Income Tax Appellate Tribunal - Ahmedabad
Aditya Medisales Ltd., , Baroda vs Assessee on 22 March, 2016
आयकर अपील
य अ धकरण, अहमदाबाद यायपीठ ''डी' अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" BENCH, AHMEDABAD
BEFORE SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER
AND SHRI KUL BHARAT, JUDICIAL MEMBER
आयकर अपील सं./ ITA No. 1616/Ahd/2014
नधा रण वष /Assessment Year: 2009-10
Aditya Medisales Ltd, The CIT-I,
402, 4th Floor, R K Center, Vs Baroda
Fateh Gunj, Baroda-390002
PAN : AABCA 9314 J
अपीलाथ / (Appellant) यथ / (Respondent)
Assessee(s) by : Shri S.N. Soparkar, AR
Revenue by : Shri Sanjay Agrawal, CIT-DR
सन
ु वाई क तार ख/Date of Hearing : 10/03/2016
घोषणा क तार ख /Date of Pronouncement: 22/03/2016
आदे श/O R D E R
PER SHRI KUL BHARAT, JUDICIAL MEMBER:-
This appeal by the assessee is directed against the order of the learned Commissioner of Income-tax-I, Baroda, dated 13.03.2014 for Assessment Year 2009-10.
2. The assessee has raised following grounds of appeal:-
1. Re: Order passed u/s. 263 is bad in law.
1.1 The learned Commissioner of Income Tax-I, Baroda ("the CIT") erred in fact and in law in setting aside the assessment made U/s.
143(3) by invoking powers u/s. 263 of the Income Tax Act, 1961 ("the Act") despite the fact that the conditions stipulated for invoking such extra-ordinary jurisdiction were not satisfied. 1.2 The order passed by the CIT u/s. 263 is bad in law on the ground there is no finding given by the CIT about incurring any expenditure for earning exempt income. Section 263 cannot be resorted to apply arithmetical working specified under Rule 8D.
ITA No. 1616/Ahd/2014Aditya Medisales Ltd vs. CIT AY : 2009-10 2
2. Re: Disallowance u/s. 14A:
2.1 The learned CIT erred in fact and in law in observing that the disallowance u/s. 14A was not properly worked out by the Deputy Commissioner of Income Tax, Circle 1(1), Baroda ("the AO") while assessing the income of the Appellant u/s. 143(3) of the Act. 2.2 The learned CIT erred in fact and in law in directing the AO to re-compute the disallowance u/s. 14A applying Rule 8D despite the fact that the Assessing Officer had applied his mind to the disallowance made by the Appellant and was satisfied about the disallowance so made.
2.3 The learned CIT failed to appreciate the fact that while assessing the total income in scrutiny assessment u/s. 143(3), the AO had disallowed net interest expenditure of Rs. 26,19,62,722/- which otherwise would have proportionately increased the disallowance u/s.
14A and therefore on this count also there is no error in the order u/s. 143(3) passed by the AO nor the order passed by the AO is prejudicial to the interest of the revenue.
2.4 Without prejudice to above, the learned CIT erred in fact and in law in computing the disallowance u/s. 14A read with Rule 8D at Rs. 215,16,31,588 as against Rs. 6,06,477 disregarding the submissions made by the Appellant.
2.5 Without prejudice to the above, the learned CIT grossly erred in calculating the disallowance u/s. 14A read with rule 8D in following respects a. In working out the disallowance u/s. 14A on the basis of gross interest without reducing the interest earned by the Appellant b. While computing the average total assets u/r 8D current liabilities have been included in the total assets c. While calculating average investments, the investments earning taxable income have been included.
3. Your Appellant craves the right to add to or alter, amend, substitute, delete or modify all or any of the above grounds of appeal.
3. Briefly stated facts are that the case of assessee was picked up for scrutiny assessment and the assessment u/s 143(3) of the Income-tax ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 3 Act, 1961 (hereinafter referred to as "the Act") was framed vide order dated 30.12.2011. While framing the assessment, the Assessing Officer made disallowance of interest paid to the Sun Pharma Group of Rs.66,19,55,722/-, disallowance of discount claim of Rs.7,34,80,655/- and disallowance of donation of Rs.11,00,000/-; thus, he made the addition of Rs.33,65,43,377/- as against the returned income of Rs.1,82,77,859/-. Subsequently, the learned CIT proposed to revise the assessment so framed on the basis that in computation of income filed by the assessee alongwith the return for the year under consideration, i.e., AY 2009-10, shows that it had earned exempted income of Rs.4,22,54,212/- which did not form part of total income. Against this an amount of Rs.50,000/- only offered for disallowance u/s 14A of the Income-tax Act. Considering the financial expenses, administrative expenses, management expenses and other operating expenses attributable to earn the exempted income the disallowance u/s 14A r.w. Rule-8 should have been Rs.2,15,16,31,588/-. Therefore, the learned CIT proceeded to pass an order u/s 263 of the Act, thereby he directed the Assessing Officer to pass a fresh de novo assessment order. The assessee, aggrieved by this decision of the learned CIT, has preferred the present appeal.
4. Ground Nos.1 to 1.2 are with regard to validity of the order passed u/s 263 of the Act. Learned Sr. Counsel for the assessee, Shri S.N. Soparkar, submitted that learned CIT has grossly erred in invoking the provisions u/s 263 of the Act. He submitted that the conditions stipulated for invoking such extra-ordinary jurisdiction ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 4 were not satisfied as there is no prejudice caused to the Revenue by the assessment order. He submitted that the law is well settled that for invoking the provisions of Section 263 of the Act, twin conditions are to be satisfied; firstly, the assessment order so framed is to be erroneous and also prejudicial to the interest of Revenue. He submitted that the provisions of Section 263 cannot be resorted to apply arithmetical working specified under Rule 8D. The learned CIT has to demonstrate that, by the assessment so framed by the Assessing Officer, some prejudice is caused to the Revenue. The learned Counsel for the assessee, in support of his contention, has relied upon the judgment of Hon'ble Supreme Court rendered in the case of Malabar Industrial Co. Ltd vs. CIT (SC), reported in 243 ITR 83. He also reiterated the submissions as were made before the learned CIT in response to notice u/s 263 of the Act.
5. On the contrary, learned CIT-DR has supported the order of the learned CIT and submitted that it is the case where no enquiry was made by the Assessing Officer. If there is failure to make such enquiry, order is erroneous and prejudicial to the interest of Revenue. The CIT need not prove that it is erroneous and he can revise it u/s 263 of the Act. In support of his contention, learned CIT-DR has placed reliance on the judgments of the various Courts, rendered in the cases of Rampyari Devi Saraogi vs. CIT, reported in 67 ITR 84 (SC); Malabar Industrial Co. Ltd. vs. CIT, 234 ITR 83 (SC); Swarup Vegetable Products Industries Ltd vs. CIT, 187 ITR 412 (All) and Gee Vee Enterprises vs. Addl. CIT & Ors (Del), 99 ITR 375 (Del). He further submitted that it would not be proper for the Hon'ble Members of the ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 5 Tribunal to look into the merits of the issue as the court of first instance. In support of this contention learned CIT-DR has placed reliance on the decision of Delhi High Court rendered in the case of CIT vs. Eastern Medikit Ltd, reported in 337 ITR 56 (Del). He also placed reliance on the judgment of Hon'ble Gujarat High Court in the case of Addl. CIT vs. Mukur Corporation, reported in (1978) 111 ITR 312 (Guj.).
6. In rejoinder, the learned Sr. Counsel, appearing on behalf of the assessee, submitted that similar issue was decided by the Co-ordinate Bench of the Tribunal in assessee's own case in ITA No.1334/Ahd/2015 for Assessment Year 2010-11, wherein the Tribunal, after examining the issue, came to the conclusion that CIT was not justified in invoking the provisions of Section 263 of the Act.
7. We have heard the rival contentions, perused the material on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that the Assessing Officer has not made any enquiry with regard to the exempt income during the assessment proceedings and non-conducting of the enquiry by the Assessing Officer is an erroneous approach. The learned CIT is empowered u/s 263 of the Act to initiate the proceedings in case the Assessing Officer has not conducted any enquiry and applied his mind on the issue. Therefore, the initiation of proceedings u/s 263 of the Act is concerned, we do not see any illegality in to the act of the learned CIT. Therefore, the Ground No.1 of the assessee's appeal is rejected.
ITA No. 1616/Ahd/2014Aditya Medisales Ltd vs. CIT AY : 2009-10 6
8. Ground No.2 is with regard to working of disallowance u/s 14A of the Act. The learned Counsel for the assessee submitted that the learned CIT was erred in fact and law in computing the disallowance u/s 14A read with Rule 8D at Rs.2,15,16,31,588/- as against Rs.6,06,477/- disregarding the submissions made by the assessee. It is contended that the CIT has erred in working out the disallowance u/s 14A on the basis of gross interest without reducing the interest earned by the assessee. While computing the average total assets under Rule 8D, current liabilities have been included in the total assets. While calculating average investments, the investments earning taxable income have been included. The learned Counsel for the assessee has placed reliance on the judgment of Hon'ble Gujarat High Court rendered in the case of Pr. CIT vs. India Geltine and Chemicals Ltd, in Tax Appeal Nos.276 and 277 of 2015. The learned Counsel also relied upon the judgment of Hon'ble Delhi High Court in the case of Pr. CIT vs. Bharti Overseas (P.) Ltd.
9. We have heard the rival contentions and perused the material on record. Before the learned CIT, the assessee had submitted as under:-
"Sub: Reply to your Show Cause notice for action U/s.263 dated 05.12.2013; Your letter dated 06.01.2014 Ref: M/s. Aditya Medisales Pvt. Ltd A.Y.: 2009-10 PAN: AABCA9317J This has reference to show cause notice issued by your kind office regarding proceeding initiated u/s 263 of the Income-tax Act, 1961 (the "Act"). With respect to the same we submit as under:
Reply on invocation of provision of section 263 of the Act:ITA No. 1616/Ahd/2014
Aditya Medisales Ltd vs. CIT AY : 2009-10 7
1. Your office has issued notice u/s. 263 of the Act stating the order passed by the Assessing Officer U/s. 143(3) of the Act dated 30.12.2011 was erroneous in so far as it was prejudicial to the interest of the revenue. Your office has stated that considering the financial expenses, administrative expenses, management expenses and other operating expenses attributable to earn the exempted income the disallowance U/S.14A read with Rule 8 should have been Rs.215,16,31,588 (Rs.215.16 Cr.) whereas the assessee has disallowed the sum of Rs.50,000 U/s. 14A of the Act. Your office has asked us to submit as to why the order passed by the Assessing Officer U/s. 143(3) of the Act should not be enhanced or cancelled with a direction to make fresh assessment in accordance with provision of section 263 of the Act.
Further as per our request letter dated 17.12.2013, your office has also provided working of disallowance of Rs.215.63 Cr.
2. In the above respect we submit that the order passed by the AO is not erroneous and also not prejudicial to the interest of the revenue. The issue under consideration has already been examined by the AO during the course of assessment proceedings. For ready reference the chronology of events in the case of the Assessee is as under:
Event Date Regular Assessment U/s. 143(3): Return of Income filed u/s. 139(1) on 29th September , 2009 Notice u/s. 143(2) issued on 19.08.2010 Regular Assessment completed on 30.12.2011
3. We most respectfully submit that the case of the assessee was selected for regular scrutiny U/s. 143(2) of the Act. During the course of assessment proceedings the assessing officer had called for various information and explanation by issuing notices U/s. 142(1) of the Act. Your office may kindly note that the Assessee has disallowed sum of Rs.50,000 in the return of income U/S.14A of the Act. We also wish to highlight that along with the return of income, the assessee is required to file a tax audit report duly certified by a charted accountant in Form 3CA together with form 3CD. The said Form 3CD has a specific requirement of reporting any disallowance under section 14A vide ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 8 clause no. 17(1). The assessee has duly reported the disallowance of Rs.50,000/- in the said clause and the same has been certified by the Tax Auditor.
4. It is only after verifying the above return of income and tax audit report, the AO has decided to accept the contention of the Assessee. Also the AO has in the earlier years made an addition / disallowance with respect to sec. 14A and that since during the year under consideration already interest expenses have been disallowed by the AO in the assessment order therefore the Assessing Officer after due application of mind has made no disallowance under sec. 14A. Hence, it can be said that the Assessing Officer had applied his mind in respect of the said issue.
5. In this regard we would also like to submit that in terms of section 14A(2), only where an Assessing Officer is not satisfied with regard to the disallowance carried out by the assessee, can he invoke the provisions of Rule 8D. There are various judicial decisions which have held that invoking Rule 8D is not automatic as it is dependent upon the satisfaction or otherwise of the assessing officer. A few decisions are cited in this regard:
• Auchtel Products Limited - ITAT Mumbai ITA 3185/Mum/2011 It is only when the Assessing Officer is not satisfied with the correctness of the claim of the Assessee in respect of such expenditure or no expenditure having been incurred in relation to exempt income, that the mandate of rule 8D will operate. • Jindal Photo Ltd. (ITAT Delhi) ITA No. 814(Del)2011 The Assessing Officer applied rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses as adopted by the assessee.
Rule 8D can be invoked only if the Assessing Officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of the expenditure incurred in relation to tax free income. • Godrej & Boyce Manufacturing Co. Ltd.328 ITR 81 (Bom HC) • Maxopp Investment Limited 247CTR162(Delhi HC) • Saw Pipes Limited 3 SOT 237 (Delhi ITAT) ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 9
6. In our case there is no finding on record that the AO is not satisfied with the correctness of the claim of the Assessee. In the present case having regard to the totality of the facts and the disclosures made by the Assessee in the annual accounts is also in the tax audit report, the assessing officer had come to a reasonable satisfaction that no disallowance under section 14 A is called for. Accordingly no disallowance was carried out. We therefore submit that the AO has taken one of the possible views on satisfaction of disallowance U/S.14A and hence proceedings U/s.263 cannot be initiated for such issue. The disallowance of Rs.50,000/- made by the Assessee has been accepted by the Assessing Officer during the course of assessment. All relevant details pertaining to investments, exempt income, etc. were on records. The Assessing Officer has framed the assessment after due application of mind. Thus, it would be incorrect to hold that the assessment order was erroneous merely because of a different opinion which varies with the opinion of the Assessing Officer. Since the relevant material was already on record and being duly considered by the Assessing Officer based on which the Assessing Officer has taken a particular view, the mere fact that a different view is possible cannot be the basis for invoking S. 263. Hence, we respectfully submit that the issue ought not to be considered again u/s. 263.
7. We therefore submit that the AO has passed the order after considering the facts on record and after due application of mind as mentioned in the above Paras. We therefore submit that the order passed by the AO is a reasoned order. We are therefore of the view that the assumption of extraordinary jurisdiction u/s. 263 by your office is not as per law. The order of the AO is neither erroneous nor prejudicial to the interest of the revenue. We invite your kind attention to the decision of jurisdictional Gujarat High Court in the case of Amit Corpn. 21 taxmann.com 64 (2012) wherein it was held that where Assessing Officer after verification of records and making inquiry, had framed assessment, Commissioner could not revise it. Similar view is also expressed by in the case of CIT-III v. Reconstruction Co. 175 Taxmann 165 (2008) (Guj.). In this case it was held that when the Assessing Officer has taken a particulars view based
8. upon evidenced produced before him, the Commissioner cannot take a different view by invoking the provision of Section 263 of the Act.
ITA No. 1616/Ahd/2014Aditya Medisales Ltd vs. CIT AY : 2009-10 10
9. The Assessing officer considered one of the two possible and plausible alternatives. It is a finding of fact and the finding of fact is not perverse and therefore it would not be correct to state that the view of the AO is erroneous. It is a matter of judgment, which AO has exercised after due application of mind. In the case of CIT V Max India LTD 295 ITR 282 (SC), it was held that when the AO interpreted the provision of the Act in one of the two possible ways, the order of the AO was not erroneous. These are the matters which do not come within the purview of Section 263 revision. We also rely upon the decision of Mumbai High Court in the case of CIT V Gabriel India Ltd.203 ITR
108. In the said case it was held that CIT cannot revise order because he disagrees with the decision of AO, further the court observed that without finding the order of ITO as erroneous, Commissioner cannot set aside the same and direct ITO to re-examine the facts. Reliance is also placed on the decision of Delhi High Court in the case of DLF Power Ltd 329 ITR 289.
10. If the assessing officer has followed one of several permissible views, it cannot be said that the order is erroneous and prejudicial should be caused as a result of passing an erroneous order.
11. We further submit that an order cannot be termed as erroneous unless it is not in accordance with law. If the AO makes an assessment in accordance with law, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Assessing Officer. Also in the case of CIT V Gabriel India Ltd 203 ITR 108 (Mum.)
12. We would like to submit that the as per the provisions of sec. 263 the prerequisite to exercise Revision by the CIT u/s.263 is that the order of the AO is erroneous to the extent it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely,
(i) the order of the AO sought to be revised is erroneous; and
(ii) it is prejudicial to the interests of the Revenue.
13. If one of them is absent i.e., if the order of the Assessing Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue then the recourse cannot be had to s. 263(1). In the present case, the Assessing Officer has already made a ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 11 disallowance of interest expenditure incurred by the Assessee Company during the year. Thus by making disallowance there has been addition made to the income of the Assessee. Since the interest has been disallowed while making the assessment, the alleged failure to make disallowance under section 14A does not cause any prejudice to the interests of the revenue as the alleged interest has already been disallowed. Since the order of the Assessing Officer is not been prejudicial to the interest of the Revenue therefore recourse to sec. 263 cannot be taken. To justify the same we also relied upon the decision of Saw Pipes Limited (2005) 3 SOT 237 (Del. ITAT). In this case it was held that the issue of allow-ability of interest having been examined by the CIT(A), the CIT's jurisdiction to examine that issue or any other aspect related to that issue under s. 263 stands ousted.
14. We further submit that the entire issue of disallowance under section 14A is highly legally debatable and contentious issue. Since the assessing officer after due appreciation of the facts of the present case accepted the disallowance u/s. 14A carried out by the assessee and not made any disallowance under section 14A, there was no error prejudicial to the interests of the revenue. This is more so because the disallowance under section 14 A is fairly intricate based on review of the facts and the law on the subject. Hence the disallowance under section 14A is not automatic especially where more than one view is possible and the Assessing Officer has accepted a particular position taken by the assessee. In the circumstances the power to invoke section 263 is absent. We further submit that the issue of disallowance U/s. 14A is highly debatable and hence provision of section 263 is not applicable In the following cases too it has been held that where an issue is debatable, the provisions of s. 263 cannot be invoked:
CIT Vs. DLF Ltd (2013) 31 taxmann.com 158,
Delhi HC
Method Trading & Investment Ltd. (2000) 246 ITR 588 Cal HC AN SAL PROPERTIES & IND. (P) LTD. (2009) 315 ITR 225 Delhi HC
15. We therefore submit that provision of section 263 is not applicable under these circumstances based upon the above submissions. Hence we request your office to drop the further proceedings.
16. Without prejudice to the above we also submit that as per explanation (c) to section 263 (1), power under the said section can be ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 12 exercised in respect of matters which are not subject matter of any appeal. In the present case, the Assessing Officer has disallowed the interest claimed (net) by the Assessee. The assessee has carried the said matter in appeal before the CIT(A). Since the disallowance of interest is subject matter of an Appeal, it is prayed that the proposed action under section 263 is not within the scope of the powers granted under the law in this regard as a major portion of the proposed disallowance pertains to disallowance of interest.
17. We further submit that your office has also not given any finding that the Assesee has incurred any direct expenditure to earn the tax free income. Your office has proposed to apply Rule 8D(2) by stating that various expenditure is debited to profit and loss account. However there is no finding that this expenditure should have been incurred for earning the exempt income. We therefore submit that the provision of section 263 cannot be apply for merely applying the arithmetical working specified under Rule 8D(2). In the case of Accel Ltd 25 taxmann.com 377 Chennai ITAT has held that no revision can be made U/s.263 of the Act, unless any expenditure is shown for earning exempt income. In absence of finding about incurring of any expenditure in earning exempt income, revision cannot be done on ground that assessee had not offered any such expenditure. On this ground also we request your office to drop the proceedings. Submissions on merits of the case:
18. Without prejudice to our right to challenge the validity of proceedings u/s.263 of the Act on the basis of the above contentions, we submit on merits of the case as under.
19. Your office has proposed to apply the provision of Rule 8D(2) and to disallow the expenditure U/S.14A of Rs.215.16 Cr. Without prejudice to various mistakes as appeared in the working of disallowance U/S.14A, we submit that the Assessee has already disallowed sum of Rs.50,000/- and hence no further disallowance can be made U/s. 14A of the Act.
20. Your office may kindly note that Rule 8D is applicable when the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred for the earning tax free income or in case where the assessee claims that no such expenditure has been incurred for earning tax free income. In our case the Assessee has disallowed expenditure of Rs.50,000 since no other expenditure is ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 13 directly or indirectly attributable for earning the exempt income. Since all the investment were made from non-interest bearing funds, there is no question of disallowance of interest U/S.14A of the Act. We therefore submit that Rule 8D(2) is not applicable in our case.
21. During the year, the assessee has earned dividend income of Rs. 4,22,54,212 which has been claimed as exempt u/s 10(34). The Appellant had sufficient interest free funds to carry out the investments and hence no borrowed funds were utilized for making investments and hence no disallowance ought to be made under Rule 8D(2) of the Act.
22. The Assessee's interest free funds comprising of share capital and reserves and surplus were sufficient to cover the cost price of the investments which yield tax free income. Thus there could not be any disallowance of interest because none of the interest bearing funds were used for the purpose of making tax free investment, The following table provides details of own funds available and investments made:
Figures as at 31.03.2009 Amount in Rs. Share Capital 82,76,000 Reserves and Surplus 29,53,22,342 Total 30,35,98,342 Amount of tax free investments 12,54,57,104
We also submit herewith in Annexure 1 a chart containing details of the Own funds of the Company and the amount of tax free investments evidencing that the Assessee Company has substantial own funds to cover the cost of tax free investments.
23. It is evident from the above that there are sufficient interest free funds to cover the costs of the investment. In the absence of a direct nexus between funds deployed and units purchased, the interest free funds should be considered first for the purpose of the units acquired. If the cost of units is higher than the interest free funds then only for the balance amount, interest bearing funds should be considered. We rely on the following decisions in which it was held that no disallowance should be made if sufficient interest free funds are available.
24. We invite reference to the recent judgment of the Bombay High Court in the case of Reliance Utilities and Power Limited - 18 DTR 1 (Bom) (2009). This is very recent decision of the Bombay High Court ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 14 which has laid down that if the interest free funds of the Appellant are sufficient to cover the interest free advances, then the presumption ought to be that the interest free advances should be considered from the Assessee's own funds. The discretion of the Assessee to invest his own funds in the manner considered appropriate by him is not to be questioned. Even otherwise in the following decisions it has been held that if own funds are sufficient, then a presumption to be made that any investment of interest free funds should be attributed to own funds rather than borrowed funds:
Harrisons Malayalam 19 SOT 363 (Cochin) Beck India Ltd. 26 SOT 141 (Mumbai) Hotel Savera 239 ITR 795 (Madras) United Agencies 37 TTJ 374 (Ahmedabad) Assandas & Sons 18 TTJ 199 (Bombay) Torrent Financiers vs. ACIT 73 TTJ 624 (Ahmedabad) Sahni Silk Mills Pvt. Ltd. 253 ITR 294 (Delhi)
25. Further, the investments in shares of listed and unlisted companies held as investment are long term in nature and there is no major transaction-wise activity of buying or selling of these investments. Accordingly, the Assessee is not required to incur any major administrative expenses for earning the exempt income. Considering these facts, the Assessee had suo motu disallowed a sum of Rs. 50,000/- for the purpose of earning the exempt income._The amount of Rs. 50,000/- was disallowed representing 0.5% of time of the person handling investment Mr. Hiren Desai (Director) devoted towards maintenance, updating of investments and other related ancillary activities undertaken and also 0.5% of above salary as expenses towards administrative expenses. The working of the expense is disallowed is given as under:
Particulars Amount in Rs. 0.5% of Salary of Mr. Hiren Desai 25,000 Other Administrative Expenses 25,00 Total 50,000
26. We also rely on Rule 8D(2)(ii), which specifically provides that the pro rata disallowance of interest is required to be made only in a situation where the interest paid by the assessee is not specifically ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 15 attributable to earning any income. We enclose herewith in the Annexure-2, the details of interest expenditure incurred by the assessee. A perusal of the said details will indicate that the entire interest has been incurred in respect of the pharmaceutical trading business activity of the assessee. In view of the specific provision of rule 8D, no pro rata allocation of interest is required to be made.
27. Based upon the above analysis we submit that the assessee has already disallowed relevant expenditure for earning tax free income from its investment. Hence Rule 8D is not applicable. We therefore submit that no disallowance can be made under Rule 8D (2).
28. Based on the above we humbly request your office to please drop the proceedings initiated by you u/s.263 of the Act. Mistakes in computation of disallowance under Rule 8D(2):
30. Without prejudice to the above we submit that there are mistakes in the working of disallowance U/S.14A submitted by your office vide letter dated 06.01.2014. While computing the said deduction your office has considered all the investment outstanding as on 31.03.2009 & 31.03.2008. This also includes investment earning taxable income.
Further the value of total assets and the value of interest are also taken incorrectly. In view of the said mistakes the amount of disallowance is worked out at Rs.215.16 cr. which is not more than the value of investment but higher than the total amount of expenditure debited to profit and loss account of Rs.165.34 Cr. The same is elaborated as under:
a. Consideration of Gross Interest for the purpose of Rule 8D without reducing the interest incurred specifically and directly in the course of pharma business:
i. Your Honour while computing the disallowance u/s 14A has considered gross interest expenditure for the purpose of Rule 8D without deducting the interest expenditure incurred by the Assessee Company on overdue bills aggregating to Rs.66,08,23,037/-. ii. We would like to state that the interest expenditure incurred by the Assessee is on account of the overdue sales bills i.e., in other words the interest on overdue bills incurred is specific to Pharrna activity of the Assessee. As the same is specifically attributable to the Pharma activity, therefore it would be inappropriate to consider the same as attributable ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 16 towards earning of exempt income. Any expenditure attributable to a specific business activity of the Assessee should be outside the scope of working out the disallowance u/s. 14A. Hence the said interest should be excluded from the total interest expenses incurred by the Assessee Company.
iii. Without Prejudice to the above, we submit that during the course of assessment the Assessing Officer has disallowed the above expenditure by considering the same as non-business purpose and made net disallowance of Rs.26,19,62,722/-. Therefore if the entire interest expenses incurred by the Assessee are considered for working out disallowance u/s. 14A read with Rule 8D it would tantamount to double disallowance in the hands of the Assessee in respect of the same expenditure. Thus while computing the disallowance U/S.14A r.w. Rule 8D the total interest expenditure should be reduced by the amount of interest expense already disallowed by the Assessing Officer. b. Non deduction of interest income from the interest expenses: i. While working out the disallowance u/s. 14A read with Rule 8D the interest expenses are considered without deducting there from the interest income earned by the Assessee. During the year ended 31.03.2009, the Assessee had earned an interest income of Rs.
39,99,93,354/- and incurred interest expenditure of Rs. 66,21,35,396/-. It is the basic principle of law to charge net income to tax. On the same analogy interest expenditure to be considered for computing disallowance as per rule 8D has to be the net expenditure i.e. after reducing interest income from the aggregate interest expenditure. ii. We also rely on the decision in case of Morgan Stanley India Securities (P) Limited (55 DTR 177) ITAT Mumbai. wherein it has been held that interest expenditure has to be considered on net basis. Further, Hon'ble ITAT - Kolkata in the case of M. S. Trade Apartment Limited (ITA No; 1277/Kolkata/2011 for A. Y. 2008-091 has also held that interest expenditure has to be set off against interest income and if there is no interest expenditure left after adjusting the interest income, the disallowance us/ 14A is not warranted. It was also held in case of Karnavati Petrochmem Pvt. Ltd. (Ahd.) (Trib.) that in case the interest income was more than interest expense and the assessee had net positive interest income, the interest expenditure cannot be considered for disallowance u/s 14A and Rule 8D.
ITA No. 1616/Ahd/2014Aditya Medisales Ltd vs. CIT AY : 2009-10 17 iii. Thus the net interest expenditure incurred during the year should be considered for computing the disallowance as per Rule 8D. iv. Hence based on above it is respectfully submitted that the amount of interest expenditure considered for the purpose of the clause
(ii) of Rule 8D(2) is incorrect.
c. Current Liabilities should be excluded from the total assets for computing the average total assets u/r, 8D:
i. The term "Total assets" would comprise of only fixed assets, investments and current assets. In the balance sheet, current liabilities are netted off against current assets on account of the format specified under Schedule VI - Part A of the Companies Act, 1956. Such format is specified so that it would represent the Company's net working capital on the face of the balance sheet. This format has no relation with the method specified u/r. 8D. If the balance sheet were to be prepared in the T format then the current liabilities and provisions would have been reflected as liabilities. From the language used in the rule, it is clear that to ascertain the "total assets" current liabilities are not to be netted off. The only adjustment that is prescribed to determine the "total assets" is an adjustment for revaluation of assets. Further, the terminology used in the balance sheet total as per the Schedule VI format is "Application of funds" as opposed to "Total assets". Had the term "Total assets" been used in arriving at the balance sheet total as per Schedule VI, then it would be out of doubt that current liabilities need to be reduced for arriving at the average total assets as per rule 8D.
ii. In order to substantiate our claim we would like to state that even the Revised Schedule VI which has become applicable for the preparation of Financial Statements classifies current liabilities as a distinct item from current assets. As per Revised Schedule VI the current liabilities are presented below Non -Current Liabilities under the head "Equity and Liabilities". Hence on the above observations we hereby submit that for the purpose of Rule 8D the "total assets" shall be computed without adjusting the current liabilities there from. d. Investment earning taxable income should be excluded for the purpose of calculation of the average investments:
i. We would like to state that in arriving at the Investment related figures in the computation mechanism of Rule 8D, total investments ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 18 have been considered for the purpose of calculating the average investments without reducing investments which yields taxable income. As per Rule 8D(2) investment earning tax free income is required to be considered. Hence the computation of average investments required for the purpose of the clause (ii) and clause (iii) of Rule 8D(2) is incorrect. Out of the total investments as on 31.03.2009, the following investments being taxable should not be considered for working out the disallowance u/s. 14A read with Rule 8D:
Sr. Nature of investment Amount Rs. Amount Rs. Reason
No.
31.03.2009 31.03.2008
1 National Housing Bonds 50,00,000 1,45,10,000 Interest
and Rural Electrification Income
Bonds Taxable
2 National 7,000 7,000 Interest
Savings Certificate Income
Taxable
3 Investment in Fixed 15,00,00,000 182,20,61,380 On
Maturity Plans (FMP) Redemption
of FMP
offered as
taxable
income.
4 Optionally Fully 15,30,000 15,30,000 Interest
Convertible Debentures Income
taxable
Total 15,65,37,000 183,81,08,380
31. Since income from all the above investment is taxable, the same is not required to be considered while computing the average value of investment for the purpose of Rule 8D(2). Further, in the present case the proposed disallowance on account of interest itself has been computed at Rs. 2,14,60,88,499/-. This is higher than the interest expenditure incurred by the assessee amounting to Rs.662135396/-.
This is due to the fact that the average investments as per the said computation considered as Rs.1,11,86,17,994/- is higher than the average total assets of Rs.34,51,28,62s/-. This clearly indicates that there is a basic flaw in working out the proposed disallowance.
32. If your office considers the above submissions and rectify the above mistakes, the total amount of disallowance is to be worked out at ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 19 Rs.6,06,477/-. The computation of the same is enclosed as Annexure-3. Hence even if your office apply the provision of Rule 8D(2), the disallowance can be made up to Rs.6,06,477 and not Rs.215.60 Cr. This is without prejudice to our right that provision of Rule 8D(2) is not applicable in our case and the Assessee has correctly disallowed sum of Rs.50,000 U/S.14A of the Act.
10. However, the learned CIT without considering the submissions decided the issue by observing as under:-
2.2 The submission of the assessee has been considered. The case records were also examined. On perusal of the balance sheet it is noticed that during the year under consideration heavy investments were made by the assessee in shares and securities which generated exempted income.
In the statement of computation of income filed with the return of income it is seen that the assessee has shown an amount of Rs. 4,22,54,212 as exempted income u/s. 10(34) of the I.T. Act which did not form part of total income. To earn this income the assessee has shown a meagre amount of Rs. 50,000/- as disallowance u/s. 14A of the I.T. Act. Looking to the quantum of exempted income shown by the assessee, the amount of disallowance shown is illogical. No investigation have been carried out by the A.O. during the course of assessment proceedings in this regard. The basis of disallowance of Rs.50,000/- has neither been disclosed nor investigated by the Assessing Officer. Personal whim cannot be a substitute for provision of Rule 8D read with S-14A. Therefore, the assessment order by the A.O is held to be erroneous and prejudicial to the interest of revenue as the disallowance of Rs.50,000/- was shown to earn an amount of exempted income of Rs.4,22,54,212 has absolutely no basis.
It has further been submitted by the assessee that if provision of R-8D(2) is applied then disallowance would come to Rs.6,06,477/- and not 215.60 crores. From this also, it is seen that there was no basis for making of disallowance of Rs.50,000/- only. It is also noticed that working of disallowance of Rs.6,06,477/- of assessee is not in accordance with the provision of R-6D.
2.3 In view of above factual position, the assessment order passed is set-aside and the A.O is directed to pass a fresh order denovo after investigating this issue thoroughly and make disallowance following the method prescribed u/s. 14A r.w. rule 8D r.w.s 14A of the I.T.Act ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 20 after affording opportunities to the assessee. In the assessment order it is seen that the A.O has disallowed interest net of Rs. 26,91,62,722/- [Interest paid to the Sun Pharma Group Rs. 66,19,55,722 (-) Interest earned of Rs. 39,99,93,000 = Rs. 26,91,62,722). In this connection the assessee in the above submission has stated as under:
i. Without Prejudice to the above, we submit that during the course of assessment the Assessing Officer has disallowed the above expenditure by considering the same as non-business purpose and made net disallowance of Rs.26,19,62,722/-. Therefore if the entire interest expenses incurred by the Assessee are considered for working out disallowance u/s. 14A read with Rule 8D it would tantamount to double disallowance in the hands of the Assessee in respect of the same expenditure. Thus while computing the disallowance U/S.14A r.w. Rule 8D the total interest expenditure should be reduced by the amount of interest expense already disallowed by the Assessing Officer. 2.4. This plea of the assessee merits consideration. The A.O is directed to examine this issue and reduce the amount of interest expenses which were already disallowed by the A.O, if any, while computing the disallowance u/s. 14A read with Rule 8D of the I.T. Act."
11. As per section 14A(1), 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 under this Act. Therefore, the first requirement for making disallowance is that such expenditure should be related to the income which does not form part of the total income, i.e., exempt income. As per Section 14A(2), the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed (Rule 8D), if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 21 does not form part of the total income under this Act. Therefore, the second requirement is that the Assessing Officer has to satisfy about the correctness of the expenditure claimed in respect of the income which does not form part of the total income of the assessee. The method is prescribed under Rule 8D of the Income Tax Rules. Rule 8D(2) reads as under:-
"(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :--
(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 :--
B A× 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 ;
12. In the light of aforesaid provision, now we examine the correctness of the order of the learned CIT. The learned CIT observed that there is under assessment of Rs.2,15,16,31,588/-. This figure is arrived by the learned CIT by invoking the provisions of Rule 8D;
however, the contention of the assessee is that the learned CIT has taken gross interest without reducing the interest incurred specifically and directly in the course of pharma business. The contention of the ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 22 assessee is that total interest expenditure should be reduced by the amount of interest expenses already disallowed by the Assessing Officer. It is also submitted that no deduction is given in respect of interest income earned from the interest expenditure. The learned Counsel for the assessee has demonstrated that during the year ended on 31.03.2009, the assessee has earned interest income of Rs.39,99,93,354/- and incurred interest expenditure of Rs.66,21,35,396/-. Therefore, only the net of the same was required to be taken for computing the disallowance as per Rule 8D. In support of this, reliance has been placed on the decision of Co-ordinate Bench of the Tribunal in the case of Morgan Stanley India Securities (P) Limited v/s. ACIT, reported in (2011) 55 DTR 177 (Mumbai) and also the decision of the Co-ordinate Bench of Tribunal in the case of M. S. Trade Apartment Limited in ITA No. 1277/Kolkata/2011 for A. Y. 2008-09. The grievance of the assessee is also that the current liability should be excluded from the total assets for computing the average total asset under Rule 8D. The ld. CIT(A) has not considered this; he has simply remanded the issue to the file of the Assessing Officer. The Co-ordinate Bench of Tribunal (ITAT, Ahmedabad "D" Bench) in assessee's own case in ITA No.1334/Ahd/2015 has observed as under:-
"9....
Whether the net interest amount is to be considered for disallowance under section 14A is now judicially settled by a number of decisions of this Tribunal in favour of the assessee. When these decisions are pointed out to the learned Commissioner, he does not even deal with these judicial precedents. Various benches of this Tribunal, such as in ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 23 the cases of Morgan Stanley (supra) and Trade Apartment (supra) have consistently taken the view that the amount of interest, for the purpose of computing the disallowance, is to be taken at the net figure. Such being the circumstances, by no stretch of logic, the Assessing Officer considering the net interest amount for disallowance under section 14A cannot said to be erroneous. As regards the question of including the mutual funds in the figure of investments in assets yielding tax exempt income, for the purpose of computing disallowance under section 14A, we have noted that there was no income from these mutual funds which was claimed as exempt, and that income on redemption of these mutual fund units was exigible to tax as capital gain. We have also noted that variable B in the formulae set out in rule 8D(2)(ii) refers to "the average value of investments, income from which does not, or shall not, form part of the total income, as appearing in the balance sheet of the assessee....". The investment in mutual fund satisfies this condition inasmuch as the investment is stated to be in fixed maturity plan- a fact stated by the assessee all along, including in his submission before the Commission in response to the show cause notice- at page 54 of the paperbook before us, and the same has not been controverted at any stage. The income in the case of a fixed maturity plan arises only on redemption which is taxable as capital gain. On these facts, exclusion of these units in the computation of disallowance was wholly justified and there was no error in the stand of the assessee. As regards the question whether current assets are to be taken on the basis of the actual figures or net of the current liabilities, we find that the wordings of the formula are clear and unambiguous and it refers to "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". Clearly, therefore, the assets are to be taken at the balance sheet value and there is no scope of netting these figures by subtracting current liabilities from the same. A reference to the average value of 'total assets as appearing in the balance sheet' implies the total of assets appearing in the balance sheet; nothing more, nothing less. There is no reason for reducing the total of assets by the current liabilities. The wording is clear and unambiguous. What is to be taken into account is the total of assets appearing in the balance sheet and there is no controversy about the gross assets and net assets in the formulae. As for the coordinate bench decision in the case of Geojit Investments (supra), all it says is that "Since there is mistake in computing the disallowance, as rightly pointed out by the Ld. AR, we are inclined to hold that net current assets is to be considered while applying the formula under Rule 8D of the I.T. Rules instead of gross ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 24 current assets", but then the limited facts set out in this order do not make it clear as to what is the mistake in computation which has led to the conclusion that net current assets are to be adopted rather than gross current assets and whether the net current assets are net of liabilities or net of something else. There is nothing more on facts or the reasoning process, except for a reference to 'mistake in computing the disallowance' but then there is no clue about this mistake either. We find no guidance in this decision on the issue whether the assets are to be taken as aggregate of the balance sheet value or the assets are to be taken, after netting off the liabilities, from the aggregate value so arrived at. It was not, in any event, a point of dispute on which adjudication was done. The figure of net assets will always be lower vis-à-vis the gross assets and the formulae set out in rule 8D(2) will, therefore, have a larger denominator in the event of gross assets being adopted. Essentially, the figure of gross assets being adopted as a denominator will lead to lower amount. Yet, it appears that, in this case, the assessee himself pointed out that the figure of net assets should be adopted which would have led to a higher disallowance under rule 8D. Such a concession cannot, in any event, constitute an adjudication by the coordinate bench. Be that as it may, at the minimum, it is a highly contentious issue that adopting the gross assets figure, without reducing liabilities from the same, is an error. We are of the considered view that such a netting or adjustment is uncalled for, nor is it an error to take the assets at the balance sheet value. It is at best one of the possible views of the matter that the assets, net of liabilities, should be taken into account, and the other view, which is equally if not, more convincing a view is that the total value of assets should be taken into account without making any adjustment for the liabilities. It is elementary, as was held by Hon'ble Supreme Court in the case of Malabar Industrial Co Ltd Vs CIT [(2000) 243 ITR 83 (SC)], "Every loss of revenue as a consequence of an order of AO cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law". Learned Commissioner was thus in error in holding that taking the total of assets on the basis of its value in the balance sheet has rendered the assessment order erroneous and prejudicial to the interest of the revenue. The view that the assets are required to be taken on the basis of value shown in the ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 25 balance sheet, and not after reducing the liabilities, is an equally, if not more, convincing approach to the issue. Viewed in the light of Hon'ble Supreme Court's judgment in the case of Malabar Industrial (supra), thus the assets being taken on the value in the balance sheet, without adjusting the liabilities, is not such an error, error even if it is, which can lead to the assessment order being subjected to the revision proceedings under section 263."
14. The ld. Counsel appearing on behalf of the assessee has admitted the fact that the Assessing Officer has not examined the issue of disallowance of expenditure u/s 14A of the Act. There is also no dispute with regard to the fact that the assessee has earned exempt income and for the purpose of computation of disallowance, method prescribed under Rule 8D of the Income Tax Rules, 1962 is to be adopted, subject to satisfaction of conditions as prescribed under the Act. It is also not in dispute that the assessee has suo motto disallowed the expenditure of Rs.50,000/-. The Assessing Officer has not given any finding as to whether he is satisfied about such disallowance or not. During the course of appellate proceedings, the assessee itself has computed disallowance u/s 14A at Rs. 6,06,477/- which is much higher than the amount disallowed by the assessee in its Return of Income. Under these facts, we are unable to accept the contention of ld. Sr. Counsel that the assessment order is not prejudicial to the interest of the Revenue. However, we direct the Assessing Officer while working out disallowance u/s 14A of the Act, he would keep in mind the observations as made by the Co-ordinate Bench in ITA No.1334/Ahd/2015. This ground of the assessee's ITA No. 1616/Ahd/2014 Aditya Medisales Ltd vs. CIT AY : 2009-10 26 appeal is disposed of in the term of discussions made hereinabove. Accordingly, the appeal of the assessee is dismissed.
15. In the result, the appeal filed by the assessee is dismissed.
Order pronounced in the Court on 22nd March, 2016 at Ahmedabad.
Sd/- Sd/-
(ANIL CHATURVEDI) (KUL BHARAT)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 22/03/2016
*Biju T.
आदे श क" #त%ल&प अ'े&षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. संबं!धत आयकर आयु#त / Concerned CIT
4. आयकर आयु#त(अपील) / The CIT(A)
5. &वभागीय त न!ध, आयकर अपील य अ!धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड फाईल / Guard file.
/ BY ORDER, आदे शानुसार TRUE COPY उप/सहायक पंजीकार (Dy./Asstt.Registrar) / ITAT, Ahmedabad आयकर अपील य अ धकरण, अहमदाबाद