Income Tax Appellate Tribunal - Hyderabad
Deepti Formulations Private Limited, ... vs Ito, Ward-17(1), Hyderabad, Hyderabad on 9 February, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B" (SMC), HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
I.T.A. No. 238/HYD/2017
Assessment Year: 2012-13
Deepti Formulations Private Income Tax Officer,
Limited, Vs Ward-17(1),
HYDERABAD HYDERABAD
[PAN: AAACD7145G]
(Appellant) (Respondent)
For Assessee : Shri T. Chaitanya Kumar, AR
For Revenue : Shri P.V. Subba Raju, DR
Date of Hearing : 02-02-2018
Date of Pronouncement : 09-02-2018
ORDER
This is an appeal by assessee against the order of Commissioner of Income Tax (Appeals)-5, Hyderabad, dated 30-11-2016 on the issue of disallowance u/s. 14A of the Income Tax Act [Act].
2. Briefly stated, assessee is in the business of manufacturing of pharmaceutical formulations. In addition to earning its regular income, it also earned dividend from mutual funds amounting to Rs. 40,000/- and claimed exemption. Assessing Officer (AO) invoked the provisions of Section 14A r.w.r. 8D and made a disallowance of Rs. 3,87,990/- calculated :- 2 -: ITA No. 238/Hyd/2017 under the Rule 8D of the Act. It was the contention of assessee that assessee has not spent any direct expenditure to be disallowed under Rule 8D(2)(i) and also there was no interest expenditure pertaining to investments as it has sufficient funds and regular income of the business was more than the investments in such funds. AO while accepting the explanation of assessee with reference to the direct expenditure, however, invoked Rule 8D(2)(ii) to disallow proportionate interest expenditure on certain loans obtained to an extent of Rs. 2,31,06,277/- and also 0.5% of average value of investments under Rule 8D(2)(iii). Assessee contested the same before the CIT(A) to submit that all the borrowals are for specific purposes and no part of the borrowed amount was diverted to investments and questioned the disallowance. It was contended that AO cannot disallow expenditure by making general observations in a mechanical way. Since assessee questioned the very invoking of Section 14A, Ld. CIT(A) elaborately discussed the principles governing Section 14A, Rule 8D in his order. In doing so, he confirmed the disallowance made under Rule 8D(2)(ii) and 8D(2)(iii). Hence, the present appeal.
3. Ld. Counsel referring to the annual reports, incomes earned and dividend and bank account of the relevant period submitted that assessee received Rs 40 lakh by way of sale of property and balance is business funds available with assessee. It was submitted that there was direct nexus of own funds with that of investment made. With reference to the disallowance under Rule 8D(2)(iii) of administrative expenditure, it was submitted that AO should have considered :- 3 -: ITA No. 238/Hyd/2017 only proportionate disallowance for part of the year but not for entire year.
4. Ld. DR however, relied on the detailed order of the CIT(A).
5. We have examined the rival contentions and perused the contentions. There is no dispute with reference to invoking of Rule 14A which, assessee has not contested before us, consequently, the issue is only whether disallowance can be made under Rule 8D? There is no direct expenditure which can be disallowed under Rule 8D(2)(i). As far as the expenditure incurred by way of interest, Rule 8D(ii) can be invoked only in a case where there is an interest during the previous year which is not directly attributable to any particular income or receipt. In that event, proportionate amount is to be disallowed as provided in the Rule. However, as seen from the balance sheet, there are loans from the directors and shareholders obtained in earlier years. It was submitted that no part of it was diverted to investments in mutual funds etc. No finding was given by the AO that these funds are utilised for the investments. As seen from the Bank statement filed, there was sufficient cash balance in the account during the period. Opening balance as on 01-02-2012 was Rs. 21,66,808/-. An amount of Rs. 40 lakhs was received on 09-02-2012. The balance as on 13-02-2012 was Rs. 52,95,625/-. Out of this assessee invested an amount of Rs. 50,00,000/- in Mutual funds. Consequently, it can be stated that no part of borrowed funds are diverted to investments. Following the principles laid down by the Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd., :- 4 -: ITA No. 238/Hyd/2017 [313 ITR 340] (Bom), we are of the opinion that no part of the interest paid on the borrowed funds can be disallowed under Rule 8D(2)(ii). Moreover, if at all there is any diversion of funds that should trigger disallowance u/s. 36(1)(iii) i.e., for diversion of funds from the business. AO has not disallowed any amount u/s. 36(1)(iii). In view of this, we are of the opinion that the interest paid on term loans obtained cannot be considered as interest which is not directly attributable to any particular income or receipt under Rule 8D(2)(ii). In view of this, disallowance of Rs. 3,71,990/- invoking the sub-Rule 2(ii) is set aside.
5.1. Coming to the disallowance of Rs. 16,000/- invoking Sub-Rule (2)(iii) of 0.5% of average value of investment, it was the contention that only proportionate amount for the period can be disallowed. Rule 8D(2) (iii) specifies that an amount equal to ½% of the average value of investment, income from which does not or shall not form part of the total income, as appear in the balance sheet of assessee on the first day and the last day of the previous year has to be attributed. Working has to be made on the investment as specified, without segregating them on income yielding or non-income yielding during the year. The Rule does not provide for proportionate expenditure disallowance. Moreover, as seen from the Balance Sheet, assessee also had Rs. 6 Lakhs opening investment and another Rs. 8 Lakhs during the year. Therefore, the contention that only proportionate amount should be disallowed does not require any consideration. In view of the above, we are of the opinion that AO is correct in disallowing 0.5% of the average investments as available in the balance sheet. To that extent of :- 5 -: ITA No. 238/Hyd/2017 Rs. 16,000/-, assessee's contentions are rejected. The disallowance is confirmed.
6. In the result, appeal is partly allowed.
Order pronounced in the open court on 9th February, 2018 Sd/-
(B. RAMAKOTAIAH)
ACCOUNTANT MEMBER
Hyderabad, Dated 9th February, 2018
TNMM
:- 6 -: ITA No. 238/Hyd/2017
Copy to :
1. Deepti Formulations Private Limited, C/o. Sri T. Chaitanya Kumar, Advocate, Flat No. 102, Gowri Apartments, Urdu Lane, Himayat Nagar, Hyderabad.
2. The Income Tax Officer, Ward-17(1), Hyderabad.
3. CIT (Appeals)-5, Hyderabad.
4. Pr.CIT, Hyderabad.
5. D.R. ITAT, Hyderabad.
6. Guard File.