Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S Hema Engineering Industries Ltd.,, ... on 29 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "A", NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No.4570/Del/2015
Assessment Year : 2011-12
DCIT, Circle- 11(1), Hema Engineering Industries Ltd.,
New Delhi. Sachidanand Farm House,
Kishan Garh Village,
Vs. Near DDA Sport Complex,
In front of Swimming Pool Lane,
Green Avenue, New Delhi.
PAN : AAACH0118F
(Appellant) (Respondent)
Department by : Shri R. C. Danday, Sr.DR
Assessee by : None
Date of hearing : 21-08-2017
Date of pronouncement : 29-08-2017
ORDER
PER R. K. PANDA, AM :
This appeal filed by the Revenue is directed against the order dated 30.04.2015 passed by the CIT(A)-4, New Delhi relating to assessment year 2011-12.
2. The only effective ground raised by the Revenue reads as under :-
"1. Whether on the facts and circumstances of the case & in law, the ld. CIT(A) erred in excluding the investments made in the subsidiaries companies for computing the average investments for the purpose of calculation of disallowance u/s 14A read with rule 8D of the Act."
3. Facts of the case, in brief, are that the assessee is a company and is engaged in business of manufacturing of auto parts for two wheelers and to 2 ITA No.4570/Del/2015 some extent for four wheelers and other engineering items at its various manufacturing units. It filed its return of income on 11.08.2011 declaring loss at Rs.1,62,98,973/- and book profit at Rs.7,53,16,534/-. During the assessment proceedings, the Assessing Officer observed that the assessee has received dividend income of Rs.16,92,540/- and has claimed the same as exempt. He, therefore, asked the assessee to explain as to why disallowance u/s 14A read with Rule 8D should not be made. The assessee submitted that no expenses were incurred for earning the dividend income. However, on the basis of the direction of the Assessing Officer, the assessee filed the computation under Rule 8D by which the disallowance of Rs.13,99,342/- was calculated.
4. However, the Assessing Officer was not satisfied with the same. He observed that the assessee has earned exempt income of Rs.16,92,540/- on the investment made in mutual funds and has not made any disallowance in respect of expenses incurred for making such investment, which requires close vigil and monitoring. He observed that the assessee's total turnover was Rs.553 crores and total turnover in respect of mutual funds was Rs.25 crores. He, therefore, held that certain common expenses such as audit fee, etc. are to be incurred for both such incomes, in addition to rental expenses, personnel cost, depreciation, communication cost, etc.. According to him, the provisions of Rule 8D were to be applied. He accordingly, made disallowance of Rs.2,39,42,234/-.
5. Before the CIT(A), the assessee filed detailed submissions. It was submitted that disallowance u/s 14A would arise, only if any expenditure is 3 ITA No.4570/Del/2015 actually incurred for making investments against which exempt income has been earned. It was argued that while making disallowance under Rule 8D, the Assessing Officer has not pointed out any particular expenditure that was incurred for earning the exempt income. Since the Assessing Officer failed to establish the pre-requisite nexus between the expenditure disallowed and the investments made from which exempt income was or shall be earned, no disallowance was called for. The assessee further submitted that the Assessing Officer while applying the provisions of Rule 8D had written in details about the concept and features of mutual funds and the cost involved in making investment therein without realizing that the earning by the assessee on account of dividend income was from its equity holding in a foreign company which was taxable during the year. It was argued that under the provision of section 10(34), such dividend income from foreign company was not exempt and, therefore, no exempt income was earned by the assessee. It was accordingly argued that the very basis of the Assessing Officer in applying the provision of Rule 8D was misplaced. The assessee argued that all investments of the assessee were made out of general reserves and accumulated profits and no investment was made out of borrowed funds and, therefore, no disallowance under Rule 8D(2)(ii) can be made. Relying on various decisions, it was argued that no disallowance u/s 14A is called for.
6. The assessee further argued that where there are identifiable expenditure which was directly related to investments then only such administrative 4 ITA No.4570/Del/2015 expenses can be disallowed and not otherwise. Referring to the decision of Chennai Bench of the Tribunal in the case of EIH Associated Hotels Ltd. vs. DCIT, it was argued that the Tribunal in the said decision has held that where investments are made by the assessee in its subsidiary company, the same are not to be reckoned for disallowance u/s 14A. It was argued that out of the total investments of Rs.25.24 crores, the investment in wholly owned subsidiary is 16.67 crores, while the balance amount is investment in other group companies including foreign subsidiaries. Further, no dividend was actually received during the year from the above companies which was exempt. So far as the computation of average investments which the Assessing Officer has taken at Rs.24,16,59,592/- the assessee referred to schedule 6 of the Balance Sheet of the company and argued that the total investments as on 31.03.2010 and 31.03.2011 respectively are as under :-
Table-1 Schedule : 6 Investments 31.03.2011 31.03.2010 Quoted - -
Unquoted
a) Wando India Pvt. Ltd. (Formerly Tobu India 7,54,954 7,54,954 Pvt. Ltd.)
b) Eurotherm Hema Radiators India Ltd. 16,67,46,453 16,67,46,453
c) Eurotherm Gmbh, Germany 58,87,317 58,87,317
d) Sabo Hema Automotive Pvt. Ltd. 3,71,50,000 2,81,50,000
e) Hema Engg. Ind. Ltd. D.O.O. Laktasi, Bosnia 1,15,36,965 1,15,36,965
f) Eurotherm Heating Systems Ltd. 9,99,700 -
g) Hema & Geja Kft, Hungry 1,71,31,401 1,77,08,116
h) Hema Global Trading FZE, Dubai 4,28,590 -
i) Verlichhi Hema Automatives Pvt. Ltd. 11850000 50000
252485380 230833805
5
ITA No.4570/Del/2015
7. It was argued that the dividend received from foreign
companies/subsidiaries being not exempt and taxable should not be included in the amount of investment. Further, investment in the subsidiary companies which is engaged in the same line of business as that of the assessee also should be excluded. In was argued that the investment in the subsidiary company namely Wando India Pvt. Ltd. in which the assessee has made substantial investment for business purposes also be excluded. Referring to the order of the ld. CIT(A) for assessment years 2009-10 and 2010-11 it was brought to the notice of the ld. CIT(A) that such investments were excluded from the scope of provision of Rule 8D. Certain computational errors while calculating the average assets was brought to the notice of the CIT(A).
8. Based on the argument advanced by the assessee ld. CIT(A) partly allowed the grounds raised before him by observing as under :-
"6. I have carefully considered the facts of the case in the light of the submission made by the appellant and the applicable law in this regard. Accordingly, my decision in the matter is as under:
6.2 I find that the appellant has earned dividend income of Rs.16,92,540/- from a foreign company, which is an associate company. The dividend from foreign company is not exempt u/s 10(34), therefore, effectively no exempt income was earned by the appellant during the year. Accordingly, the basic premise on which the Ld. AO has proceeded ahead was based on incorrect facts. The appellant has made investments in various group companies, four of which are foreign companies, the dividend from which is not going to be taxed. With regard the other five companies, the appellant has made investment in its 100% subsidiaries M/s Eurotherm Hema Radiators India Ltd., Which is also engaged in a same line of business. This investment has been made in the earlier years and has been carried forward in the current year. Similarly, investment in M/s Wando India Pvt. Ltd. which is another group subsidiary has been made in the earlier years, which have been carried forward during the year. That company also in same business.
6.3 Keeping in view the fact that the appellant had made investment in the group companies/subsidiaries for the business purposes and such companies are engaged in the same line of business evidently, such investment cannot be held to 6 ITA No.4570/Del/2015 be for earning dividend income, which undoubtedly has not been earned during the current year or in the earlier years. Under the circumstances I find no justification for inclusion of these two companies within "average investment" also. 6.4 Nevertheless, the appellant has been holding significant investments in three other companies, out of which two are the group companies. In making such an investments, it cannot be ruled out that no administrative expenses would have been incurred for such purposes. The appellant has pleaded that its own funds exceed the amount of investments significantly and hence, pleaded that under the circumstances, provision of u/s 14A does not apply to its case. It is seen that the appellant had incurred huge interest expense amounting to RS.27.91 crores as against which it has its own funds of Rs.40.02 crores at the beginning of the year plus further accretion of profit of Rs.16.50 crores during the year. It is thus evident that while significant amount of own funds were available with appellant, equally significant amount of borrowed funds were also at the disposal of the appellant. Therefore, it cannot be held that in making new investment during the year, no amount of borrowed funds would have gone towards such investments.
6.5 Under the circumstances, I hold that the lack of satisfaction of the AO with the claim of the appellant made in the return of income that no expenses were incurred for earning the exempt income was based on cogent grounds. Under the circumstances, following the decision of Delhi High Court in the case of CIT vs. Maxopp Investment Limited 64 DTR 122 (Del.), I hold that the Ld. AO was justified in invoking the provisions of Ruled 80, which is the only prescribed method left with the AO where he is not satisfied with the correctness of the claim of the Appellant with regard expenses incurred for earning exempt income, having regard the accounts.
6.6 Having held that the AO was justified in invoking the provision of Rule 8D, in my considered view the computation of Rule 8D as made by the Ld. AO suffers from severe fallacies and requires due correction. The Ld. AO has erroneously taken the value of "average assets" by excluding the current liabilities and provisions from the value of the 'total assets' as on 31.03.2010 and 31.03.2011.
The values as per the balance sheet have to be duly substituted, according to which the 'average value of assets' would come at Rs.4,17,40,65,907/-. 6.6.2 Secondly, with regard 'average investments', based on my decision in para 6.2 above, the value of investment made in the four foreign companies has to be excluded. Similarly, the investment made in the 100% subsidiaries also has to be excluded, being made for business purposes and not for earning dividend, in view of the decision of Hon'ble Delhi High Court in the case of CIT v Oriental Structural Engineers (P.) Ltd. [2013] 35 taxmann.com 210 (Delhi). Keeping in view the above, the 'average value of investments' would come at Rs.390,99,850/-. 6.6.3 Lastly, from the amount of interest expenses, interest on term loan Unit-8 (Haridwar) of Rs.29,76,188/- and interest on term loan Unit-4 (Hosar) amounting to Rs.l,02,63,270/- are also to be excluded from the amount of interest to be disallowed u/s 8D (2)(ii). This has to be further netted off with the amount of interest income received amounting to Rs.7,73,21,494/-, keeping in view the decision of ITAT Mumbai in the case of Morgan Stanley India Securities vs. ACIT (supra). In view of the above, the Ld. AO is directed to re-compute the disallowance under Rule 8D accordingly."
7ITA No.4570/Del/2015
9. Aggrieved with such order of CIT(A), the Revenue is in appeal before the Tribunal.
10. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the 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 Assessing Officer made disallowance of Rs.2,39,42,234/- u/s 14A read with Rule 8D on the ground that assessee has earned exempt dividend income of Rs.16,92,540/- and has not made any disallowance u/s 14A read with Rule 8D while computing the disallowance of Rs.2,39,42,234/-. The Assessing Officer computed the same as under :-
i) The amount of expenditure directly relating to income Nil 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 Rs.27,91,71,060/-
the amount of interest included in clause (i) incurred during the previous year;
2,27,33,936 B- The average of value of investment, income from which Rs.24,16,59,592/-
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 Rs.2,96,75,62,000/-
of the previous year.
iii) An amount equal to one-half per cent of the average of Average investments:
the value of investment, income from which does not or Rs.24,16,59,592/- shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last = 0.5% of Rs. 24,16,59,592/- Rs 12,08,298/-
day of the previous year. = Rs.12,08,298/-
Total Rs.2,39,42,234/-
11. We find the ld. CIT(A) directed the Assessing Officer to exclude the investment made in the subsidiary company for computing the average investment for the purposes of calculation of disallowance u/s 14A read with Rule 8D which has already been reproduced in the preceding paragraph. From 8 ITA No.4570/Del/2015 the details furnished by the assessee before the CIT(A), we find it was categorically stated that the dividend income from the foreign company as per Sl.No. c, e, g and h (total number 4) are taxable and not exempt u/s 10(34) of the I.T. Act. We, therefore, uphold the order of the CIT(A) in directing the Assessing Officer to exclude the investments in those companies for computing the average investments.
12. Similarly, the assessee has made investment in its 100% subsidiaries of M/s Eurotherm Hema Radiators India Ltd. and M/s Wando India Pvt. Ltd.
which are also engaged in same line of business are subsidiary company. The findings of ld. CIT(A) that these investments were made in the earlier years and has been carried forward to the current year could not be controverted by the ld. DR. The ld. DR also could not controvert the finding given by the CIT(A) that the investments were made for the purposes of business and the companies are engaged in same line of business. Therefore, we agree with the finding of the ld. CIT(A) that such investment cannot be held to be for earning dividend income. Further, no dividend has been earned during the current year or in the earlier years from the above companies. Under these circumstances, we find no infirmity in the order of the CIT(A) in holding that there is no justification for including those two companies for computing the average investment. In view of the above discussion, we are in agreement with the finding given by the ld. CIT(A) that the investment made in the subsidiary companies be excluded for computing the average investment for the purposes of computation of 9 ITA No.4570/Del/2015 disallowance u/s 14A read with Rule 8D since no dividend income has been received from these companies during the year and the investments were made in the earlier years and has been carried forward into the current year and the companies are in the same line of business. The ground raised by the Revenue is accordingly dismissed.
13. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on this 29th day of August, 2017.
Sd/- Sd/-
(SUDHANSHU SRIVASTAVA) (R. K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 29-08-2017.
Sujeet
Copy of order to: -
1) The Appellant
2) The Respondent
3) The CIT
4) The CIT(A)
5) The DR, I.T.A.T., New Delhi
By Order
//True Copy//
Assistant Registrar
ITAT, New Delhi