D. SATHYAMOORTHI, CHENNAI V. DCIT, CORPORATE CIRCLE - 6 (1), CHENNAI

ITA 1749/CHNY/2019

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 9083 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 5 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-11-2021
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 03-06-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Depreciation; Business expenditure; Earning of tax free income; Rule 8D; Set aside; Capital Gains
• Section: 14A

Judgement Text

आयकर अपील सं./ITA No.1749/Chny/2019 िनधा रण वष /Assessment Year: 2014-15 Mr.Devarajulu Sathyamoorthi, New No.11, Old No.5, Bishop Wallers Avenue West, Mylapore, Chennai-600 004. v. The Dy. Commissioner of Income Tax, Corporate Cirlce-6(1), Chennai. [PAN: AASPS 3613 H ] (अपीलाथ /Appellant) ( थ /Respondent) अपीलाथ की ओर से/ Appellant by : None थ की ओर से /Respondent by : Mr.N.Sanjay Gandhi, JCIT सुनवाई की तारीख/Date of Hearing : 09.11.2021 घोषणा की तारीख /Date of Pronouncement : 09.11.2021 आदेश / O R D E R PER M.L.MEENA, ACCOUNTANT MEMBER: The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-15, Chennai, in ITA No.586/2016-17/CIT(A)-15 dated 29.03.2019 for the AY 2014-15. The assessee raised the following grounds in its appeal: 1.0 The order of the Commissioner of Income Tax (Appeals) - CIT in so far as it is held against the Appellant is erroneous, arbitrary, and unjust and is liable to be set aside. 2.1 The Commissioner of Income Tax erred in assuming that the assessee had invested out of his own funds as well as borrowed funds without verifying the materials on record "placed before the Assessing Officer as well C.I.T. establishing the utilization of the borrowed funds. आयकर अपीलीय अिधकरण, ‘बी’ "ायपीठ, चे%ई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH: CHENNAI ी धु ु आर.एल. रे ी, ाियक सद एवं एवंएवं एवं डॉ एम.एल. मीना, , लेखा सद' के सम BEFORE SHRI DUVVURU R.L. REDDY , JUDICIAL MEMBER AND Dr. M.L. MEENA, ACCOUNTANT MEMBER ITA No.1749/Chny/2019 :: 2 :: 2.2 The Commissioner of Income Tax was wrong in applying Rule 8D that there are court decisions in which it has been held that the application of Rule 8D is mandatory. 2.3 The Commissioner of Income Tax was wrong in concluding that the assessee could not demonstrate in terms of accounts that in the year of investments in shares, the Appellant had surplus of own funds and the same was invested only out of his own surplus funds and not out of borrowed funds without appreciating the materials placed before the A.O as well as the C.I.T. and in disregard of the submissions made. 2.4 The learned Commissioner relied on certain decisions which were rendered on its own facts and are not applicable to the facts of the present case. The learned CIT erred in not following the decisions cited by the Appellant, in particular the decision of the Bombay High Court in CIT vs HDFC Bank Limited (2014-49 Taxman.com 335) dated at Chennai on this 04th day of June, 2019. 2. The first issue is regarding disallowance u/s.14A r.w.r.8D made to the extent of Rs.83,58,270/- as against the said disallowance restricted to Rs.33,62,157/- by the assessee itself. 3. The Assessing Officer has observed from the breakup expenses furnished that the assessee has claimed total expenditure of Rs.2,77,94,486/- in the Profit & Loss Account which includes STT of Rs.59,73,441/- and interest of Rs.2,00,55,709/-. STT disallowed to the extent relating to Capital Gains is Rs.31,20,539/-, therefore, the balance amount of STT Rs. 28,52,902/- has been allowed as business expenditure. Similarly, out of the total expenditure of Rs.2,00,55,709/- as interest, in terms of Rule 8D 2 nd limb, Rs.47,77,437/- has been disallowed and the balance interest of Rs.1,52,78,272/- has been very much allowed as business expenditure. Thus even without considering other expenses allowed, in respect of STT and interest alone expenditure of Rs.1,81,31,174/- is allowed as business expenditure. Only after claiming these expenditure, the current year business loss of Rs.18,37,523/- is ITA No.1749/Chny/2019 :: 3 :: worked out in the computation by assessee. Thus, the AO observed that there was no logic in assessee’s restricting the 14A disallowance to Rs.33,62,157/- contending that the total business expenditure as per Profit & Loss Account is only Rs.33,62,157/-. Accordingly, he rejected the assessee's contention and made disallowance u/s.14A in terms of rule 8D to full extent of Rs.83,58,270/- as worked out by the assessee himself as against disallowance actually made by the assessee in the computation of income. 4. Aggrieved with the AO, the assessee filed this appeal before the Ld. CIT(A) who has confirmed the addition by observing vide Para No.4.3 of the impugned order as under: 4.3 CIT(A)’s remarks and decision: I have carefully gone through the observation of the AO in the assessment order as mentioned above under para 4.1 and the appellant's submission before the CIT(A) under para 4.2. 4,3.1 After noticing the dividend income of Rs.1.29 crore declared as exempt and the average investment of Rs.71.61 crore, the AO made a disallowance u/s.14A of Rs.49,96,113/- in addition to the appellant's suo moto disallowance of Rs.33,62,157/-. Before the CIT(A), the appellant's AR reiterated the same submission which was already considered by the AO in the assessment order. The AR has contended that interest expenditure was for a specific purpose and should not be disallowed as it was not meant for the investment in shares which yielded dividend income. 4.3.2.1 have considered both the points of view. It is an admitted fact that the appellant had invested in shares out of owned fund as well as borrowed fund which has yielded substantial dividend income of Rs.1.29 crore. There are court decisions in which it has been held that after the introduction of Rule 8D, disallowance u/s 14A should be ITA No.1749/Chny/2019 :: 4 :: made as per the formula prescribed under Rule 8D. Therefore, the appellant's contention that further disallowance u/s 14A is not warranted as he had suo moto disallowed Rs.33.62 lacs is not acceptable. In spite of specific opportunity given at appeal stage, the appellant could not demonstrate in terms of accounts that in the year of investment in shares, the appellant had surplus own fund and it was invested only out of own surplus fund and not out of borrowed fund. 4.3.3. In the following decisions, it has been held that when an assessee has mixed fund i.e. own fund and borrowed fund, then the AO has to make disallowance u/s.14A by applying Rule 8D. (A) In the case of Asha Lalit Kanodia vs. Additional Commissioner of Income Tax [2016] 71 ITR 84(Mumbai - Trib.) the Hon’ble ITAT, Mumbai has held as under: “Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (Onus of proof) - Assessment year 2008-09 - Assessee had earned tax-exempt income, being dividend on units, shares and securities and long-term capital gain - She had also earned exempt dividend income from proprietary concern - Assessing Officer made disallowance under section 14A, read with rule 8D(2)(iii), i.e., toward indirect administrative expenditure discarding assessee's contention that no expenditure had been incurred by her - Whether since assessee had claimed that no expenditure was incurred to earn exempt dividend income, onus was on assessee which had to be substantiated with her accounts - Held, yes - Whether since assessee failed to discharge her onus, disallowance made under section 14A, read with rule 8D was justified - Held, yes (Para 4,4.)". (B) In the case of DCIT vs. Dufon Laboratories (P) Ltd. [2014J 50 ITR 143, the Hon'ble ITAT, Mumbai has held as under: "Section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (Rule 8D) - Assessment year 2009-10 - Whether decision-making in respect of investment is located at higher echelons of management, and same would only be upon expending time and resources - Held, yes - Whether, therefore, expenditure ITA No.1749/Chny/2019 :: 5 :: would be embedded in various accounts heads under general administrative expenditure viz, rent, telephone, office expenditure (including depreciation on office building ; repairs and maintenance thereof), electricity, etc. - Held, yes - Assessee suo motu disallowed certain amount by way of interest in respect of tax exempt income but no disallowance was made for any other indirect expenditure on ground that no such expenditure was incurred towards tax exempt income - Whether since assessee had clearly not discharged said initial onus, revenue could not be faulted with for applying rule 8D - Held, yes [Paras 7 & 8]". (C) In the case of ACIT vs Anil Kumar Singhania [2014] 51 taxmann.com 98, the Hon'ble ITAT, Chandigarh has held as under: "Section 14A of the Income-tax Act, 1961 - Expenditure in relation to income not includible in total income (Rule 8D) - Assessment years 2008-09 and 2009-10 - Whether theory of disallowance under section 14A read with rule 8D on proportionate basis itself is based on concept of mix funds - Held, yes – “whether in case of mixed funds, disallowance has to be made under section 14A read with rule 8D – Held, yes [Para 8] in favour of Revenue”. 4.3,4. In view of the above remarks and the decisions relied on, the AO's disallowance u/s.14A by applying Rule 8D is upheld and the appellant's grounds are dismissed. 5. The ld. Counsel for the assessee submitted that the CIT(A) has erred in assuming that the assessee had invested out of his own funds as well as borrowed funds without verifying the materials on record "placed before the Assessing Officer as well C.I.T. establishing the utilization of the borrowed funds; that the CIT(A) was wrong in applying Rule 8D that there are court decisions in which it has been held that the application of Rule 8D is mandatory. Again, the Ld. AR argued that the CIT(A) was wrong in concluding that the assessee could not demonstrate that in the year of investments in shares, the Appellant had surplus of own funds and the ITA No.1749/Chny/2019 :: 6 :: same was invested only out of his own surplus funds and not out of borrowed funds without appreciating the materials placed before the A.O as well as the C.I.T. and thus confirm additio in disregard of the submissions made. The AR contended that the learned CIT(A) relied on certain decisions which were rendered on its own facts and are not applicable to the facts of the present case. In support, he relies on the decision of the Bombay High Court in CIT vs HDFC Bank Limited (2014-49 Taxman.com 335) as alleged to be not appreciated by the Ld. CIT(A). 6. Per Contra, the Ld. DR stands by the impugned order and contended that the Ld. CIT(A) has confirm the addition owing to the reason that in spite of specific opportunity given at appeal stage, the appellant could not demonstrate in terms of accounts that in the year of investment in shares, the appellant had surplus own fund and it was invested only out of own surplus fund and not out of borrowed fund. 7. Heard the rival contentions, perused the material on record and the submissions made before us by them. Admittedly, Accordingly, the assessee itself had computed disallowance u/s.14A in terms of rule 8D to full extent of Rs.83,58,270/-, however restricted to Rs. Rs.33,62,157/- contending that the total business expenditure as per Profit & Loss Account is only Rs.33,62,157/-. The ld. Counsel reiterated the contentions raised before the ld. CIT(A) that the interest expenditure was for a specific purpose and should not be disallowed as it was not meant for the investment in shares which yielded dividend income. ITA No.1749/Chny/2019 :: 7 :: 8. Admittedly, the appellant had invested in shares out of owned fund as well as borrowed fund which has yielded substantial dividend income of Rs.1.29 crore. The Ld. CIT(A) with the support of the court decisions in where it is held that after the introduction of Rule 8D, disallowance u/s 14A should be made as per the formula prescribed under Rule 8D. Accordingly, the appellant's contention that further disallowance u/s 14A is not warranted as he had suo moto disallowed Rs.33.62 lacs was not acceptable to the CIT(A). Further, in spite of specific opportunity given at stage of proceeding at the level of AO till the date of concluding the proceeding before us, the appellant could not demonstrate in terms of accounts either before the AO or the CIT(A) or before us that in the year of investment in shares, the appellant had surplus own fund and it was invested only out of own surplus fund and not out of borrowed fund. 9. The Mumbai Tribunal in the cases of Asha Lalit Kanodia (Supra) and Dufon Laboratories (P) Ltd. (Supra), and ITAT Chandigarh Bench, in the case of Anil Kumar Singhania (Supra) held that when an assessee has mixed fund i.e. own fund and borrowed fund, then the AO has to make disallowance u/s.14A by applying Rule 8D. The decision of Hon’ble Bombay high Court relied by the assessee is distinguishable on the peculiar facts of the case at hand. 10. It is evident from the above that since assessee had claimed that no expenditure was incurred to earn exempt dividend income, onus was on assessee which had to be substantiated with her accounts. Since he failed ITA No.1749/Chny/2019 :: 8 :: to discharged his onus, disallowance made under section 14A, read with rule 8D was justified. In our view, in case of mixed funds, disallowance has to be made under section 14A read with rule 8D. 11. In the above view, we do not find any merit in the submissions of the assessee. We hold the finding of the Ld. CIT(A) in confirming the the AO's disallowance u/s.14A by applying Rule 8D is as per law and justified. As such the appellant's grounds are hereby dismissed. 12. In the result, the appeal of the assessee is dismissed. Order pronounced on the 09 th day of November, 2021, in Chennai. Sd/- (धु ु आर.एल. रे ी) (DUVVURU R.L. REDDY) "ाियक सद'/JUDICIAL MEMBER Sd/- (एम.एल.मीना) (M.L. MEENA) लेखा सद'/ACCOUNTANT MEMBER चे%ई/Chennai, िदनांक/Dated: 09 th November, 2021. TLN आदेश की ितिलिप अ(ेिषत/Copy to: 1. अपीलाथ /Appellant 4. आयकर आयु)/CIT 2. थ /Respondent 5. िवभागीय ितिनिध/DR 3. आयकर आयु) (अपील)/CIT(A) 6. गाड फाईल/GF