IN INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI R. C. SHARMA, ACCOUNTANT MEMBER AND SHRI SANDEEP GOSAIN, JUDICIAL MEMBER . I.T.A. No. 462 Mum 2014 ( Assessment Year: 2007-08) JSW Energy Limited ACIT, Central Circle-46, JSW Centre, Bandra Kurla Complex, Aayakar Bhavan, M. K. Road, Bandra (E), Mumabi-400 051 Vs. Mumbai . . PAN GIR No. AAACJ 8109 N (Assessee) : (Revenue) . I.T.A. No. 981 Mum 2014 ( Assessment Year: 2007 -08) ACIT, Central Circle-46, JSW Energy Limited Aayakar Bhavan, M. K. Road, JSW Centre, Bandra Kurla Mumbai Vs.Complex, Bandra (E), Mumabi-400 051 . . PAN GIR No. AAACJ 8109 N (Revenue) : (Assessee) Assessee by : Shri Rakesh Joshi Revenue by : Shri K. Ravi Kiran : 12.7.2016 Date of Hearing : 07.10.2016 Date of Pronouncement ORDER Per R. C. Sharma, A. M.: These are cross appeals filed by assessee and Revenue against order by ld. CIT(A) for assessment year (A.Y.) 2007-08. 2 ITA Nos. 462 & 981 Mum 2014 (A.Y. 2007 -08) JSW Energy Limited 2. Rival contentions have been heard and record perused. Facts in brief are that assessee is engaged in generation of power and operation and maintenance of power plants and project management services. During course of scrutiny assessment, A.O. disallowed assessee s claim of deduction u s. 80-IA in respect of interest income. Disallowance was also made u s. 14A. A.O. also recalculated book profit u s. 115JB after making additions u s. 14A. By impugned order, CIT(A) given relief with regard to administrative expenses to tune of Rs.3 lacs, thus disallowance u s. 14A was partly deleted by ld. CIT(A). Against this order of CIT(A), both assessee and Revenue are in appeal before us. 3. We have considered rival contentions and found from record that A.O. has treated interest income of Rs.2,35,87,315 - as income from other sources in place of business income . Accordingly, no deduction was allowed with respect to this income u s. 80IA. CIT(A) confirmed action of AO by following decision of Hon ble Supreme Court in case of Pandian Chemicals 129 Taxman 539. Assessee is in further appeal before us. 4. From record we found that interest income is earned on amount kept as Debt Service Reserve under loan agreement for 2X130MW power project, income from which is eligible for deduction under Section 80IA of Act. amount was kept as Debt Service Reserve for smooth functioning of Power Project and thus, it was contended that interest earned on such amount is directly related to power undertaking. 5. ld. AR relied on decision of Hon ble Supreme Court in case of ACG Associated Capsules Pvt. Ltd v. CIT 343 ITR 89 (SC), and contended that only net interest should be excluded from eligible profit and not gross interest income. We 3 ITA Nos. 462 & 981 Mum 2014 (A.Y. 2007 -08) JSW Energy Limited have carefully gone through decision of Hon ble Supreme Court in case of ACG Associated Capsules Pvt. Ltd., (supra) wherein it was held that while computing deduction u s.80HHC, net interest income which has been included in profit of business of assessee as computed under head profits and gains of business and profession is to be excluded and not gross interest income. Respectfully following proposition laid down by Hon ble Supreme Court, we direct A.O. to examine nature of interest income so received by assessee, whether it is income from business and profession or income from other sources . proposition laid down by Hon ble Supreme Court in case of ACG Associated Capsules (supra) is applicable only where interest income is assessed as business income . However, where interest income is assessed as income from other sources , benefit of netting can be given only with respect to interest expenditure which has been incurred for earning interest income which has been included in profit of business of assessee. Accordingly, we restore matter back to file of AO for deciding afresh in terms of our above discussion. We direct accordingly. 6. With regard to disallowance u s. 14A, we found that in return of income for year under appeal, assessee had made disallowance of Rs.5,28,211 - under section 14A of Act, being expenditure incurred for purpose of earning exempt dividend income amounting to Rs.28.18 crores. assessing officer however, in impugned assessment order has made further disallowance of expenses of Rs.9,14,54,978 - under section 14A of Act treating same as expenses incurred in relation to earning of exempt income. As per rectification order dated December 8, 2010, disallowance made under Section 14A of Act in assessment order has been rectified to Rs.9,04,80,767 -. Break-up of disallowance made under Section 14A of Act is as under: 4 ITA Nos. 462 & 981 Mum 2014 (A.Y. 2007 -08) JSW Energy Limited Particulars Amount in Rs. Direct Expenses 6,37,23,291 Proportionate Expenses Nil Indirect Expenses (0.5% of Average 2,67,57,476 value of Investments) Total disallowance 9,04,80,767 7. Before ld. CIT(A), it was contended by assessee that investment are in nature of business assets. Accordingly interest on borrowing used for such investment is deductible u s.36(1)(iii), and no disallowance is warranted u s. 14A. ld. CIT(A) did not agree with assessee s contention, however, disallowance made under Rule 8D(iii) was reduced by ld. CIT(A) to Rs.40,18,773 - as against disallowance of Rs.2,72,03,476 proposed by AO by observing that even though in year under consideration Rule 8D is not applicable, but reasonable disallowance is to be made. Accordingly, he estimated disallowance at Rs.3 lacs per month on account of administrative expenses as against disallowance of Rs.2,72,03,476 - made by AO. Both assessee and Revenue are in appeal before us. 8. It was argued by ld. AR that Rule 8D is not applicable for year under consideration, i.e., for A.Y. 2007-08. He further contended that no disallowance can be made with regard to fund invested for strategic investment. He further invited our attention to fact that interest expenditure has already been reversed from income while computing deduction u s. 80IA. Reliance was placed on decision of Hon ble Delhi High Court in case of Oriental Structure Engineers P. Ltd. in support of proposition that no disallowance of interest could be made in respect of investment made in subsidiary group companies for controlling interest. Our attention was also invited to fact that assessee was earning taxable income from subsidiaries. As per ld. AR, sufficient interest free funds were available with assessee, therefore in view of decision of Hon'ble jurisdictional High Court in 5 ITA Nos. 462 & 981 Mum 2014 (A.Y. 2007 -08) JSW Energy Limited case of CIT vs. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom), no disallowance on account of interest expenditure is warranted. 9. We have considered rival contentions and also deliberated on judicial pronouncement referred by lower authorities in their respective orders as well as cited by ld. AR and ld. DR during course of hearing before us. From recordwe find that A.O. has disallowed direct expenditure of Rs.6,37,23,291 - mainly on account of interest on funds invested in tax free securities. However, major investment was strategic. In view of decision of Hon ble Delhi High Court in case of Oriental Structure Engineers P. Ltd. (supra) and Mumbai Bench Tribunal in case of Garware Wall Ropes Limited (ITA No. 5408 Mum 2012 dated 15.01.2014) and J. M. Financial Ltd. (in ITA No. 4521 Mum 2012), no disallowance of interest could be made in respect of investment made in group concerns. Accordingly, we direct A.O. to exclude investment made in group concerns while computing disallowance of interest. We further direct A.O. to verify interest free funds available with assessee for making investment. As per verdict of Hon'ble jurisdictional High Court in case of CIT vs. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom), CIT vs. HDFC Bank 366 ITR 505 (Bom) and decision of Mumbai Tribunal in case of ACIT Vs Prakash I Shah (ITA No. 6349 Mum 2011), no disallowance of interest is warranted when assessee is having sufficient own funds for making investment. A.O. is directed to verify availability of interest free funds with assessee for investment. 10. In view of above, disallowance made u s.14A is restored back to file of A.O. for re-computing disallowance of interest in terms of above discussions. Further in view of decision of Hon ble Delhi High Court in case of ACB India Ltd. vs. ACIT 374 ITR 108, we direct A.O. to consider only those investment on which dividend is received while computing disallowance u s.14A. 6 ITA Nos. 462 & 981 Mum 2014 (A.Y. 2007 -08) JSW Energy Limited Similar view has been taken by Hon ble Gujarat High Court in case of CIT vs. Corrtech Energy (P) Ltd. 272 CTR 262 (Guj) and by Hon ble Punjab & Haryana High Court in case of CIT v. Lakhani Marketing Incl. [2014] 272 CTR 265(P&H). A.O. is accordingly directed to consider these judicial pronouncements while working out disallowance u s. 14A. 11. On other hand, ld. DR invited our attention to order of tribunal in assessee s own case for A.Y. 2006-07, wherein issue with regard to disallowance u s. 14A was restored back to file of A.O. 12. Learned DR also objected to disallowance deleted by CIT(A) by estimating administrative expenditure at Rs. 3.00 lacs per month and contended that without giving any cogent reason, CIT(A) had reduced disallowance of Rs.2,67,57,476 - to Rs.36.00 lacs. As per learned DR, looking to dividend income of assessee amounting to Rs. 28.18 crores, disallowance made by AO was perfectly justified and CIT(A) has reduced same considerably without giving any justification. 13. We have considered rival contentions and also gone through order of Tribunal, in assessee s own case for assessment year 2006-07 wherein Tribunal held that Rule 8D is not applicable prior to assessment year 2008-2009. Accordingly, matter was restored back to file of AO for deciding afresh as per directions given therein. relevant assessment year under consideration is 2007-08, Rule 8D is also not applicable to this assessment year in terms of decision of Bombay High Court in case of Godrej & Boyce Manufacturing Company 328 ITR 81. Respectfully following decision of tribunal in assessee s own 7 ITA Nos. 462 & 981 Mum 2014 (A.Y. 2007 -08) JSW Energy Limited case, having similar facts, we restore matter back to file of AO for computing afresh disallowance warranted under Section 14A keeping in view our above observation. We direct accordingly. 14. Assessee has also taken ground for addition of disallowance made under Section 14A while computing book profit under Section 115JB. As we have already restored ground with regard to computation of disallowance addition made under Section 14A to file of AO, in interest of justice, this ground of assessee s appeal is also restored back to file of AO for deciding afresh after re-computing disallowance to be made under Section 14A. We direct accordingly. 15. In result, both appeals of Revenue and assessee are allowed in part in terms indicated hereinabove. Order pronounced in open court on 07 10 2016 Sd - sd - (SANDEEP GOSAIN) (R. C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 07 10 2016 . . . Roshani, Sr. PS Copy of Order forwarded to : 1. Appellant 2. Respondent 3. ( ) CIT(A) 4. CIT - concerned 5. , , DR, ITAT, Mumbai 8 ITA Nos. 462 & 981 Mum 2014 (A.Y. 2007 -08) JSW Energy Limited 6. Guard File BY ORDER, (Dy. Asstt. Registrar) , ITAT, Mumbai JSW Energy Limited v. ACIT, Central Circle-46, Mumbai