Income Tax Appellate Tribunal - Jaipur
Om Metals Infraprojects Ltd., Jaipur vs Department Of Income Tax on 4 February, 2016
1 ITA No. 916/JP/2014
DCIT, Circle- 2, Jaipur vs. M/s. Om Metals Infra-Projects Ltd. , Jaipur
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IN THE INCOME TAX APPELLATE TRIBUNAL,
JAIPUR BENCHES, JAIPUR
Jh vkj-ih-rksykuh] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k
BEFORE:SHRI R.P.TOLANI, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ITA No. 230/JP/2015
fu/kZkj.k o"kZ@Assessment Year : 2008-09
The DCIT cuke M/s. Om Metals Infa-Projects Ltd.
Circle- 2 Vs. Om Tower, Church Road,
Alwar M.I. Road, Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACO 8245 J
vihykFkhZ@Appellant izR;FkhZ@Respondent
jktLo dh vksj ls@ Revenue by:Shri Rajender Singh, JCIT - DR
fu/kZkfjrh dh vksj ls@ Assessee by : Shri B.V. Maheshwari CA &
Shri Ramesh Goyal , CA
lquokbZ dh rkjh[k@ Date of Hearing : 21/12/2015
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 4 /02/2016
vk;dj vihy la-@ITA No. 916/JP/2014
fu/kZkj.k o"kZ@Assessment Year : 2011-12
The DCIT cuke M/s. Om Metals Infa-Projects Ltd.
Circle- 2 Vs. Om Tower, Church Road,
Alwar M.I. Road, Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACO 8245 J
vihykFkhZ@Appellant izR;FkhZ@Respondent
jktLo dh vksj ls@ Revenue by:Shri Rajender Singh, JCIT - DR
fu/kZkfjrh dh vksj ls@ Assessee by : Shri Ramesh Goyal , CA
lquokbZ dh rkjh[k@ Date of Hearing : 17/12/2015
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 4 /02/2016
2 ITA No. 916/JP/2014
DCIT, Circle- 2, Jaipur vs. M/s. Om Metals Infra-Projects Ltd. , Jaipur
vkns'k@ ORDER
PER R.P. TOLANI, JM
These are two revenue appeals against the respective orders of ld.
CIT(A)-1, Jaipur dtd. 22-12-2014 for AY 2008-09 and dtd. 28-10-2014 for AY 2011-12.
2.1 One common ground in both revenue appeals for these assessment years challenges disallowance on account of expenditure as U/s 14A applying rule 8D of the Income Tax Act amounting to Rs. 53,54,056/- and Rs. 1,29,52,621/- for AYs 2008-09 and 11-12 respectively.
3.1 Brief facts are assessee, Om Metals Infra-Projects Ltd. is a listed Company, engaged in the business activities of Hydro-mechanical dam gates as its main business and also business activities like hotel, multiplex, housing projects etc. In both the years assessee had earned dividend from old share holdings amounting to Rs. 1,14,77,297/- & Rs. 1,19645/- respectively.
Original assessment for AY 2008-09 was completed u/s 143(3) where no such disallowance was made u/s 14A, the impugned addition in AY 2008-09 was made by reopening assessment u/s 147. and for AY 2011-12 has framed u/s 143(3). During the course of these proceedings ld. AO asked for the 3 ITA No. 916/JP/2014 DCIT, Circle- 2, Jaipur vs. M/s. Om Metals Infra-Projects Ltd. , Jaipur applicability of sec. 14A r.w. rule 8D for disallowance expenses attributable to exempt income. Assessee filed detailed replies and workings contending that the investments in shares and mutual funds relating to exempt income were old and made by the Company out of its own funds. The borrowed funds were exclusively used for acquiring its other assets and since no expenditure was incurred by assessee to earn the exempt income no disallowance u/s 14A rw rule 8D was called for. Assessee relied on various judicial precedents in this behalf to support its contentions. Ld. AO referred to rule 8D applicable from AY 2008-09 and relied on:
(i) Godrej and Boyce Mfg. Co. Ltd. v. CIT (2010) 328 ITR 81 (Bom) holding that once a proximate cause is established between the expenditure and exempt income, disallowance u/s 14A is called for.
(ii) CIT v Leena Ramchandran (2011) 339 ITR 296 (Kerala) holding that when whole of the borrowed funds are utilized in purchase of shares, entire interest should be disallowed u/s 14A. So far as acquisition of shares in the investment is concerned and the only benefit derived is exempt dividend income, disallowance u/s 14A is squarely attracted.
Based on these observations ld. AO applied mechanics of rule 8D and made the above disallowances out of expenditure.
3.2 Aggrieved assessee went in appeal before CIT(A) and contended that ld. AO summarily dismissed its contentions and made the impugned 4 ITA No. 916/JP/2014 DCIT, Circle- 2, Jaipur vs. M/s. Om Metals Infra-Projects Ltd. , Jaipur additions which was contrary to the factual position and judicial citations.
The Ld. CIT(A) gave the relief in question by mainly holding that:
(i) Ld. AO has not considered the financial breakup, working and judicial citation contended by the assessee. In AY 2008-09 the correct investment in JV shares and mutual funds was to the tune of Rs.
21,06,71,000/- and not Rs. 37,55,36,330/- as held by AO. The major share investment made in JV shares to hold controlling interest was a business necessity to promote its business and cannot be termed an investment to earn exempt income.
(ii) Total share capital and reserves available with assessee were to the tune of Rs. 378.00 crores. It has been admitted by ld. AO that investment in shares is made by the assessee out of its own funds. The reason for disallowance u/s 14A as given by ld. AO is only that still rule 8d is to be mechanically applied. This clearly indicates that ld. AO has not discharged his onus on cogent reasons to establish how the assessee's working about non disallowance of expenditure u/s 14A can be found fault with.
(iii) Fixed and currents assets used by the assessee in its business were more than the borrowed moneys, therefore, there was no reason to hold that any part of interest incurred by assessee was attributable to investments in shares and mutual funds.
5 ITA No. 916/JP/2014DCIT, Circle- 2, Jaipur vs. M/s. Om Metals Infra-Projects Ltd. , Jaipur
(iv) Ld. AO has failed to bring on record any evidence to suggest any administrative or other expenditure was incurred for earning exempt income.
(v) Since ld. AO has failed to substantiate that any direct or indirect expenditure was incurred by assessee to earn exempt income or to show any proximate nexus, the impugned disallowance based on notional apportionment of total expenditure in the guise of rule 8D was not called for.
(vi) For attracting section 14A of the Act, there should be proximate cause for disallowance which has relationship with the tax exempt income as held by the Hon'ble Supreme Court in case of CIT Vs. Walfort Share and Stock Brokers P. Ltd. (2010) 326 ITR 1. Ld. AO has not discharged the onus of establishing any proximate relationship between the expenditure and the exempt income in this case. which does not form part of the total income. It was incumbent on the AO to find out as to whether the assessee has incurred any expenditure in relation to income which does not form part of the total income and if so to quantify the expenditure of disallowance. The AO has not brought on record any fact or material to show that any expenditure has been incurred on the activity of non taxable income.
(vii) In AY 2008-09, assessee incurred expenditure of interest amounting to Rs. 3,26,05,191/- the break thereof is as under:-
a. Term loan used for particular assets Rs. 2,35,26,803/-6 ITA No. 916/JP/2014
DCIT, Circle- 2, Jaipur vs. M/s. Om Metals Infra-Projects Ltd. , Jaipur b. Working capital used for business Rs. 90,78,388/-
Rs. 3,26,05,191/-
Thus there was no nexus between the interest expenses incurred and exempt income. Similar was the position for AY 2011-12.
3.3 Aggrieved revenue is in appeals. Ld. DR relied on the orders of lower authorities.
3.4 Ld. counsel for the assessee contends that:-
(i) Sub-section (2) of section 14A, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to exempt income when he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. In that eventuality by correlation of proximate nexus between the exempt income with expenditure incurred in this behalf by an objective analysis and for cogent reasons such expenditure may be recourse to on the basis of a reasonable and acceptable method of apportionment, as held by Supreme Court in Walfort cse (supra). In the case of assessee the Ld. A. O. has not given any correlation of nexus or specific categorical findings in this behalf.
Reliance is placed on the cases of:-
(1) CIT vs. Taikisha Engeenign India Ltd. 370 ITR 338 (Delhi) :- ''That the clear findings of the Appellate authorities were 7 ITA No. 916/JP/2014 DCIT, Circle- 2, Jaipur vs. M/s. Om Metals Infra-Projects Ltd. , Jaipur that the assessee had sufficient funds for making investment in shares and mutual funds. The findings coupled with the failures of the Assessing Officer to record his satisfaction clinched the issue in favor of the assessee. The voluntary deductions made by the assessee were not rejected or held to be unsatisfactory, on examination of accounts.
The Assessing Officer erred in invoking sub-rule (2) without elucidating and explaining why the voluntary disallowance made by the assessee was unreasonable and unsatisfactory. There was no such satisfaction recorded by the Assessing Officer before he invoked sub- rule (2) of rule 8D and made the computation. The Assessing Officer has to reject the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income; the Assessing Officer would have to indicate cogent reasons for the same. We do not find any such satisfaction recorded in the present case by the Assessing Officer before he invoked sub-rule (2) of rule 8D of the Rules and made the re-computation. Therefore the respondent assessee would succeed.'' (2) CIT V TAIKISHA ENG. 2014-TIOL-2239-DEL-IT 9 (Delhi HC) :- ''18. It is in this context we feel that the findings recorded by the CIT(A) and the Tribunal are appropriate and relevant. The clear findings are that the assessee had sufficient funds for making investments in shares and mutual funds. The said findings coupled with the failure of the Assessing Officer to hold and record his satisfaction clinches the issue in favour of the respondent assessee and against the Revenue.'' (3) JOINT INVESTMENTS PVT. LTD. 372 ITR 694 (DEL HC):- ''9. In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing Rs.2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely 8 ITA No. 916/JP/2014 DCIT, Circle- 2, Jaipur vs. M/s. Om Metals Infra-Projects Ltd. , Jaipur unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs.48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs.52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.'' (4) REGENT AUTO. PVT. ITA/684/DEL/2014 (DEL ITAT) DTD 18-6-15 :- ''Delhi ITAT after considering its own judgment in the case of Holicim India Pvt. Ltd. and Hon'ble Delhi High Court in Joint Investments (supra) reiterated the view that the disallowance u/s 14A cannot the exempt income.
3.5 It is admitted by ld. AO himself that the investments in JV equity and mutual funds was made by the assessee out of own capital and reserves. The disallowance is made not on consideration of assessee's reply and merits of its contention but merely by mechanically applying rule 8D. These unambiguous observations on the part of ld. AO clearly clinch the issue in favor of the assessee in view of above judgments.
3.6 Without prejudice to above in AY 2011-12, assessee earned dividend of only to the extent of Rs. 1,19,645/- whereas Rs. 59,01,52,708 9 ITA No. 916/JP/2014 DCIT, Circle- 2, Jaipur vs. M/s. Om Metals Infra-Projects Ltd. , Jaipur has been disallowed u/s 14A by mechanical application of rule. In view of above judgments even in worst circumstances and if assessee's all explanation fail, disallowance u/s 14A can never exceed the exempt income. In AY 2011-12 also ld. AO has admitted the acquisition of JV shares and mutual funds from the same interest free own sources i.e. capital and reserves of company.
4.1 Apropos the second ground raised in AY 2011-12 in respect of contribution to Employees PF, it is not disputed that the payments are made by the assessee within the due date prescribed for filing the return.
The issue in question is squarely covered by Hon'ble Rajasthan High Court judgment in the case of CIT V. SBBJ (2014) 263 ITR 17, which has been relied by ld. CIT(A). Respectfully following Hon'ble Rajasthan High court judgment this ground is dismissed.
5.1 We have heard the rival contentions, judicial pronouncements and material available on record. Following facts clearly emerge from the record:-
10 ITA No. 916/JP/2014DCIT, Circle- 2, Jaipur vs. M/s. Om Metals Infra-Projects Ltd. , Jaipur
(i) It is admitted by ld. AO himself that the investments in assets from which exempt income is earned i.e. JV equity and mutual funds were made by the assessee out of its own capital and reserves.
(ii) Assessee's explanation that in AY 2008-09, interest expenditure amounting to Rs. 3,26,05,191/- was incurred as under:
(a) Term loan used for particular assets Rs. 2,35,26,803/-
(b) Working capital used for business Rs. 90,78,388/-
Rs. 3,26,05,191/-
Thus there was no nexus between the interest expenses and exempt income. Similar position for AY 2011-12 also is not disputed.
(iii) Ld. AO invoked sub-rule (2) without demonstrating why the assessee's explanation was unreasonable and unsatisfactory. On one hand it is admitted that impugned investments are not out of borrowed funds and they were out of assessee's own resources. On the other hand a self contradictory stand is adopted by AO in the guise of mechanical rule and these interest free own funds are included as borrowed funds. This is impermissible and and clearly manifests a self contradictory approach.
(iv) Ld. AO has failed to correlate proximity of any nexus between the exempt income with expenditure incurred in this behalf by an objective analysis and cogent reasons. Since there is no correlation no basis exists for method of any apportionment of expenses, as held by Supreme Court in Walfort case (supra).
11 ITA No. 916/JP/2014DCIT, Circle- 2, Jaipur vs. M/s. Om Metals Infra-Projects Ltd. , Jaipur
(v) Apropos administrative or other expenses there is even no whisper from ld. AO that assessee had to incur any such expenditure for investment in JV or acquisition of mutual funds.
(vi) Hon'ble Delhi High Court in Taikisha (supra) held that to proceed further for disallowance u/s 14A rw rule 8D the determination amount is derived after examination of the accounts and rejection if assessee's claim or explanation. We find that ld. AO rather accepts that the impugned investments in JV equity and mutual funds is out of own funds of assessee, nevertheless AO proceeds for disallowance in this behalf. The second aspect is there appears to be non scrutiny of the relevant aspects and propositions the ld. AO.
(vii) Ld. CIT(A) has considered the issues, relevant facts, assessee's explanation and judicial precedents in right perspectives and by detailed findings dislodged the AO's observations and findings. The orders of ld. CIT(A) suffer from no inconsistency and deserve to be upheld.
5.2 In view of the facts, circumstances, contentions and our observations mentioned above & respectfully following the judgments in the case of Taikisha, Joint Investments, Regent Automobiles and Hon'ble Supreme Court in the case of Walfort shares and stock brokers (supra) we find no 12 ITA No. 916/JP/2014 DCIT, Circle- 2, Jaipur vs. M/s. Om Metals Infra-Projects Ltd. , Jaipur inconsistency or infirmity in the impugned orders passed by ld. CIT(A), which are upheld.
6.0 In the result, revenue's appeals are dismissed.
Order pronounced in the open court on 4/02/2016.
Sd/- Sd/-
¼ foØe flag ;kno ½ ¼vkj-ih-rksykuh½
(Vikram Singh Yadav) (R.P.Tolani)
ys[kk lnL;@ Accountant Member U;kf;d lnL;@Judicial Member
fnukad@Dated:- 4/02/ 2016
*Mishra
vkns'k dh izfrfyfi vxzfs 'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- The DCIT, Circle- 2, Jaipur
2. izR;FkhZ@The Respondent- M/s. Om Metals Infra-Projects Ltd.
3. vk;dj vk;qDr¼vihy½@ CIT(A).
4. vk;dj vk;qDr@ CIT
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No.916/JP/2014) vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant. Registrar