846/H/2014Srinivasa Cystine P. Ltd.
16. In the result, appeal of the assessee is allowed.
Pronounced in the open court on 18 th January, 2017.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 18 th January 2017
kv
Copy to:-
1) M/s Srinivasa Cystine Pvt. Ltd., G-2, 6-3-658, Concorde Apartments, Somajiguda, Hyderabad - 500 082.
2) ITO, Ward - 3(1), Hyderabad.
3) CIT(A) - IV, Hyderabad 4 CIT - III, Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.
6) Guard File