C/TAXAP/11/2020 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 11 of 2020 With R/TAX APPEAL NO. 12 of 2020 PRINCIPAL COMMISSIONER OF INCOME TAX VADODARA-1 Versus ADITYA MEDISALES LTD Appearance: MR.VARUN K.PATEL(3802) for Appellant(s) No. 1 for Opponent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 10/02/2020 COMMON ORAL ORDER (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1. These appeals under Section 260A of Income Tax Act, 1961 (for short Act, 1961 are at instance of Revenue and are directed against common order passed by Income tax Appellate Tribunal, Ahmedabad in ITA No.3354/Ahd/2015 for A.Y.2009-10 and ITA No.3415/Ahd/2015 for A.Y.2009-10 filed by Revenue as well as assessee respectively. 2. Revenue has proposed following question as substantial question of law in Tax Appeal No.11 of 2020; Whether in facts and circumstances of case, learned ITAT has erred in law and on facts in deleting disallowance of interest expenses made by Assessing Officer u/s.14A of Income Tax Act, 1961 r.w. Rule 8D(2)(ii) of Income Tax Rules, 1962 merely on Page 1 of 7 Downloaded on : Tue Apr 21 10:38:16 IST 2020 C/TAXAP/11/2020 ORDER basis that assessee was having sufficient own interest free funds available, which exceeded tax free investments even though no material was placed on record by assessee to establish that said funds were available for investment at relevant point of time? 3. Revenue has proposed followings question as substantial question of law in Tax Appeal No.12 of 2020. Whether in facts and circumstances of case, learned ITAT has erred in law and on facts in directing Assessing Officer to recompute disallowance of administrative and other general expenses under section 14A r.w. Rule 8D(2)(ii)? 4. Assessing Officer while passing assessment order under Section 143(3) read with Section 263 of Act, 1961, made disallowance under Section 14A of Act amounting to Rs.1,27,92,81,434/- with respect to interest expenses and administrative expenses. 5. Being aggrieved by order passed by Assessing Officer, making disallowance, assessee preferred appeal before CIT (A). CIT (A) restricted disallowance so far as it relates to interest expenses are concerned. CIT(A), while restricting disallowance to Rs.6.06,477/-, has observed as under; 6.3 I have considered appellant's submission, order of CIT-I, Vadodara's order u/s. 263 and observations made by A.O. in his order passed in pursuance to this order u/s.263. appellant in its return of income has disallowed um of Rs.50,000/- u/s.14A of Act. This fact was also mentioned in Clause No.17(1) of Form 3CD, giving Tax Audit Report, before CIT -I, Vadodara. appellant submitted that it had earned dividend income of Page 2 of 7 Downloaded on : Tue Apr 21 10:38:16 IST 2020 C/TAXAP/11/2020 ORDER Rs.4,22,54,212/-. It was further submitted that appellant had sufficient interest free funds to carry out investment and no borrowed funds were utilized for making investments and hence no disallowance ought to be made under Rule 8D(2) of Act. details of such interest free funds were also provided as per which figures as on 31.03.2009 of such Interest Free Funds came to Rs.30,35,98,242/- as against amounts of Tax Free Investments made of Rs.12,54,57,104/- One of other major arguments taken by Appellant before CIT-I, Vadodara was that investment earning taxable income should be excluded for purpose of calculation of average investment. amount of such investment earning taxable income and not giving any exempt income was quantified at Rs.1,83,81,08,380/- as on 31.03.2008 and Rs.15,65,37,000/- as on 31.03.2009. It was further claimed that current liabilities should be excluded from total assets for computing average total assets under Rule 8D and interest income should be deducted from interest expenses for such computation. appellant claimed that if these mistakes are rectified from proposed computation of disallowance as per Rule 8D, disallowance would come to Rs.6,06,477/- as against proposed disallowance. 6.5.2 Thus investments made in opening investments yielding exempt income, has been held by my Predecessor as having been made by appellant out of its own interest free funds and accordingly he has deleted disallowances u/s.14A made out of interest paid by appellant on account of such investments. Accordingly no disallowance on account of such investments can be made out of interest paid by appellant in current assessment year also. 6.5.3 So far investment made during current year amounting to Rs.85,00,000/- is concerned, appellant has not filed any detail in this regard to show that such investment were made out of its own interest funds only. Only generalized statement has been filed. In this regard, it is seen that appellant is paying huge interest on outstanding balances of its sundry creditors and investment made by appellant is shares and securities is being financed by such outstanding balance of sundry creditors. In this circumstances, it is held that part of interest paid by appellant to said Page 3 of 7 Downloaded on : Tue Apr 21 10:38:16 IST 2020 C/TAXAP/11/2020 ORDER sundry creditors is attributable to investments made during current year for purpose of earning of exempt income. Hence, disallowance is required to be made under Rule 8D on account of investments of Rs.85 lacs made during course of current year. Accordingly, AO is directed to make this disallowance as per Rule 8D. 6.5.3.1 So far as investment in daily dividend reinvestment plan of JP Morgen India Mutual Fund is concerned, such investments were made between 7/11/2008 to 11/11/2008. details of such investments are as follows; Fund Type Growth Nature Nature of Whether Whether Inves Amt. Openin Name Plan of Fund Plan/ Divrecd SIT t Invested Nav Scheme or not applicable Date or not JP Liquid Super Debt Daily Yes N.A. 4,30,00,000 10,0079 Morgan fund dividend India Rs. Mutual Invested Fund No., of MTM Date NAV on Amt. Gain/ Statement Units Exit Realized (Loss) of A/c. 4296606 11/11/08 10.01 4,30,00,00 - Copy 12 0 Such investments was of Rs.4,30,00,000/-. appellant has not filed any details in this regard to show that such investments were made out of its own interest funds only. Only generalized statement has been filed. In this regard, it is seen that appellant is paying huge interest on outstanding balances of its sundry creditors and investment made by appellant in shares and securities is being financed by such outstanding balance of sundry creditors. In this circumstances, it is held that part of interest paid by appellant to said sundry creditors is attributable to investments made during current year is attributable to such investments also. Hence, AO is directed to disallow interest on amount of Rs.4.3 Crore for period 7.11.2008 to 11.11.2008 at same rate at which appellant is paying interest to its sundry creditors. 6.5.3 Moreover, my predecessor in his appellate order Page 4 of 7 Downloaded on : Tue Apr 21 10:38:16 IST 2020 C/TAXAP/11/2020 ORDER for A.Y. 2008-09 has upheld disallowance u/s.14A of administrative expenses. Hence, for current year also, such disallowance is upheld. For this purpose, entire investments yielding exempt income, whether made out of own funds of out of borrowed fund, and forming parts of opening balance as well as closing balance will be considered. AO is directed to recompute disallowance accordingly. 6.5.4 appellant has also claimed that Total assets for computing average total assets under Rule-8D would comprise of fixed assets, investments and current assets. In balance sheet, current liabilities are netted off against current assets. Hence for purpose of computing total assets, no such netting off of current liabilities should be made. This contention of appellant is correct. Accordingly, AO is directed to compute average assets without netting off current liability from current assets. 6. Both, Revenue as well as assessee went in appeal before Tribunal against order passed by CIT (A). Tribunal, after considering evidence on record, passed following order; 32. Both appeals give rise to common issue of disallowance under s.14A of Net in pursuance of assessment order passed under s.143(3) r.w.s. 263 of Act. With assistance of learned AR for assessee, we note that ACO made, disallowance towards proportionate interest expenditure under Rule 8D(2)(ii) and towards administrative and general expenses under Rule 8D(2)(iii). assessee has shown suo moto disallowance of Rs.50,000/-. In view of suficient own funds available (Rs.30.35 Crores) in excess of corresponding investment (Rs.12.54 Crores) giving rise to exempt income, there is no warrnt to make disallowance under Rule 8D(2)(ii) in view of decision in Pr. CIT vs. Sintex Industries Ltd,82 taxmann.com 171 (Guj.) and CIT vs. HDFC Bank Ltd., 366 ITR 505 (Bom.). Identical view has been expressed in other years of assessee's appeals discussed above. Accordingly, AO is directed to delete disallowance made under s. 8D(2) (ii) of IT Rules. Page 5 of 7 Downloaded on : Tue Apr 21 10:38:16 IST 2020 C/TAXAP/11/2020 ORDER 7. In view of aforesaid findings of fact given by CIT (A) as well as Tribunal to effect that no disallowance towards proportionate interest expenditure can be made under Rule 8D(2)(ii) as there was sufficient fund available with assessee as its own fund, i.e, Rs.30.35 Crore in excess of corresponding investment of Rs.12.54 Crore giving rise to exempt income, no addition can be made by applying Rule 8D(2)(ii) of Income Tax Rules, 1962. To reach at aforesaid finding, Tribunal has relied upon decision of this Court in case of Pr. CIT vs. Sintex Industries Ltd., 82 taxmann.com 171 (Guj.) and decision of Bombay High Court in case of CIT vs. HDFC Bank Ltd., 366 ITR 505 (Bom.). 8. In view of concurrent finding of fact arrived at by CIT (A) as well as Tribunal, question of law, as proposed by Revenue, cannot be termed as substantial question of law arising out of impugned order of Tribunal. 9. So far as ax Appeal No.12 of 2020 is concerned, CIT (A) has followed ratio laid down by his predecessor in its order wherein predecessor had upheld disallowance under Section 14A. Hence, CIT (A) has applied same method to case on hand and upheld disallowance. CIT (A), in para-6.5.3 of its order, held thus; Moreover, my predecessor in his appellate order for A.Y.2008-09 has upheld disallowance u/s.14A out of administrative expenses. Hence for current year also, such disallowance is upheld. For this purpose, entire investments yielding exempt income, whether made out of own funds or out of borrowed funds, and forming parts Page 6 of 7 Downloaded on : Tue Apr 21 10:38:16 IST 2020 C/TAXAP/11/2020 ORDER of opening balances as well as closing balances will be considered. AO is directed to recompute disallowance accordingly. 10. In appeal filed by assessee, Tribunal remitted matter back to AO for recomputing disallowance with reference to investment which have actually given rise to tax free income instead of gross investment. In view of fact that Tribunal has remitted matter back to Assessing Officer for re computation of disallowance, question of law, as proposed by Revenue, cannot be termed as substantial question of law arising out of impugned order of Tribunal. 11. In result, both appeals fail and are dismissed. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) Vahid Page 7 of 7 Downloaded on : Tue Apr 21 10:38:16 IST 2020 Principal Commissioner of Income-tax, Vadodara-1 v. Aditya Medisales Ltd