Income Tax Appellate Tribunal - Chandigarh
Advanced Micro Devices Pvt. Ltd., ... vs Assessee on 13 June, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH,CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND Ms. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA No. 737/CHD/2015
Assessment Year: 2007-08
M/s Advanced Micro Devices P.Ltd., Vs The ACIT,
21, Industrial Area, Ambala.
Ambala Cantt.
PAN: AABCA0652J
(Appellant) (Respondent)
Appellant by : Shri Sudhir Sehgal
Respondent by : Shri Manjit Singh
Date of Hearing : 27.05.2016
Date of Pronouncement : 13.06.2016
O R D E R
PER BHAVNESH SAINI,JM This appeal by assessee has been directed against the order of ld. CIT(Appeals) Panchkula dated 29.05.2015 for assessment year 2007-08 challenging the order of ld. CIT(Appeals) in confirming the disallowance made under section 14A of the Income Tax Act in the proceedings under section 154 of the Income Tax Act.
2. The brief facts of the case are that original assessment in this case was completed under section 143(3) of the Act on 22.12.2009 at an income of 2 Rs. 18.64 Cr which was also returned income as per revised return filed by the assessee. The Assessing Officer issued notice under section 154 of the Act for rectification for disallowing interest to Rs.3,06,035/- and Rs. 3,09,566/- under section 14A and 36(1)(iii) of the Act respectively. The assessee objected to the proposed rectification as there was no mistake apparent from record and both the issues are debatable. The Assessing Officer, however, proceeded under section 154 of the Act for rectification and disallowed both the amounts of interest under section 14A in a sum of Rs. 3,06,035/- and under section 36(1)(iii) of the Act at Rs. 3,09,566/-.
3. The assessee challenged the order under section 154 of the Act before ld. CIT(Appeals) whereby both the above additions were made. The ld. CIT(Appeals), considering explanation of the assessee, deleted addition of Rs.3,09,566/-under section 36(1)(iii) of the Act of the Act.
4. The issue in the present appeal is, therefore, disallowance of Rs. 3,06,035/- under section 14A of the Act.
5. During the rectification proceedings, the AO noted that the assessee had made investment of Rs.8,45,95,172/- in shares and in a partnership firm namely M/s Micro Instruments Co. Dividend income 3 from such shares and share of profit from the partnership firm is exempt from tax. The assessee had claimed interest expenses amounting to Rs.6,15,601/-. The AO applied the provision of section 14A of the Act that no deduction shall be allowed in respect of expenditure incurred by the assessee in relating to income which does not form part of the total income. The AO considering the mistake apparent from the record issued notice proposing the rectification. The assessee replied that disallowance u/s 14A as per Rule 8D is not appropriate as the specified rule was effective from A.Y. 2008-09. Further, the assessee had earned interest on capital from the firm as well as share of profit. The interest on capital is taxable on which the tax was paid. However, after considering the assessee's reply the AO observed that section 14A was inserted by Finance Act, 2001 and therefore, made a disallowance of Rs.3,06,035/- on account of interest u/s 14A of the Act.
6. During appellate proceedings, the counsel for the appellant submitted that disallowance of Rs.3,06,035/- by invoking the provisions of section 14A read with rule 8D is not correct as the rule specified came into force w.e.f. A.Y. 2008-09. Hence, disallowance with regard to A.Y. 2007-08 by applying rule 8D is legally not tenable. Further, after referring to the provisions of section 14A read with Rule 8D and key financial parameters as on 31.03.2006 and 31.03.2007, the appellant submitted 4 that the company had made investments from its own interest free resources coupled with the fact that no direct or indirect expenses were incurred to earn tax free income. The appellant relied on the decision of Delhi Bench of ITAT in the case of ACIT Vs. Mohan Export Pvt. Ltd. 151 TTJ 667 that where investment in shares have been made out of interest free fund and where there was nothing on record to show that investment was made from borrowed fund no disallowance can be made under Rule 8D(2)(ii) of the I.T. Rules.
6(i) The appellant further relied on the decision of Hon'ble Bombay High Court in the case of Godrej & Boycee Manufacturing Vs. DCIT 328 ITR 81 that Rule 8D cannot have retrospective application and the same can be applied only for A.Y. 2008-09. The appellant further submitted that as per sub section 2 & 3 in section 14A effecting from 01.04.2007, the AO shall follow the prescribed method only if after having regard to the accounts of the assessee he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income. On this the appellant had submitted that the AO has not pointed out any specific defect regarding the correctness of the claim of the assessee in respect of expenditure in relation to income which does not from part of the total income. The 5 expenditure actually incurred should be considered for disallowance to earned tax free income and therefore, the disallowance by the AO is not in accordance with section 14A of the Act.
6(ii) The appellant further relied on the decision of Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Hero Cycles Ltd. 323 ITR 518 that for the purpose of disallowance u/s 14A of the Act, the expenses must have been incurred for the purpose of earning exempt income. Mere fact that some interest expenses were incurred cannot be the reason for disallowance unless the nexus between the expense and the exempt income is established. The appellant concluded that i) the assessee had not incurred any direct or indirect expenses to earn to earn tax free income; ii) there is no finding by Ld. AO that any expenditure has been incurred by the assessee for earning exempt income; iii) Ld. AO has not pointed out any specific defect regarding correctness of the claim of the assessee in respect of expenditure in relation to income, which does not form part of the total income and iv) rule 8D came into force with effect from A.Y. 2008-09. Hence disallowance with regard to A.Y. 2007-08 by applying Rule 8D is legally not correct.
7. The ld. CIT(Appeals) confirmed the addition. His findings in para 5.2 to 5.5 of the impugned order are 6 reproduced as under :
"5.2 I have gone through the facts of the case and written submission filed by the appellant It is noted that the appellant had made investment in the shares and in a partnership firm. The dividend income from such shares and share of profit from the partnership firm is exempt from tax and interest expenditure have also been claimed. Therefore, the AO applied the provisions of section 14A and disallowed proportionate interest u/s 14A of the Act. On the other hand the appellant has submitted that disallowance as per Rule 8D is not effective for the A.Y. 2007-08 i.e. the year under consideration. Although, the taxability of interest on capital from partnership firm was explained but no submission was made on income from shares and share of profit from partnership firm which are exempt income. However, during appellate proceedings, the appellant has made further submission that the appellant had its own fund to make fresh investment to earn exempt income, there were no direct or indirect expenses incurred to earn such income and the AO has not discussed regarding the correctness of the claim of the appellant.
5.3 After considering the facts and submission, I find that the provisions of section 14A were inserted by Finance Act, 2001 with retrospective effect from A.Y. 1962-63. The object of the section is to disallow expenditure that have been incurred in relation to income which do not form part of the total income under the Act. So, the apportionment of expenditure was applicable even during the A.Y. 2007-08. However, due to ambiguity in such apportionment and to provide a proper method Rule 8D was made applicable from A.Y. 2008-09. The AO in its order has nowhere mentioned that the proportionate interest has been disallowed by applying Rule 8D of the I.T. Rules. It was open to the AO to make a reasonable apportionment of expenditure incurred for earning exempt income even in the absence of specified Rule 8D. Therefore, the applicability of provisions of section 14A in the absence of Rule 8D during the year under consideration cannot be challenged. However, the section 14A refers to expenditure incurred in relation to income which does not form part of the total income. In the 7 instant case, on perusal of balance sheet, it is noticed that the appellant has made investment during the year as the total investment have increased from Rs.148.68 lacs as on 31.03.2006 to Rs.845.95 lacs as on 31.03.2007. The investments are in the capital of partnership firm, Micro Instruments Company, equity shares of Luxmi Udyog Mandir Pvt. Ltd. and in PNB and units of mutual funds. The appellant has earned exempt income as dividend income of Rsl9,430/- and also share of profit and interest on capital with partnership firm of Rs.10.27 lacs and Rs.20.37 lacs respectively. Schedule - N to balance sheet shows interest & commission to bank of Rs.1,10,380/-, interest on IDS of Rs.53/-, interest on SBI FDR of Rs.30,935/-, interest against loan UBI FDR of Rs.3,54,877/- and interest on loan of Rs.l,19,356/-. The AO has adopted total of bank interest & commission and interest on loan amounting to Rs.6,15,601/- whereas the appellant has considered interest on overdraft against FDR and interest on loan amounting to Rs.5,05,168/-excluding Rs.53/- as interest on TDS. For the purpose of computation of proportionate interest u/s 14A, the total interest expenditure to be considered is taken at Rs.5,05,221/- excluding the bank commission. On perusal of computation of income, it is found that the appellant has neither computed nor deducted the expenditure incurred in relation to exempt income as per provisions of section 14A of the Act.
5.4 Section 14A inserted w.r.e.f. A.Y. 1962-63 provides that no deduction shall be made in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act, The section is applicable where the assessee generates an income which is exempt from tax, expenditure has been incurred for earning such income and the AO is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which is incurred in relation to the-income exempt from tax. In such situation, the AO will determine the quantum of such expenditure in accordance with the h / v .provisions of section 14A of the Act. In the instant case, the appellant has exempt income in the form of dividend from investments and share on profit from the partnership firm. Further, there were expenditure incurred for earning exempt income. The appellant had common fund to earn taxable as well as non taxable income which were managed together from the common establishment of the 8 appellant company. So, there were components of expenses in earning the exempt income. Here, I refer to the decision of Hon'ble Supreme Court in the case of CIT Vs. Walfort Share & Stock Brokers Pvt. Ltd. [2010] 326 ITR 1 where the Hon'ble Supreme Court recorded that the theory of apportionment of amount of expenses between taxable and non taxable income stood widened by incorporation of section 14A. The Hon'ble Court further observed that it is clear that the words 'expenditure incurred' in section 14A refers to expenditure on rent, taxes, salaries, /, interest etc. in respect of which allowances are provided for under sections 30 to 37 of the Act. This was further approved by Hon'ble P&H High Court in the case of CIT Vs. Punjab State Industrial Development Corp. Ltd. [2002] 255 ITR 351. In view of the observations of Hon'ble Court and the facts of instant case, it is clear that the appellant has not computed the correct disallowance as per provisions of section 14A of the Act for exclusion from its computation of income. The AO on finding that there was income exempt from tax and the appellant had claimed interest expenses; he proceeded with the computation of disallowance as per provisions of section 14A of the Act This observation of AO amounts to the objective satisfaction drawn by him about the correctness of claim of expenditure made by the appellant. Therefore, appellant submission on objective satisfaction of AO is devoid of merit.
5.5 Regarding the appellant's reliance on the decision in the case of Mohan Export Pvt. Ltd. (supra) as well as the decision in the case of Hero Cycles Ltd. (supra), it is noticed that the Hon'ble Tribunal and Court found that no disallowance can be made under Rule 8D(2)(ii) on categorical finding of the fact that investments were made out of non interest bearing fund. In the appellant's case, no such finding has been recorded nor the appellant has been able to substantiate that investment were out of non interest bearing funds. Therefore, the decisions are distinguishable from the facts of the instant case, whereas, I refer the decision of the Hon'ble Tribunal Chandigarh Bench in the case of Chadha Super Cars Vs. ACIT [ITA No. 1241/Chd/2011 dated 11.11.2011], where the Hon'ble Tribunal following the decision of Hon'ble High Court of P&H in the case of CIT Vs. Punjab State Industrial Development Corp. Ltd. [2002] 255 9 ITR 351 held that disallowance u/s 14A was maintainable. In the instant case, common fund has been utilized for taxable as well as non taxable income and therefore, the apportionment of the expenses related to tax free income is liable to be made. Since, rule 8D is not applicable in the year under consideration; therefore, in the absence of any prescribed method, the AO has to compute the expenses attributable to generation of tax free income. In the assessment order, the AO has considered the interest expenditure of Rs.6,50,601/- arid made disallowance of Rs.3,06,035/- u/s 14A of the Act. The AO has not given the computation to arrive at the amount of the disallowance. It is found that the interest expenditure is of Rs.5,05,221/- instead of Rs.6,50,601/-. Since, the appellant has incurred direct or\ indirect expenses to earn tax free income, the AO is directed to re-compute the apportionment of expenditure incurred for earning the tax free income as per provisions of section 14A of the Act on verification of information available on record. This ground of appeal is partly allowed for statistical purpose."
8. The ld. counsel for the assessee reiterated the submissions made before authorities below. He has submitted that in order to have a mistake to be apparent from record, it has to be on record and same must have been discussed in the assessment proceedings, instead of being a mistake which takes long drawn process of reasoning to establish. The 'record' means the record of the case comprising the entire proceedings including documents and material produced by the parties and taken on record by the authorities which were available at the time of passing of the order which is the subject matter of the proceedings for rectification. In the case of the assessee, neither any question regarding disallowance 10 of expenditure under section 14A of the Act was raised nor was the relation of expenditure with earning of the exempt income established. The Assessing Officer did not issue any questionnaire to the assessee in this regard, copies of which are filed at pages 18 to 26 of the Paper Book. Since the issue of Section 14A of the Act was not before the authorities below, there is no question of mistake apparent from record. 8(i) The ld. counsel for the assessee further submitted that the issue under section 14A is highly debatable and the Assessing Officer has, after long drawn process of reasoning and re-appreciation of the facts made disallowance which is not permissible in law and relied upon decision of Hon'ble Supreme Court in the case of T.S.Balaram, ITO Vs Volkart Brothers & Ors. 82 ITR 50 wherein it has been held, "That the mistake f rom record, i n S e c t i o n 1 5 4 - mu s t b e a n o b v i o u s a n d p a t e n t m i s t a k e a n d n o t s o me t h i n g wh i c h c a n b e e s t a b l i s h e d b y a l o n g d r a wn p r o c e s s o f r e a s o n i n g o n p o i n t o n wh i c h t h e r e m a y b e c o n c e i v a b l y t wo o p i n i o n s " . The ld. counsel for the assessee submitted that addition made by Assessing Officer is not tenable because no interest bearing funds have been used. The perusal of the balance sheet would indicate that assessee did not have any interest bearing funds outstanding at the end of the relevant assessment year. The interest income on FDR was Rs. 2.60 Cr. The interest expenditure of Rs. 11 3,85,812/- is on account of loan against FDR and it can also be seen that interest income on the FDR have been duly recognized by the assessee in the Profit & Loss Account and it is very much higher than the interest expenditure leaving no net interest expenditure. Therefore, the very basis of disallowance under section 14A is unjustified. He has further submitted that Assessing Officer has not recorded any satisfaction in orders for making disallowance under section 14A of the Act.
9. PB-1 is balance sheet of assessment year under appeal showing assessee has Rs. 58.95 Cr as reserve and surplus. PB-3 shows assessee has profit before taxation in a sum of Rs. 17.83 Cr. Therefore, the investment of Rs. 8.45 Cr is out of his reserves and surplus which is more. Since no interest bearing funds have been used therefore, addition is wholly unjustified. On the other hand, ld. DR relied upon orders of the authorities below and submitted that assessee merely challenged addition on merit without challenging the proceedings under section 154 of the Act.
10. We have considered rival submissions and material available on record. It is admitted fact that assessee disclosed all the facts in the trading and Profit & Loss Account and balance sheet alongwith annexures and 12 schedules. The Assessing Officer, in the original assessment proceedings under section 143(3) did not raise the issue of disallowance under section 14A and did not discuss anything in the assessment order. The Assessing Officer in the rectification proceedings under section 154 raised the issue of disallowance under section 14A and considered the details from the Profit & Loss Account and balance sheet filed on record proposing to disallow interest under section 14A of the Income Tax Act. Hon'ble Supreme Court in the case of V o l c a r t B r o t h e r s ( s u p r a ) h e l d t h a t , " T h e m i s t a k e mu s t be apparent f rom record and must be a obvious and patent mistake and not something wh i c h can be e s t a b l i s h e d b y a l o n g d r a wn p r o c e s s o f r e a s o n i n g o n p o i n t o n wh i c h t h e r e m a y b e c o n c e i v a b l y t wo o p i n i o n s " . The way the order under section 154 have been passed, would clearly establish that it was not an obvious or patent mistake for disallowing interest under section 14A. The Asses si ng Offi cer has gone on record i n detai l and after l ong dra wn proces s of reasoni ng , made di sal l o wance under secti on 14 A in the recti fi cati on proceedi ngs under secti on 154 of the Act. Further, the materi al on rec ord referred to by l d. counsel for the assessee cl earl y sho ws that assessee has o wn reserve and surpl us of Rs. 58.95 Cr as wel l as profi t i n the year under consi derati on of Rs. 17.83 Cr whi ch w a s m u c h m o r e t h a n the investments made by the assessee. Therefore, assessee has not used any interest bearing funds for 13 the purpose of making investments for earning exempt income. Hon'ble Punjab & Haryana High Court in the case of CIT Vs Winsome Textile Industries Ltd. 319 ITR 204 held as under :
"The assessee was engaged in manufacture and sale of cotton yarn. It made investment in shares in the assessment year 1994- 95 using its own funds. The Assessing Officer disallowed the interest on the amount of investment in shares on the ground that the dividend income was exempt from tax and applied section 14A. The Commissioner (Appeals) held that no interest expenditure was incurred in the assessment year which could be disallowed under section 14A. This was confirmed by the Tribunal. On appeal :
Held, dismissing the appeal, that the assessee did not make any claim for exemption. Therefore, section 14A could have no application".
11. Hon'ble Punjab & Haryana High Court in the case of CIT Vs Abhishek Industries Ltd. 380 ITR 652 held as under :
Section 14A of the Income-tax Act, 1961, empowers an Assessing Officer to disallow expenditure in relation to exempted income from shares if interest bearing funds have been used by the assessee. Section 14A may only be invoked if the assessee has made investments in purchase of shares out of borrowed funds. As a consequence, if the assessee has invested his own money in purchase of shares, there is no question of disallowance under section 14A. Section 14A requires the Assessing Officer to record satisfaction that interest bearing funds have been used to earn tax-free income. The satisfaction to be recorded must be based upon credible and relevant 14 evidence. The onus, therefore, to prove that interest bearing funds were used, lies squarely on the shoulders of the Revenue. Thus, if the Assessing Officer is able to refer to relevant material while recording satisfaction that borrowed funds were used to earn interest-free income as opposed to the assessee's own funds, the Assessing Officer may legitimately disallow such a claim. The Assessing Officer, however, cannot, by recording general observations, particularly where the assessee has denied using interest bearing funds, proceed to infer that interest bearing income must have been used to earn exempted income. Section 14A, being in the nature of an exception, was to be construed strictly and only where the Assessing Officer records satisfaction, on the basis of clear and cogent material, shall an order be passed under section 14A disallowing such a claim.
The assessee made a categorical submission of fact before the Assessing Officer that no interest bearing funds had been diverted to make investments leading to tax exempt income The Assessing Officer, under section 14A read with Rule 8D of the Income-tax Rules, 1962, disallowed expenditure in respect of the dividend earned by the assessee holding that interest bearing funds had been used to earn tax-free dividend. The Commissioner (Appeals) held that the Revenue had not been able to prove that interest bearing funds were used. This was confirmed by the Tribunal holding that as the Assessing Officer had failed to prove that interest bearing funds were used, it would not invite disallowance under section 14A. On appeal:
Held, dismissing the appeal, that as there was no tangible material on record that could have enabled the Assessing Officer to record satisfaction in terms of section 14A the findings recorded by the Commissioner (Appeals) and the Tribunal that the Assessing Officer had 15 failed to discharge this onus were neither perverse nor arbitrary and, therefore, did not call for interference".
12. The submissions of the assessee and material on record clearly indicated that no interest bearing funds have been diverted to make investments leading to tax exempt income. The assessee further claimed that no expenses directly or indirectly have been incurred for the purpose of earning exempt income. The Assessing Officer has not recorded any satisfaction either in the order under section 143(3) or in order under section 154 of the Act to prove that how the interest bearing funds have been used or expenses have been incurred by the assessee for purpose of making disallowance under section 14A of the Act. The assessee further explained even the borrowed funds have no connection with the earning of exempt income. These facts clearly indicated that even on merit, disallowance under section 14A was wholly unjustified. Therefore, the issue is highly debatable and Assessing Officer has gone on a wrong premise for making disallowance under section 14A of the Act. The disallowance under section 14A in the present case is against the judgements of Hon'ble Punjab & Haryana High Court referred to above. Therefore, proceedings under section 154 were clearly abuse of the process of law in the present case. Even if assessee has not challenged the legality of the proceedings under section 154 of Income Tax Act before authorities below but it being legal issues arising from 16 the record, the Tribunal is having jurisdiction to decide the question of law. Hon'ble Supreme Court in the case of Kapoor Chand 131 ITR 451 held that, "Appellate authority has jurisdiction and duty to correct all errors in the proceedings under appeal".
13. Considering the above discussion, we are of the view proceedings under section 154 of the Act in the present case are wholly unjustified and addition on merit was also wholly unjustified.
14. In view of the above discussion, we set aside the orders of authorities below, quash the order under section 154 of the Act and delete the addition.
15. In the result, appeal of the assessee is allowed.
Sd/- Sd/-
(ANNAPURNA GUPTA) (BHAVNESH SAINI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 13th June, 2016.
'Poonam'
Copy to:
The Appellant, The Respondent, The CIT(A), The CIT,DR Assistant Registrar, ITAT/CHD