Income Tax Appellate Tribunal - Bangalore
M/S Karnataka State Financial ... vs Assistant Commissioner Of Income Tax ... on 24 September, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER
AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER
ITA No.427/Bang/2017
Assessment year : 2011-12
The Assistant Commissioner of Vs. M/s. Karnataka State Financial
Income Tax, Corporation Ltd.,
Circle 4(1)(1), "KSFC Bhavan", No.1/1,
Bangalore. Thimmaiah Road,
Near Cantonment Railways
Section,
Bangalore - 560 052.
PAN: AAACK 9480H
APPELLANT RESPONDENT
Appellant by : Shri C.H. Sundar Rao, CIT(DR-I)(ITAT), Bengaluru.
Respondent by : Shri A.C. Raju, CA
Date of hearing : 06.09.2018
Date of Pronouncement : 24.09.2018
ORDER
Per N.V. Vasudevan, Judicial Member
This is an appeal by the Revenue against the order dated 19.12.2016 of the CIT(Appeals)-12, Bengaluru relating to assessment year 2011-12.
2. Gr.No.1, 6 & 7 raised by the revenue are general in nature and does not call for any specific adjudication.
3. Gr.No.2 & 3 raised by the Revenue reads as follows:-
ITA No. 427/Bang/2017 Page 2 of 11"2. On facts of the case, Whether the Ld.CIT (A) is right in concluding that the provision of section 14A r.w.r. 8D is not applicable in this case when the AO has clearly held that the assessee has failed to prove the source of investment in the State Govt. undertaking.
3. On facts of the case, the Ld. CIT (A) ought to have appreciated that the assessee has failed to show that the fund received from the Govt. of Karnataka has been utilized in making the investment in the State Govt. undertaking."
4. The Assessee is a corporation established by the State of Karnataka under the State Financial Corporation Act, 1951. As far as ground no. 2 & 3 raised by the revenue are concerned the facts are that the assessee earned income which does not form part of the total income and therefore expenditure incurred by the assessee to earn such income had to be disallowed while computing income from business as required under the provision of section 14A of the Income Tax Act, 1961 (Act) read with Rule 8D of IT Rules 1962 (Rules).
5. The Assessee had computed the disallowance u/s.14A of the Act read with Rule 8D of the Rules, without considering investments made by it in three Pubic Sector Enterprises viz., (i) Cauvery Neeravari Nigam Ltd., of Rs.150,00,00,000/- (ii) M/S.Karnataka Neeravari Nigam Ltd. Of Rs.200,00,00,000/- and (iii) Krishna Bhagya Jala Nigam Ltd., of Rs.110,00,00,000/- in all totalling Rs.460 Crores while computing average value of investments for the purpose of Rule 8D of the Rules. The Assessee also did not consider an investments of Rs.65.33 Crores while computing average value of investments for the purpose of Rule 8D of the rules, being investments made in debt funds while making disallowance u/s 14A of the Act.
ITA No. 427/Bang/2017 Page 3 of 116. As per sub rule 2 of Rule 8D, the expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts :-
(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 -
A = amount of expenditure by way of interest (other than the amount of interest directly relating to income which does not form part of total income) 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.
(iii) an amount equal to 0.5% of the average of the 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. Further, the term 'total assets' has been defined to mean total assets as appearing in the Balance Sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.
7. In the present case, admittedly, there was no direct expenses and therefore there was no necessity of invoking rule 8D2(i) of the Rules. There was interest expenses and other expenses and therefore disallowance had to be made in terms of Rule 8D(2)(ii) & (iii) of the Rules of interest expenses and other expenses. In terms of Rule 8D(2)(ii) & (iii) of ITA No. 427/Bang/2017 Page 4 of 11 the Rules, the average value of investments had to be worked out. The question is while working out average value of investments, should one include the investments which yielded dividend income during the relevant previous year or all investments irrespective of the fact whether the investments yielded dividend income or not during the relevant previous year. The plea of the Assessee was that only investments which yielded dividend income should be considered while working out the average value of investments for the purpose of applying Rule 8D(2)(ii) & (iii) of the Rules.
8. The AO did not agree with the aforesaid computation of disallowance of expenses u/s.14A of the Act. He computed the disallowance u/s.14A of the Act as follows:-
4.9 Hence rule 8D(2)(ii) and (iii) are applied here and the disallowance is calculated as under:
Total direct interest expenditure NIL ....................... (p) Total indirect interest expenditure Rs. 70,44,20,000 Disallowance u/r 8D(2)(ii) D= Ax B , where C A= Rs. 70,44,20,000 A= indirect interest expenditure, B= Average of investments and B= Rs. 497,45,42,000 C= Average of assets C= Rs. 2576,88,62,500 AXB = 13,59,84,539.... (q) C Disallowance u/r 8D(2)(iii) 0.5% of average of investments Rs. 2,48,72,710 (r) Total disallowance u/r 8D (p)+(q)+(r) Rs.16,08,57,249/-
However, the assessee company has already disallowed an amount of Rs.19,01,760/-. Hence, Rs.15,89,55,489/- is now ITA No. 427/Bang/2017 Page 5 of 11 disallowed and added back to total income u/s. 14A of the I.T. Act r.w.r. 8D of the I.T. Rule."
9. On appeal by the Assessee, the CIT(A) accepted the plea of the Assessee. Aggrieved by the order of the CIT(A), the revenue has raised Gr.No.2 & 3 before the Tribunal.
10. We have heard the rival submissions. It was brought to our notice that the Hon'ble ITAT Kolkata in the case of REI Agro Ltd. Vs. DCIT 144 ITD 141 (Kol-Trib) has held that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of Rule 8D(2)(ii) & (iii) of the Rules. The relevant observations of the Kolkata Bench of the Tribunal are as follows:-
"7.1 In any case, the working of the disallowance under sub- part (ii) of subclause (2) of rule 8D as made by the AO also suffers from a substantial error in so far as in the said rule in regard to the numerator B, the words used are the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance-sheet as on the first day and in the last day of the previous year. Here the AO has taken into consideration the investment of Rs.103 crores made this year, which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. This is why the question of satisfaction is provided in section 14A and rule 8D(1), that relates to the accounts of the assessee. Thus, it is not the total investment at the beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. A question may arise as to why the term "average of the value of ITA No. 427/Bang/2017 Page 6 of 11 investment" is then used. The term average of the value of investment would be to take care of cases where there is the issue of dividend striping. In any case, as we have already held that the assessee has not incurred any expenditure by way of interest during the previous year, which is not directly attributable to any particular income, the findings of the ld. CIT(A) on the issue stand confirmed and consequently the appeal filed by the Revenue stands dismissed.
8. In respect of provisions of rule 8D(2)(iii), which is the subject-matter of the appeal in the assessee's hand, a perusal of the said provision shows that what is disallowable under rule 8D(2)(iii) is the amount equal to ½ percentage of the average value of investment the income from which does not or shall not form part of the total income. Thus, under sub-clause (iii), what is disallowed is ½ percentage of the numerator B in rule 8D(2)(ii). Again this is to be calculated in the same line as mentioned earlier in respect of Numerator B in rule 8D(2)(ii) of the Act.
8.1 Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under section 14A read with rule 8D(2)(iii), which is issue in the assessee's appeal, is restored to the file of the AO for recomputation in line with the direction given above. No disallowance under section 14A read with rule 8D(2)(i) and (ii) can be made in this case."
11. The aforesaid view of the Tribunal has since been affirmed as correct by the Hon'ble Calcutta High Court in G.A.No.3581 of 2013 in the appeal against the order of the Tribunal in the case of REI Agro Ltd. (supra).
12. Recently the Special Bench of the Delhi Tribunal in the case of ACIT v. Vireet Investments Private Limited [82 Taxman.com 415] held that only ITA No. 427/Bang/2017 Page 7 of 11 those investments which yielded dividend income are to be considered for computing average value of investments for the purpose of Rule 8D(2) of the Rules.
13. In view of the aforesaid legal position, we are of the view that there is no merit in Gr.No.2 & 3 raised by the revenue.
14. Ground Nos. 4 & 5 raised by the revenue reads thus:-
"4. On facts of the case, the Ld. CIT (A) has not considered the findings given by the AO in the assessment order that there is enhancement of equity shares and issue of bonds resulting in the expansion of capital base of the company which makes the expenditure as capital expenditure by relying on the decision of Hon'ble Supreme Court in the case of PSIDC Vs. CIT (1997) (225 ITR 792) (SC) & in the case of M/s Brook Bond India Ltd Vs. CIT (1997)(225 ITR 798)(SC).
5. On facts of the case, the Ld. CIT (A) ought to have appreciated that the AO has relied on the decision of Hon'ble Supreme Court in the case of PSIDC Vs. CIT (1997) (225 ITR
792) (SC) & in the case of M/s Brook Bond India Ltd Vs. CIT (1997)(225 ITR 798)(SC) in giving the above finding."
15. The AO noticed from the Schedule-L of the profit and loss account of the assessee that an amount of Rs.61,00,000/- had been claimed as expense on account of 'Stamp Duty to GOK'. The assessee furnished the breakup of the same vide its reply dated 19.12.2013 which is as under:-
ITA No. 427/Bang/2017 Page 8 of 11 Date Particulars Amount
31/03/2011 To Stamp duty-Share cap - 110 crores - 30-03-2011 11,00,000
Provision during the year
31/03/2011 To Stamp duty- Bonds - 110 crores - 25-01-2011 25,00,000
Provision during the year
19/11/2010 To SBM Treasury wing - on bonds Rs.123 crores Paid 25,00,000
during the year
Total 61,00,000
16. The assessee claimed that stamp duty payable on issue of Bonds is also a part of the expenditure incurred for mobilization of funds through issue on bonds. This is also in nature of Revenue Expenditure and therefore is to be allowed as deduction.
17. The AO disallowed the claim for deduction observing as follows:-
"5.1 The assessee's contention is not acceptable. It can be seen from the breakup of the stamp 'duty expense claimed towards increase in share capital and issue of bonds totaling to Rs.36,00,000/- (Rs.11,00,000 + Rs.25,00,000) is a provision created and not actually incurred. Thus, such expense is contingent in nature which is not allowable u/s.37 of the I.T.Act.
5.2 Further, it is seen from the Schedule-A of the balance sheet that there is increase in share capital by Rs.110 crores in the F.Y.2010-11. As per the breakup of stamp duty expense mentioned above, the assessee has claimed expense of Rs.11,00,000/- towards increase in its equity shares. Such expenditure claim for the enhancement of capital by way of equity shares is not allowable as revenue expenditure.ITA No. 427/Bang/2017 Page 9 of 11
5.3 As regards the stamp duty expense totaling to Rs.50,00,000/-Rs 25,00,000 + Rs.25,00,000) towards issue of bonds of Rs.233 crores (Rs.110 Rs.123 crore) is concerned, the assessee has submitted that the stamp on bonds is also a part of the expenditure incurred for mobilization of funds through issue of bonds. From this, it is clear that expenditure claim for enhancement of funds by way of issue of bonds is not allowable as revenue expenditure.
5.4 Any expenditure incurred by assessee for enhancement of capital by way of equity shares and by mobilization of funds by issue of bonds will be considered as a capital expenditure as it is related to the capital account of the assessee. Hence, the total stamp duty expense of Rs.61,00,000/- claimed by the assessee is disallowed u/s 37 of the I.T.Act as a capital expenditure"
18. On appeal by the Assessee the CIT(A) allowed expenses to the extent of Rs.50 lacs in connection with issue of bonds, for the following reasons:-
"14. It is noted from the assessment order that the assessing officer had disallowed the expenditure of Rs. 61 lakh under section 37 considering it as capital expenditure. Bonds are debt instruments issued at interest. Bonds are different from share capital as bonds have the nature of liability incurred for raising funds for a company at interest and do not enhance the capital structure of the assessee in the same manner as equity share capital. There is no legal authority to consider expenditure made for raising funds through bonds as capital expenditure. The expenditure of Rs. 50 lakhs made for stamp duty in relation to bonds is deleted."
19. Aggrieved by the order of the CIT(A), the revenue has raised Gr.No.4 & 5 before the Tribunal.
20. We have heard the rival submissions. It was brought to our notice that identical issue was considered in Assessee's own case by this Tribunal ITA No. 427/Bang/2017 Page 10 of 11 for AY 2010-11 in ITA No.888 & 889/Bang/2017 vide order dated 28.6.2017 and the Tribunal held as follows:-
"07. The next ground raised by the Revenue is with respect to the expenditure on issuance of bonds for Rs.25,00,000/-. The assessee claimed stamp duty expenses amounting to Rs.2500000/- under the head contingencies. It was clarified to the AO that these are one-time statutory expenses payable at fixed percentage of the value of the bond issued to the public. The expenditure was meagre compared to the capital raised by the bank and the expenditure was debited to the P & L account. It was also mentioned that the expenditure was not capital in nature and is therefore required to be allowed as revenue. For this purpose reliance was placed on the judgment of the Hon'ble Supreme Court in the matter of India Cements v. CIT [60 ITR 52] and the decision of the Hon'ble jurisdictional High Court in CIT v. ITC Hotels 334ITR 109.
08. The Ld. DR relies upon the judgment of the Hon'ble Supreme Court in Brooke Bond India Ltd v. CIT [(1997) 225 ITR 798].
09. We have heard the rival contentions and perused the material on record. In our view, the issue is squarely covered in favour of the assessee by the Hon'ble Supreme Court in the matter of India Cements (supra) had held that the debenture when issued is a loan and therefore the expenditure incurred for issuance of debenture would be admissible as revenue expenditure. Similarly in the present case, the bonds issued by the assessee were in the nature of a debt instrument and the stamp duty paid to Government of Karnataka by the assessee would be eligible as revenue expenditure as it will not enhance the capital base of the assessee. There is a distinction between the expenditure incurred for raising the loan and the instrument which had an effect of increasing the share capital. In the matter of Brooke Bond India Ltd (supra), the case before the Hon'ble SC was of increasing the share capital, but whereas in India Cements (supra), CIT v. Instrumentation Ltd [(2013) 37 taxmann.com 271], as well as in Secured Meters ltd 321 ITR611 the case was of allowing the expenditure for obtaining the loan.ITA No. 427/Bang/2017 Page 11 of 11
In view of the above, we do not find any merit in the appeal of the Revenue and therefore the same is dismissed."
21. The facts with regard to expenses on issue of bonds are identical in the present AY also. Following the order of the Tribunal for AY 2010-11, we uphold the order of the CIT(A) and dismiss Gr.No.4 & 5 raised by the revenue.
22. In the result, appeal by the revenue is dismissed.
Pronounced in the open court on this 24th day of September, 2018.
Sd/- Sd/-
( A.K. GARODIA) ( N.V. VASUDEVAN)
Accountant Member Judicial Member
Bangalore,
Dated, the 24th September, 2018.
/ Desai Smurthy /
Copy to:
1. The Appellant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DR, ITAT, Bangalore.
6. Guard file
By order
Senior Private Secretary
ITAT, Bangalore.