IN INCOME TAX APPELLATE TRIBUNAL BENCH : CHENNAI, [BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER] . I.T.A.Nos.640 & 641 Mds 2016 Assessment years : 2010-11 and 2011-12 Dy. Commissioner of Vs. M s Carburettors Ltd Income-tax Raheja Towers Corporate Circle 1(2) 7th Floor, Sigma Wing Chennai No.177, Anna Salai Chennai 600 002 [PAN AAACC 1299 E ] ( Appellant) ( Respondent) Appellant by : Shri Shiva Srinivas, JCIT Respondent by : Shri S. Sridhar, Advocate Date of Hearing : 17-08-2016 Date of Pronouncement : 28-09-2016 O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER These appeal of Revenue are directed against separate orders of Commissioner of Income-tax (Appeals)-1, Chennai, dated 8.12.2015 in I.T.A.No.140 13-14 A-1 and 523 13-14 A-1 for assessment years 2010-11 and 2011-12 respectively passed u s 143(3) and 250 of Income-tax Act, 1961(in short Act ). Since :- 2 -: ITA Ns.640 & 641 16o. common issue arises for consideration in both appeals, for sake of convenience we dispose of same by this common order. 2. Revenue has taken following grounds in assessment year 2011-12: 1. order of CIT(A) is contrary to law, facts and circumstances of case. 2.1 learned CIT(A) erred in directing Assessing Officer to eliminate investments made in subsidiaries while working out average investment in formula of Rule 8D(2)(iii). 2.2 learned CIT(A) ought to have appreciated fact that decision of Jurisdictional ITAT in case of EIH Associated Hotels in I.T.A.No.1503 Mds 2012 for A.Y 2008- 09 dated 17.7.2013 has not been accepted by Department and appeal u s 260A has been preferred which is pending before Hon'ble High Court. 3.For these and other grounds that may be adduced at of hearing, it is prayed that order of learned CIT(A) may be set aside and that of Assessing Officer restored. 3. Brief facts of case are that assessee is in business of promoting companies and filed return of income for impugned on 29.9.2011 admitting loss of ` 2,90,88,999 - and return was processed u s 143(1) of Act. Subsequently, case was selected for scrutiny under CASS and notices u s 143(2) dated 10.9.2012 and 142(1) dated 10.9.2012 was issued alongwith questionnaire. In compliance, ld. AR of assessee appeared from :- 3 -: ITA Ns.640 & 641 16o. time to time and submitted details called for. assessee filed clarifications by letter dated 26.4.2013 alongwith financial statements and also explained that assessee-company has obtained loans for investing in sister concerns being M s Ucal Fuel Systems Ltd. and during financial year 2010-11, assessee- company has received dividend of ` 1,08,20,089 - and also interest income from sister concern of ` 2,27,52,497 -. Out of said amount, assessee has made advances to other associate companies. Assessing Officer on perusal of financial statements found that assessee-company has obtained unsecured loan of ` 35 crores from Central Bank of India and invested sum of ` 23,01,44,989 - in equity shares of M s Ucal Fuel Systems Ltd. and remaining amount was advanced to assessee s sister concerns. Also, in Profit & Loss Account assessee-company claimed interest expenditure of ` 5,17,12,444 - on loan. Assessing Officer is of opinion that assessee has availed loan from bank and has made investment in equity shares of sister concern and interest expenditure in respect of investment in shares should not be allowed as dividend income is exempt from tax. It was explained that there is nexus between interest income and dividend income, interest expenditure paid and dividend received from sister concern. It was further explained that assessee :- 4 -: ITA Ns.640 & 641 16o. has invested in equity shares out of borrowed capital and interest income is claimed in Profit & Loss Account. Therefore, Assessing Officer issued show cause to assessee why disallowance u s 14A should not be made. contention of ld. AR that assessee-company has made investments on commercial expediency and therefore, provisions of sec. 14A cannot be applied and relied on decision of Co-ordinate Bench. Assessing Officer considered submissions, judicial decisions and provisions of law and was of opinion that interest expenditure in respect of investment made in equity shares of sister concern has to be disallowed and applying mandatory provisions of sec. 14A r.w Rule 8D(2), has worked out disallowance u s 8D(2)(i), 8D(2)(ii) and 8D(2)(iii) aggregating to ` 3,47,07,123 - as it pertains to expenditure directly attributable to investment in shares. 4. Aggrieved by order, assessee has filed appeal before CIT(A). In appellate proceedings, ld. AR of assessee reiterated submissions made before Assessing Officer and also explained facts and business expediency and exigencies for investment in equity shares of sister concern. ld. AR further explained that investment in sister concern was out of business :- 5 -: ITA Ns.640 & 641 16o. funds with objective of earning profit and not dividend and also supported with decisions. CIT(A) has considered investment pattern of assessee made in sister concern, M s Ucal Fuel Systems Ltd. where assessee is promoter. ld. AR contended that provisions of sec. 14A does not apply as investment in equity shares of M s Ucal Fuel Systems Ltd. was on commercial expediency and also considering future prospects of this company. He relied on decision of this Bench of Tribunal in case of EIH Hotels Ltd vs Dy. CIT in I.T.A.No. 1503 & 1624 Mds 2012 dated 17.7.2013 and Dy. CIT vs Amalgamations Ltd in I.T.A.No. 811 & 1712 Mds 2015 dated 16.9.2015 and 29.9.2015. CIT(A) considering submissions of assessee was of opinion that investment made by assessee-company in subsidiary was not for earning capital gain or dividend income but to promote subsidiary company and also it is business investment. dividend is only incidental to investment in subsidiary company. Considering facts of assessee and also judicial decisions referred CIT(A) was of opinion that investment made out of borrowed funds were for strategic investments in subsidiary company and interest attributable to borrowing has to be kept outside purview of disallowance under Rule 8D. Therefore, CIT(A) directed Assessing Officer to rework disallowance u s :- 6 -: ITA Ns.640 & 641 16o. 14A r.w. Rule 8D(2) excluding interest attributable and partly allowed appeal. 5. Aggrieved by order, Revenue is in appeal before Tribunal. ld. DR argued that CIT(A) has erred in directing Assessing Officer to exclude interest attributable to strategic investment for disallowance u s 14A r.w. rule 8D. ld. DR further submitted that Department has not accepted decision of Tribunal in case if EIH Associated Hotels Ltd in I.T.A.No. 1503 Mds 2012 dated 27.7.2013 and appeal is pending before Hon'ble Madras High Court and prayed for setting aside order of CIT(A). 6. Contra, ld. AR of assessee relied on order of CIT(A) and judicial decisions cited supra and submitted that investment in subsidiary company was not for earning dividend income but with business motive. In support, he relied on decision of EIH Associated Hotels (supra) and prayed for dismissing appeal of Revenue. 7. We heard rival submissions, perused material on record and judicial decision cited. sole contention of ld. Departmental Representative on applicability of provisions of Sec. 14A and Rule 8D(2) are mandatory. ld. Assessing Officer has :- 7 -: ITA Ns.640 & 641 16o. rightly calculated disallowance by applying Rule 8D(i)(ii) and (iii) irrespective of fact of not making distinction between investments. Further, assessee company has not made investments with motive to earn exempted income and no proportionate disallowance was made while computing total income in respect of expenditure. In appellate proceedings, ld. Commissioner of Income Tax (Appeals) considered strategic decisions of investment of assessee company in sister concerns subsidiary company with motive to earn profits and promotion of business and relied on judicial decisions and directed ld. Assessing Officer in calculating disallowance under Rule 8D (i) and (iii) and to exclude investments made in subsidiary companies. ld. Authorised Representative supported his arguments with decision of Co-ordinate Bench in case of EIH Associated Hotels Limited (supra) observed at para 6 page 10 to 12 as under:- 6. We have heard submissions made by rival parties. We have also examined orders passed by authorities below and judgments orders cited by representatives of both parties. first issue in appeal of assessee relates to dis-allowance made u s. 14A r.w.r. 8D. Assessing Officer has made dis- allowance to tune of Rs. 4,32,66,500 -.The contention of assessee is that assessee has earned dividend income of 4.6 Lakhs which is fully exempt u s. 10(34) of Act. assessee has made voluntarily dis-allowance of 45,927 - u s. 14A. assessee has made fresh investments to tune of 9.4 Crores during year. Assessing Officer held that investments have been :- 8 -: ITA Ns.640 & 641 16o. made from fresh secured loans obtained during year by assessee. CIT(Appeals) after going through submissions made by parties has come to conclusion that assessee has made investments from its own funds except for short term investments made in HDFC Cash Management Fund and DSPML Cash Plus Fund in respect of which amounts were invested from interest bearing funds borrowed from HBSC. Revenue has not been able to controvert findings of CIT(Appeals). We are of considered opinion that investments made by assessee in subsidiary company are not on account of investment for earning capital gains or dividend income. Such investments have been made by assessee to promote subsidiary company into hotel industry. perusal of order of CIT(Appeals) shows that out of total investment of 64,18,19,775 -, 63,31,25,715 - is invested in wholly owned subsidiary. This fact supports case of assessee that assessee is not into business of investment and investments made by assessee are on account of business expediency. Any dividend earned by assessee from investment in subsidiary company is purely incidental. Therefore, investment made by assessee in its subsidiary are not to be reckoned for dis-allowance u s. 14A r.w.r. 8D. Assessing Officer is directed to re- compute average value of investment under provisions of Rule 8D after deleting investments made by assessee in subsidiary company. Accordingly, this ground of appeal of assessee is partly allowed and that of Revenue is dismissed. findings of CIT(Appeals) on issue are accordingly modified . 8. Further, contention of Revenue before us that Revenue has not accepted said decision of Tribunal and appeal has already been filed before Jurisdictional High Court and same is pending. We are of opinion that mere pendency of appeal cannot be reason to take different view. order of Tribunal is binding :- 9 -: ITA Ns.640 & 641 16o. on all authorities in state of Tamil Nadu and Puducherry. Considering apparent facts, material evidence and judicial decisions, ld. Commissioner of Income Tax (Appeals) has dealt elaborately and discussed judicial decisions and directed ld. Assessing Officer to exclude investments made in subsidiary companies for purpose of computation of disallowance u s.14A r.w.r. 8D(i) &(iii) of Act and also written submissions viz-a-viz explanations and partly allowed appeal. We are not inclined to interfere with order of Commissioner of Income Tax (Appeals) on direction for recomputation of disallowance u sec. 14A r.w.r8D (ii) and (iii) and we uphold order of Commissioner of Income Tax (Appeals) and dismiss appeal of Revenue. appeal of Revenue is dismissed. 9. Coming to appeal for assessment year 2010-11, we find that assessee-company has not earned any dividend income and CIT(A) relying on decisions of this Tribunal in EIH Hotels Ltd (supra) and Cheminvest Ltd vs CIT, 378 ITR 33, was of opinion that investments are out of borrowed funds and considering investments are in subsidiary company M s Ucal Fuel Systems Ltd. interest attributable to borrowed funds should kept out of disallowance under Rule 8D(2)(i) and also since no dividend was :- 10 -: ITA Ns.640 & 641 16o. earned from investment, therefore, provisions of sec. 14A r.w. Rule 8D(ii) was not attracted. Accordingly, he directed Assessing Officer to delete addition. Aggrieved, Revenue is in appeal before us. 10. After considering rival contentions, we are of opinion that disallowance under sec. 14A r.w Rule 8D(2)(i) and (iii) are mandatory from assessment year 2008-09. investments made by assessee-company is on business expediency and therefore, as we have decided in assessment year 2011-12, we set aside order of CIT(A) and direct Assessing Officer to compute disallowance under section 14A r.w. Rule 8D by excluding interest attributable in respect of borrowed funds for investment in equity shares of subsidiary company and also to exclude value of investment in subsidiary companies while calculating disallowance under Rule 8D(2)(iii). Considering apparent facts, we set aside order of CIT(A) and remit issue to file of Assessing Officer. 11. In result, appeal of Revenue for assessment year 2010-11 is allowed for statistical purposes. 12. To summarize, I.T.A.No.640 Mds 2016 is allowed for statistical purposes whereas I.T.A.No.641 Mds 2016 is dismissed. :- 11 -: ITA Ns.640 & 641 16o. 13. Orr pronounced on Wednesday, 28th September, 2016, at Chennai. Sd - Sd - (ABRAHAM P. GEORGE) (G. PAVAN KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai Dated: 28th September, 2016 RD Copy to: 1. Appellant 4. CIT 2. Respondent 5. DR 3. ( ) CIT(A) 6. GF Dy. Commissioner of Income-tax, Corporate Circle 1(2), Chennai v. M/s Carburettors Ltd