Gujarat High Court
Principal Commissioner Of Income Tax-3 vs Nirma Credit And Capital ... on 31 August, 2017
Author: Akil Kureshi
Bench: Akil Kureshi
O/TAXAP/409/2017 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 409 of 2017
With
TAX APPEAL NO. 514 of 2017
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of
the judgment ?
4 Whether this case involves a substantial question of
law as to the interpretation of the Constitution of
India or any order made thereunder ?
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PRINCIPAL COMMISSIONER OF INCOME TAX-3....Appellant(s)
Versus
NIRMA CREDIT AND CAPITAL PVT.LTD.....Opponent(s)
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Appearance:
MR MR BHATT SENIOR COUNSEL WITH MRS MAUNA M BHATT,
ADVOCATE for the Appellant(s) No. 1
MR SN SOPARKAR SENIOR COUNSEL WITH MR B S SOPARKAR,
ADVOCATE for the Opponent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
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O/TAXAP/409/2017 JUDGMENT
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
Date : 31/08/2017
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. Considering the fact that issues involved in the Tax Appeal filed by the Revenue would arise in number of other cases, we had issued notice for final disposal to the respondent assessee for consideration of the following substantial question of law :
"Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance of Rs.1,06,56,837/ for A.Y.200809 made by the Assessing Officer u/s 14A of the Act ?"
2. The issues involved are identical in both the tax appeals. We have therefore, heard them together. We may record facts from Tax Appeal No.409/2017. The respondent assessee is a company registered under the Companies Act. For the assessment year 20082009, the assessee had filed the return of income on 30.9.2008 declaring loss of Rs.5.63 crores (rounded off). The return was taken in scrutiny by the Assessing Officer. During such scrutiny, the Assessing Officer noted that the assessee had shown dividend income of Rs.25.26 lacs (rounded off) from the investment made by it in the shares and securities which was claimed as an exempt income. In context of disallowance of expenditure to earn such income in terms of section 14A of the Income Tax Act("the Act" for short), Page 2 of 13 HC-NIC Page 2 of 13 Created On Sat Sep 09 12:26:54 IST 2017 O/TAXAP/409/2017 JUDGMENT the Assessing Officer called upon the assessee to furnish details of the investment and the income earned thereon. The Assessing Officer was of the opinion that the assessee failed to prove that the investment in shares and securities was made out of interest free funds only. On the contrary, he noted that the assessee had made substantial borrowings in form of unsecured and secured loans and had claimed interest expense thereof. In that view of the matter, the Assessing Officer applied the formula provided in Rule 8D of the Income Tax Rules ("the Rules" for short) read with section 14A of the Act. While computing disallowance of interest expenditure, the assessee contended that against the interest expenditure of Rs. 7.01 crores (rounded off) on the borrowings, the assessee had earned taxable interest of Rs.6.83 crores (rounded off) and, therefore, for the purpose of computing the disallowance under section 14A of the Act, if at all, it is the difference between the interest paid and the interest earned which should be considered as the assessee's interest expenditure for working out the formula provided under clause(ii) of subrule(2) of Rule 8D. The Assessing Officer however adopted the full figure of Rs.7.01 crores towards interest expenditure and thereafter applied the formula and computed sum of Rs.99.41 lakhs under subrule(2) of Rule 8D. He then added half a percent of the average value of investments not forming part of the total income in terms of clause(iii) of subrule(2) of Rule 8D to come to total figure of Rs.1.06 crores (rounded off) for disallowance under section 14A of the Act.
3. The assessee carried the matter in appeal. The assessee Page 3 of 13 HC-NIC Page 3 of 13 Created On Sat Sep 09 12:26:54 IST 2017 O/TAXAP/409/2017 JUDGMENT again raised the same issue contending that sizeable interest was earned through investment in InterCorporate Deposits and other investments. CIT(Appeals) however, did not accept the assessee's contention. While rejecting the appeal on this point, he confirmed the decision of the Assessing Officer.
4. The assessee thereupon approached the Tribunal. The Tribunal by the impugned judgment confirmed the applicability of section 14A of the Act and Rule 8D of the Rules but clarified that for computation of disallowance under Rule 8D, not the gross interest payment but the net interest payment would be considered. Against this judgment, the Revenue has filed the present appeal.
5. Facts on hand are not seriously in dispute. Upto the stage of the Tribunal, it has been concluded that the assessee had made investments for earning income which did not form part of the assessee's total income and that for disallowance under section 14A of the Act, formula provided under Rule 8D was required to be invoked in the present case. The assessee had paid interest of Rs.7.01 crores on the borrowings made and had also earned taxable interest to the tune of Rs.6.83 crores from Inter Corporate Deposits and other similar investments. Short question is, for the computation of disallowance under Rule 8D, should the net figure of Rs.7.01 crores be reckoned as assessee's interest expenditure or the difference between the interest paid i.e. Rs.7.01 crores and the interest received i.e. Rs.6.83 crores?
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6. In this context, learned counsel Shri Bhatt for the Revenue submitted that Rule 8D of the Rules provide for a complete formula for computing disallowance under section 14A of the Act. Once this formula is invoked, there would thereafter be no possibility of any adjustment or tinkering with the formula. He drew our attention to the judgment of the Supreme Court in case of Indian Molasses Co. Private Ltd. v. Commissioner of Incometax, West Bengal reported in 37 ITR 66 where the term 'expenditure' came to be explained as under :
"But there is no case directly on what is "expenditure", and if the authorities under the English statute were to be of real assistance, the whole of the matter should have been before us. The question however limits the approach to whether the payments made towards the policy were "expenditure" within clause(xv). "Expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention though in many uses of the word this element may not be present as when we speak of a joke at another's expense. But the idea of "spending" in the sense of "paying out or away" money is the primary meaning and it is with that meaning that we are concerned. "Expenditure" is thus what is "paid out or away" and is something which is gone irretrievably."
Counsel further submitted that ignoring the interest earned by the assessee from the interest expenditure for computation of disallowable expenditure in terms of Rule 8D, would distort the formula provided in clause(ii) of sub rule(2) of Rule 8D and the assessee would gain a wholly unintended benefit.
7. On the other hand, learned counsel Shri Soparkar for the assessee opposed the appeals contending that the term Page 5 of 13 HC-NIC Page 5 of 13 Created On Sat Sep 09 12:26:54 IST 2017 O/TAXAP/409/2017 JUDGMENT 'interest expenditure' has to be understood in the context of the interest paid minus the interest earned. This would be the only reasonable way of interpreting the term 'interest expenditure' used in section 14A of the Act as well as Rule 8D of the Rules. Counsel further submitted that in context of other provisions of the Act, whenever the question of exclusion of a particular income for the benefit of exemption or deduction came up for consideration, the Courts have always viewed that it would be the net income and not the gross income which would be ignored for the purpose of such benefit. In this context, counsel relied on the decision of the Supreme Court in case of ACG Associated Capsules Pvt. Ltd. v. Commissioner of Incometax reported in (2012) 343 ITR 89 (SC) in which for the purpose of deduction under section 80HHC of the Act, for ignoring the interest or rent income, the Supreme Court held that it would be the net interest or the net rent which alone would be ignored for the purpose of computing deduction. Counsel pointed out that relying on the said decision of Supreme Court in case of ACG Associated Capsules Pvt. Ltd.(supra), in case of Commissioner of Incometax v. Nirma Ltd. reported in (2014) 367 ITR 12(Guj), in context of deduction under sections 80I, 80IA and 80HH of the Act while excluding the income from sale of scrap, waste, etc., interest and other incomes, the Court held that it would be the net income which would be excluded and not the gross income. Our attention was also drawn to the judgment of Punjab and Haryana High Court in case of Commissioner of Incometax v. Hero Cycles Ltd. reported in (2010) 323 ITR 518 (P&H), in which it was held that when there was no nexus between the Page 6 of 13 HC-NIC Page 6 of 13 Created On Sat Sep 09 12:26:54 IST 2017 O/TAXAP/409/2017 JUDGMENT expenditure incurred and the exempt income generated, disallowance under section 14A of the Act would not be permissible.
8. To resolve the controversy, we may refer to the statutory provisions applicable. Section 14A of the Act, pertains to expenditure incurred in relation to income not includible in total income. Subsection (1) of section 14A provides that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income. As per subsection(2) of section 14A, if the Assessing Officer having regard to the accounts of the assessee, is not satisfied with the correctness of of the claim of the assessee in respect of such expenditure, he would determine the same in accordance with the method as may be prescribed. Such method has been prescribed under Rule 8D which at the relevant time read as under :
"8D (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with
(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of subrule(2).
(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:--Page 7 of 13
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(i) the amount of expenditure directly relating to income which does not form part of total income;
(ii) 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 : A X 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 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;
(iii) an amount equal to onehalf percent of the average of the value of investment, income from which does 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."
9. Subrule(1) of Rule 8D substantially uses the same language as is used in subsection(2) of section 14A and further provides that in such a situation the expenditure to be disallowed would be determined as per the provisions contained in subrule(2). The expenditure in relation to income not forming part of the total income would be aggregate of the three computations provided in clauses (i), Page 8 of 13 HC-NIC Page 8 of 13 Created On Sat Sep 09 12:26:54 IST 2017 O/TAXAP/409/2017 JUDGMENT
(ii) and (iii) of subrule(2). Under clause (i) would come the amount of expenditure directly relating to income which does not form part of the total income. Clause(ii) provides for a formula to be applied 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. Under clause(iii) an adhoc disallowance of an amount equal to onehalf percent of the average of the value of investment not forming part of total income would be further disallowed in addition to those mentioned in clauses (i) and (ii) of subrule(2) of Rule 8D.
10. Formula under clause(ii) of subrule(2) of Rule 8D is A X B/C, where 'A' represents the amount of expenditure by way of interest other than the amount of interest included in clause(i) incurred during the previous year, 'B' represents the average of value of investment, income from which does not form part of the total income, as per the balance sheet on the first and the last day of the previous year and 'C' is the average of total assets as per the balance sheet again on the first and the last day of the previous year. As per this formula therefore, interest expenditure to be disallowed would be the total interest expenditure which is in proportion of assessee's average value of investment not forming part of the total income to the average total assets. The legislature has therefore provided that whenever it is not possible to correlate with precision a certain interest expenditure for the purpose of earning income not forming part of the total income, disallowance of such expenditure would be in the proportion of assessee's average investment earning Page 9 of 13 HC-NIC Page 9 of 13 Created On Sat Sep 09 12:26:54 IST 2017 O/TAXAP/409/2017 JUDGMENT income not forming part of the total income, to the average value of assessee's total assets.
11. It is in this context that the computation of factor 'A' in the said formula assumes significance. In plain terms, 'A' represents the amount of expenditure by way of interest ignoring the interest expenditure already included in clause(i). The expression used by the legislature is "amount of expenditure by way of interest". When the legislature has therefore, used this expression "amount of expenditure", the said term shall have to be interpreted in the manner that will bring about the correct legislative intent and equitable application thereof. As in case on hand, when the assessee pays interest on borrowings as also earns taxable interest on investments made by him during a particular year, his interest expenditure has to be considered as one which is the net of interest paid minus interest earned. Any other view would give the unintended computation of factor 'A' provided in clause(ii) of subrule(2) of Rule 8D which will in turn distort the computation of disallowable expenditure under the said clause. It is true that the legislature has not given any further indication as to how such amount of expenditure would be ascertained. We would therefore have to apply the reasonable test and interprete the provision as is most likely to give effect to legislative intent for disallowance of expenditure by an assessee for earning income which is not accountable to tax. It is true that investment made by the assessee out of such borrowed funds will continue to be factored in denominator in the formula provided in clause(ii) of sub rule(2) since factor 'C' which forms the denominator refers Page 10 of 13 HC-NIC Page 10 of 13 Created On Sat Sep 09 12:26:54 IST 2017 O/TAXAP/409/2017 JUDGMENT to average of total assets of assessee as on the first and the last day of the previous year. However, ignoring taxable interest earned by the assessee for the purpose of ascertaining the amount of expenditure incurred by the assessee by way of interest, would amount to distorting the factor 'A' provided by the legislature in clause(ii) of sub rule(2) of Rule 8D. It may be possible for variety of reasons that in a given financial year the assessee might have earned interest income which is higher than the interest paid on the borrowed funds. This may be because assessee's investments may have earned interest at rates higher than the interest rate paid by the assessee on the borrowings or may also be because assessee's investment in earning interest may be higher in value than the assessee's borrowings, inviting interest. In such a situation, essentially, the assessee would have earned more interest than the interest paid. If we accept the interpretation suggested by the Revenue and apply the formula by computing factor 'A' by taking into account interest paid ignoring the interest earned, there would be disallowance under this formula even if in the net result, the assessee may have not paid any interest on borrowings.
12. Significantly the Rule refers to interest expenditure and not interest paid. Expenditure in the present context must mean interest paid minus taxable interest earned. In case of ACG Associated Capsules Pvt. Ltd.(supra), the Supreme Court while considering ignorable portion of interest, rent etc. for computation of deduction under section 80HHC of the Act had held and observed as under :
Page 11 of 13HC-NIC Page 11 of 13 Created On Sat Sep 09 12:26:54 IST 2017 O/TAXAP/409/2017 JUDGMENT "12.If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under Section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as an expense in accordance with Sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to Section 80HHC. In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head "Profits and Gains of Business or Profession", is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business."
13. In case of Nirma Ltd.(supra), the Division Bench of this Court in the context of excluding the income for deduction under sections 80I, 80IA and 80HH, relying upon and referring to the decision of Supreme Court in case of ACG Associated Capsules Pvt. Ltd.(supra) held that it would be the net profit which would be excluded from the claim of deduction and not the Gross Profit that is Gross Profit minus the expenditure incurred for earning such profit which would be excluded.
14. While answering the question in favour of the assessee, we hold that for the purpose of applying the factors contained in clause(ii) of subrule(2) of Rule 8D, prior to its amendment with effect from 2.6.2016, what Page 12 of 13 HC-NIC Page 12 of 13 Created On Sat Sep 09 12:26:54 IST 2017 O/TAXAP/409/2017 JUDGMENT would be considered as amount of expenditure by way of interest would be the interest paid by the assessee on the borrowings minus the taxable interest earned during the financial year.
15. Tax appeals are dismissed accordingly.
(AKIL KURESHI, J.) (BIREN VAISHNAV, J.) raghu Page 13 of 13 HC-NIC Page 13 of 13 Created On Sat Sep 09 12:26:54 IST 2017