Income Tax Appellate Tribunal - Indore
Bhaskar Industries Ltd.,, Bhopal vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
INDORE BENCH : INDORE
BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER
AND SHRI R.C.SHARMA, ACCOUNTANT MEMBER
PAN NO. : AAACB5809M
I.T.A.No. 391/Ind/2009
A.Y. : 2006-07
ACIT, M/s. Bhaskar Industries
Limited,
1(2), vs 6-Dwarka Sadan Press
Complex,
Bhopal M.P.Nagar,
Bhopal
(Appellant) (Respondent)
Appellant by : Shri K.K. Singh, CIT
DR
Respondent by : Shri S. S. Deshpande,
C.A.
ORDER
PER R. C. SHARMA, A.M.
This is an appeal filed by the Revenue against the order of CIT(A) dated 14.5.2009 for the assessment year 2006-07, wherein the Revenue is aggrieved for deletion of addition of Rs. 36,90,440/- on account of disallowance of interest expenditure.
-: 2: -
2. Rival contentions have been heard and records perused.
3. Facts in brief are that the assessee was having income from dividend which is tax free investment, in addition to its regular business income. During the course of scrutiny assessment, the AO disallowed interest expenditure of Rs. 36.90 lakhs out of interest expenditure of Rs. 616.77 lakhs incurred by the assessee during the assessment year under consideration after having the following observations :-
"As per profit and loss account, the assessee had debited expenditure under the head interest an amount of Rs. 6,16,77,133/-. Further, it would be reasonable to give a set off of interest earned by assessee to arrive at net expenditure of interest paid. The net interest paid was Rs. 5,81,53,554/- as under :-
1. Interest paid for whole of the business Rs. 6,16,77,133/-
2. Interest earned as per schedule 12
i) From Bank Rs. 14,20,488/-
ii) From other Rs. 21,03,091/-
Net interest paid Rs. 5,81,53,554/-
2
-: 3: -
As separate expenditure of interest paid on exempted income was not worked out by the assessee, it would be determined in proportionate of exempted income and total income of assessee, as under :-
Interest Expenditure x Income claimed exempted/Total income of assessee.
5,81,53,554/- x Rs. 97,80,912/- ( Dividend Income)/ 15,41,26,541/- (Profit as per profit and loss account ) = Rs. 36,90,440/-
Therefore, on amount of Rs. 36,90,440/- is required to be disallowed to assessee company as an expenditure incurred on such income which does not form part of total income."
By the impugned order, the ld. CIT(A) has deleted the disallowance of interest after having the following observations :-
"4.1 It seems that the AO has, while making the impugned disallowance out of the ld. CIT(A) of interest, had the aforesaid position of the Rule 8D in mind. He has, however, not dealt with the issue thoroughly inasmuch as these provisions can be invoked only when in a case where the assessee has incurred expenditure by way of interest during the 3
-: 4: -
previous which is not directly attributable to any particular income or receipt. This is not the position obtaining in the present matter, wherein the appellant company has paid up capital and free reserves of more than Rs. 53.30 crores at the beginning of the year which have surged up to Rs. 61.67 crores on the last day of the previous year relevant to the assessment year under consideration on which no interest cost has been incurred by the company. Also, the appellant company has paid all the interest to the Banks and Financial Institutions of various loans details of which have been provided by the appellant both at the assessment stage and the appellate stage. Thus when the entire interest is attributable to the business of the appellant, no apportionment is called for much less invocation of the provisions of Section 14A read with Rule 8D of the Income Tax Rules, 1962. In the result, the disallowance of Rs. 36,90,440/- being unmerited and unjustified, is deleted."
4
-: 5: -
4. It was argued by the ld. CIT DR, Shri K.K. Singh, that disallowance has been made by the Assessing Officer, since the assessee was having investment in tax free securities, to which provisions of Section 14A are clearly applicable, the AO has disallowed a part of interest expenditure incurred for earning the exempt income. He further submitted that even though the AO has not strictly applied the Rule 8-D, but he has tried to compute the disallowable portion of interest expenditure on the basis of total income earned vis-à-vis income, which is not liable to tax.
5. On the other hand, ld. Authorized Representative drew our attention to the audited balance sheet as placed before the lower authorities for the year ending 31st March, 2006, indicating investment of Rs. 2,10,67,500/- at the end of the year. He also drew our attention to the figure of investment as on 31st March, 2005, which is exactly the same figure i.e. Rs.
2,10,67,500/-. In view of no change in the investment, the ld. Authorized Representative argued that the assessee has not made any investment in tax free securities, income of which is 5
-: 6: -
not liable to tax during the year under consideration, therefore, no disallowance of any interest expenditure should be made. He further drew our attention to the total share capital and reserve and surplus available with the company as on 31st March, 2006, amounting to Rs. 6.16 crores and submitted that the assessee has just made investment of Rs.
2.10 crores in such securities, meaning thereby interest free funds have been utilized by the assessee for making such investment, income of which is not liable to tax. He, therefore, justified the order of the ld. CIT(A) for deleting the disallowance of interest expenditure made by the Assessing Officer.
6. We have considered the rival contentions, carefully gone through the orders of the authorities below and the documents placed on record. There is no dispute to the well settled legal proposition that if any investment has been made for earning income, which is not liable to tax, proportionate expenditure attributable to such investment is not allowable as business expenditure. In the instant case before us, even though no investment has been made during the year in such securities, 6
-: 7: -
but it could not be explained by assessee as to what is the source of this investment, which is coming from earlier years. It appears that investment was made in earlier years, which is being carried forward during the year under consideration. Therefore, it is not clear as to the nature of funds employed in such investment. The ld. CIT(A) has deleted the disallowance of interest expenditure by observing that the assessee company has paid up capital and free reserves of more than Rs. 53.30 crores at the beginning of the year, which have increased of Rs. 61.67 crores on the last date of the previous year relevant to the assessment year under consideration on which no interest cost has been incurred by the assessee. It was also observed that the assessee company has paid the interest to the bank and financial institution for various loans availed by the company for the purpose of its business. As per the ld. CIT(A), when the entire interest is attributable to the business of the assessee, no apportionment is called for, much less invocation of provisions of Section 14A read with Rule 8D of the Income Tax Rules, 1962. Thus, as per the ld. CIT(A), under these circumstances, no disallowance u/s 14A is 7
-: 8: -
warranted. We are not in agreement with this proposition of ld. CIT(A), in sofar as even during the year under consideration, the assessee was undoubtedly having investment in tax free securities and the business funds were involved. However, it was not explained as to what was the source of the fund and the year in which such investment has come into existence. The AO has also used a crude method for computing disallowance. Hon'ble Bombay High Court in the case of Godrej & Boyce, 234 CTR 1, held that Rule 8D is not retrospective but is applicable prospectively w.e.f. 24.3.2008. Thus, as per Bombay High Court, rule 8D is applicable w.e.f. assessment year 2008-09 and since the assessment year in the instant case before us is 2006-07, Rule 8-D is not applicable to it. However, even with regard to earlier period, the Hon'ble High Court has directed the AO to compute reasonably indirect expenses, which are attributable to such earning of income. In view of this position, it would be reasonable to disallow 10 % on the amount invested in shares treating rate of interest @ 10 % being paid on the advances attributable to such investment, treating the same as 8
-: 9: -
expenditure incurred for earning such income. Accordingly, we restrict the disallowance to the extent of Rs. 21.06 lakhs.
7. In the result, the appeal of the revenue is allowed in part in terms indicated hereinabove.
This order has been pronounced in the open court on 19th January, 2011.
Sd/- Sd/-
(JOGINDER SINGH) ( R.C.SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 19th January, 2011.
CPU*
1314
9