Income Tax Appellate Tribunal - Pune
Deputy Commissioner Of Income-Tax,, vs Ram Infrastructure Ltd.,, Jalgaon on 11 January, 2017
आयकर अपील
य अ धकरण "बी" यायपीठ पण
ु े म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, PUNE
ी आर. के. पांडा, लेखा सद य, एवं ी #वकास अव थी, या%यक सद य के सम& ।
BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No. 463/PUN/2014
%नधा(रण वष( / Assessment Year : 2010-11
The Dy. Commissioner of Income Tax,
Circle - 1, Old Bhikamchand Jain Market,
Jalgaon - 425001 (Maharashtra)
.......अपीलाथ / Appellant
बनाम/Vs.
Ram Infrastructure Ltd.,
6, Shreyas Residency, Ganeshwadi,
Jalgaon - 425001
PAN : AACCR2739N
......
यथ / Respondent
Assessee by : Shri Neelesh Khandelwal
Revenue by : Shri M.K. Gautam
सन
ु वाई क तार ख / Date of Hearing : 11-01-2017
घोषणा क तार ख / Date of Pronouncement : 11-01-2017
आदे श / ORDER
PER VIKAS AWASTHY, JM :
This appeal by the Department is directed against the order of Commissioner of Income Tax (Appeals)-2, Nashik dated 23-12-2013 for the assessment year 2010-11.
The only issue raised in the appeal by the Department is against allowing deduction u/s. 80IA of the Income Tax Act, 1961 (hereinafter referred to as "the Act") on the addition made u/s. 14A r.w. Rule 8D.
2 ITA No. 463/PUN/2014, A.Y. 2010-112. The brief facts of the case as emanating from records are: The assessee company is engaged in infrastructure development activity, mainly construction of roads and bridges on Built Operate and Transfer (BOT) basis. The assessee filed its return of income for the impugned assessment year on 15-10-2010 declaring taxable income as 'Nil'.
During the course of scrutiny assessment proceedings the Assessing Officer made disallowance of `7,41,26,060/- u/s. 14A r.w. Rule 8D.
Aggrieved by the assessment order dated 01-03-2013, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) by placing reliance on various decisions including the decision of Hon'ble Bombay High Court in the case of Commissioner of Income Tax Vs. Gem Plus Jewellery India Ltd. reported as 42 DTR 73 and the decision of Pune Bench of the Tribunal in the case of ITO Vs. Kalbhor Gawade Builders reported as 155 TTJ 124 decided the issue in favour of the assessee.
Against the order of Commissioner of Income Tax (Appeals) in allowing deduction u/s. 80IA of the Act on the additions made u/s. 14A r.w.
Rule 8D, the Department is in appeal before the Tribunal.
3. Shri Neelesh Khandelwal appearing on behalf of the assessee submitted at the outset that the issue raised in the present appeal by the Department has already been adjudicated by the Tribunal in assessee's own case in ITA No. 746/PN/2013 for the assessment year 2009-10 decided on 30-12-2016.
3.1 The ld. AR further submitted that the CBDT Circular No. 37/2016 dated 2nd November, 2016 categorically mentions that the Department shall not file any fresh appeal in respect of deduction claimed on enhanced profits due to disallowances made u/s. 32, 3 ITA No. 463/PUN/2014, A.Y. 2010-11 40(a)(ia), 40A(3), 43B etc. of the Act. Where the appeals have already been filed and are pending for adjudication the same may be withdrawn/not pressed.
4. On the other hand Shri M.K. Gautam representing the Department fairly admitted that the issue raised in the present appeal has already been decided in favour of the assessee in assessee's own case for the assessment year 2009-10.
5. Both sides heard. Orders of the authorities below perused. The Department has filed present appeal by raising solitary ground against allowing deduction u/s. 80IA on the addition made u/s. 14A r.w. Rule 8D. It is an undisputed fact that the assessee is eligible to claim deduction u/s. 80IA of the Act. The effect of disallowance u/s. 14A r.w.
Rule 8D is that there is increase in profits. The assessee is eligible to claim deduction on such increase in profits, as the said profits are arising from the business of assessee eligible to claim deduction u/s.
80IA of the Act. Similar view has been taken by the Tribunal in the case of ITO Vs. Kalbhor Gawade Builders (supra). Further, we find that disallowance u/s. 14A r.w. Rule 8D was made in the case of assessee on similar grounds in assessment year 2009-10. The assessee carried the issue in appeal before the Tribunal. The Co-ordinate Bench of the Tribunal decided the issue in favour of the assessee. The relevant extract of the order of Tribunal is as under :
"8. In ground No. 2 raised in the grounds of appeal, the assessee has assailed disallowance u/s. 14A. The assessee is a holding company of M/s. Hari Infrastructure (P) Ltd. The assessee has advanced borrowed money to the said subsidiary company for repayment of loan. It has been contended that the borrowed money has been advanced to the subsidiary on account of commercial expediency. Further, the assessee has made investment in two subsidiary companies i.e. M/s. Nagar 4 ITA No. 463/PUN/2014, A.Y. 2010-11 Kopergaon Infrastructure Pvt. Ltd. (hereinafter referred to as "NKIPL") `26.50 crores and M/s. Pranjal Infrastructure Pvt. Ltd. (hereinafter referred to as "PIPL") of `3.02 crores. The assessee has formed these two new companies as Special Vehicle Purpose (SPV) to accomplish the projects allotted by Public Works Department (PWD), Government of Maharashtra. The said projects were purportedly allotted to the assessee on the condition that each project should be carried out by separate SPV of the assessee company. The assessee has made investment in the above said two newly formed SPVs by utilizing borrowed funds. The assessee has paid interest to the tune of `3.44 crores on the investment made in NKIPL and `0.23 crores in respect of investment made in the shares of PIPL. It is the case of the assessee that the assessee has not received any exempt income in the form of dividend etc. from the aforesaid two newly formed companies.
The ld. AR has made an alternate submission in ground No. 4 of the appeal that even if disallowance u/s. 14A is sustained. The assessee is eligible to claim deduction u/s. 80(IA) on the said disallowance. To support his submissions the ld. AR has placed reliance on the CBDT Circular dated 02-11-2016.
9. We find that the Hon'ble Delhi High Court in the case of Commissioner of Income Tax Vs. Oriental Structural Engineers Pvt. Ltd. (supra) has upheld the order of Tribunal where disallowance made u/s.
14A r.w. Rule 8D was deleted under similar circumstances. In the said case the assessee had made investment in the subsidiary company out of borrowed funds. The said subsidiary company was formed as SPV to obtain contracts from NHAI. The Co-ordinate Bench of the Tribunal in the case of Hari Infrastructure Pvt. Ltd. Vs. Dy. CIT in ITA No. 848/PN/2013 for the assessment year 2009-10 decided on 18-01-2016, under similar circumstances by following the decision rendered in the case of Commissioner of Income Tax Vs. Oriental Structural Engineers Pvt. Ltd. (supra) deleted the disallowance made u/s. 14A r.w. Rule 8D in respect of investments made in the subsidiary companies which were created as SPV to obtain and execute Government contracts. The relevant extract of the findings of Tribunal are as under :
"17. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO on the basis of his finding that interest bearing funds have been diverted to holding company for acquisition of their shares made disallowance of Rs.1,08,81,177/- u/s.14A of the I.T. Act r.w. Rule 8D of the I.T. Rules. While doing so, he rejected the 5 ITA No. 463/PUN/2014, A.Y. 2010-11 contention of the assessee that the investment made in the shares of holding companies are due to commercial expediency and therefore no disallowance of interest should be made u/s.36(1)(iii) or u/s.14A. We find the Ld.CIT(A) rejecting the various submissions made before him and distinguishing the various decisions cited before him rejected the claim of the assessee that no disallowance is called for u/s.14A of the I.T. Act.
18. It is the submission of the Ld. Counsel for the assessee that since the investments are made in shares of the holding company who in turn has invested the amount in the subsidiary company and special purpose vehicle companies, for getting contracts from the PWD department of Government of Maharashtra, therefore, the investment was for commercial expediency and therefore no disallowance of interest is called for. It is also the alternate contention of the Ld. Counsel for the assessee that since no dividend income has been received which is exempt from tax, therefore, no disallowance u/s.14A should be made. It is also another alternate contention of the Ld. Counsel for the assessee that since the entire income of the assessee is eligible for deduction u/s.80IA(4), therefore, even if any disallowance is made the business income of the assessee will go up and therefore there will be corresponding deduction of the said amount and therefore it is revenue neutral.
18.1 We find some force in the arguments advanced by the Ld. Counsel for the assessee. We find an identical issue had come up before the Hon'ble Delhi High Court in the case of Oriental Structure Engineers Pvt. Ltd. (Supra). In that case also investments were made in the subsidiary companies out of borrowed funds. The subsidiary company had to form special purpose vehicles (SPV) in order to obtain contracts from NHAI. The disallowance u/s.14A r.w. Rule 8D was restricted by the CIT(A) which was upheld by the ITAT. On further appeal by the Revenue, the Hon'ble High Court dismissed the appeal filed by the Revenue by observing as under :
"This appeal has been preferred by the revenue against the order dated 02.12.2011 passed by the Income Tax Appellate Tribunal, New Delhi in ITA No.4245/Del/20 11 in respect of the assessment year 2008-09. The issue before the Tribunal, which is also an issue before us, was whether in the facts and circumstances of the case the Commissioner of Income Tax (Appeals) had erred in restricting the disallowance under section 14A of the Income Tax Act, 1961 to 2% of dividend income of Rs.20,27,812/-.
It was the contention of the revenue that Rule 8D of the Income Tax Rules, 1962 had not been applied properly in respect of the 6 ITA No. 463/PUN/2014, A.Y. 2010-11 assessment year 2008-09. This aspect has been considered by the Tribunal in detail and it has observed as under: -
6.3 We have carefully considered the submissions and perused the records. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that only interest of Rs 2,96,731/- was paid on funds utilized for making investments on which exempted income was receivable. Further, Ld. Commissioner of Income Tax (Appeals) has observed that in respect of investment of Rs 6,07,775,000/- made in subsidiary companies as per documents produced before him, they are attributable to commercial expediency, because as per submission made by the assessee, it had to form Special Purpose Vehicles (SPV) in order to obtain contracts from the NHAI and the SPVs so formed engaged the assessee company as contract to execute the works awarded to them (i.e. SPVs) by the NHAI. In its profit and loss account for the year, the assessee has shown the turnover from execution of these contracts and therefore no expense and interest attributable to the investments made by the appellant in the PSVs can be disallowed u/s. 14A r.w. Rule 80 because it cannot be termed as expense/ interest incurred for earning exempted income. Under the circumstances, Ld. Commissioner of Income Tax (Appeals) is correct in holding that disallowance of a further sum Rs 40,556/- calculated @ 2% of the dividend earned is sufficient. Under the circumstances, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals), hence we uphold the same.
On going through the above observations we are of the view that this is merely a question of fact and does not involve any question of law much less a substantial question of law, as the Tribunal held that the expenses which have been claimed by the assessee were not towards the exempted income. The disallowance, therefore, was rightly limited to a sum of Rs 40,556/-. The question of interpreting Rule 8-D is not in dispute and the only dispute is with regard to facts which have been settled by the Tribunal.
The appeal is dismissed."
19. We also find merit in the alternate contention of the Ld. Counsel for the assessee that since assessee is entitled to deduction u/s.80IA(4), therefore, the addition, if any, has to be allowed u/s.80IA(4) and therefore, the same is revenue neutral. Admittedly, the income of the assessee is eligible for deduction u/s.80IA which the AO himself has allowed in the body of the assessment order. The returned business income has been allowed by the AO as deduction u/s.80IA as per the 7 ITA No. 463/PUN/2014, A.Y. 2010-11 claim. Therefore, once a part of the interest expenditure is disallowed then the corresponding business income will go up. Therefore, the request of the Ld. Counsel for the assessee that the AO may be directed to increase the deduction u/s.80IA(4) to the extent of disallowance u/s.14A which increases the business profit to that extent is acceptable. In this view of the matter, we set aside the order of the CIT(A) and direct the AO to delete the disallowance made u/sa.14A. Ground of appeal No.1 as well as the first issue in the additional ground raised by the assessee are accordingly allowed."
10. We further observe that the CBDT vide Circular No. 37/2016 dated 02-11-2016 has clarified that where disallowance has been made u/s. 32, 40(a)(ia), 40A(3), 43B etc., of the Act and other specific disallowance relating to business activity deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance. The relevant extract of the circular is as under:
"Chapter VI-A of the Income-tax Act, 1961 ("the Act"), provides for deductions in respect of certain incomes. In computing the profits and gains of a business activity, the Assessing Officer may make certain disallowances, such as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act. At times disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. Doubts have been raised as to whether such higher profits would also result in claim for a higher profit-linked deduction under Chapter VI-A
2. The issue of the claim of higher deduction on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows :
(i) If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-
deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40 (a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. This view was taken by the courts in the following cases:
• Income-tax Officer - Ward 5(1) vs. Keval Construction, Tax Appeal No. 443 of 2012, December 10, 2012, Gujarat High Court.
• Commissioner of Income-tax-IV, Nagpur vs. Sunil Vishwambharnath Tiwari, IT Appeal No. 2 of 2011, September 8 ITA No. 463/PUN/2014, A.Y. 2010-11 11,2015, Bombay High Court.
(ii) If deduction under section 40A(3) of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act. This view was taken by the court in the following case:
• Principal CIT, Kanpur vs. Surya Merchants Ltd., I.T. Appeal No. 248 of 2015, May 03, 2016, Allahabad High Court.
The above views have attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department.
3. In View of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter Vl-A is admissible on the profits so enhanced by the disallowance."
11. The Co-ordinate Bench of the Tribunal in the case of Hari Infrastructure Pvt. Ltd. Vs. Dy. CIT (supra) has already decided the issue with respect to disallowance u/s. 14A has accepted the contentions of the assessee in respect of disallowance u/s. 14A on both the grounds. Thus, in view of the facts of the case, the order of Co-ordinate Bench and the CBDT Circular, we direct the Assessing Officer to delete the disallowance made u/s. 14A of the Act. Accordingly, ground Nos. 2 and 4 raised in the grounds of appeal by the assessee are allowed."
6. The ld. AR has pointed that the present appeal filed by the Department is not maintainable in view of CBDT Circular. We find that in para 4 of the circular it has been categorically mentioned that no appeal is to be filed on this issue and if any appeal is pending in Tribunal the Department may withdraw/not press the same. The relevant extract of para 4 of the CBDT Circular reads as under :
"4. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned."9 ITA No. 463/PUN/2014, A.Y. 2010-11
7. Thus, in view of the fact that the issue raised by the Department in appeal has already been decided in favour of the assessee in the immediately preceding year and in the light of CBDT Circular dated 2nd November, 2016, the present appeal by the Department is liable to be dismissed.
8. In the result, the appeal of the Department is dismissed.
Order pronounced on Wednesday, the 11th day of January, 2017.
Sd/- Sd/-
(आर. के. पांडा / R.K. Panda) (!वकास अव"थी / Vikas Awasthy)
लेखा सद"य / ACCOUNTANT MEMBER $या%यक सद"य / JUDICIAL MEMBER
पुणे / Pune; &दनांक / Dated : 11th January, 2017
RK
आदे श क+ ,%त.ल#प अ/े#षत / Copy of the Order forwarded to :
1. अपीलाथ / The Appellant.
2. यथ / The Respondent.
3. आयकर आयु'त (अपील) / The CIT(A)-2, Nashik
4. आयकर आयु'त / The CIT-2, Nashik
5. !वभागीय %त%न,ध, आयकर अपील य अ,धकरण, "बी" ब/च, पण ु े / DR, ITAT, "B" Bench, Pune.
6. गाड1 फ़ाइल / Guard File.
//स या!पत %त // True Copy// आदे शानुसार / BY ORDER, सहायक पंजीकार / Assistant Registrar, आयकर अपील य अ,धकरण, पुणे / ITAT, Pune