M/s M K Agrotech Private Limited, Srirangapatna V. Assistant Commissioner Of Income Tax, Central Circle, Mysuru

ITA 215/BANG/2021

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 5512 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-12-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 26-05-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMER SINGH
• Assessee Lawyers: RISHABH SINGHVI
• Keywords: Earning of tax free income; Rule 8D
• Section: 132; 271(1)(c); 143(3); 153A; 234B; 14A; 250

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA Nos. 214 to 218/Bang/2021 Assessment Years : 2009-10 to 2013-14 M/s. M.K. Agrotech Pvt. Ltd., Cauvery Layout, Bangalore Mysore Road, SH-17, No. 389, Srirangapatna, Karnataka – 571 438. PAN: AADCM7734K Vs. The Assistant Commissioner of Income Tax, Central Circle, Mysuru. APPELLANT RESPONDENT Assessee by : Shri Rishabh Singhvi, CA Revenue by : Shri Sumer Singh Meena, CIT DR (OSD) Date of Hearing : 23-12-2021 Date of Pronouncement : 28-12-2021 ORDER PER BENCH Present appeals are filed by assessee against separate orders of Ld.CIT(A)-11, Bangalore all dated 23.03.2021 for Assessment Years 2009-10 to 2013-14. Common issue is raised in present appeals. The solitary issue that is to be considered is whether the CIT(A) is justified in confirming the addition made u/s 14A of the I.T.Act r.w.Rule 8D of the I.T. Rules. The Ld.AR argued the issues based on the facts for A.Y: 2013-14. Page 2 of 10 ITA Nos. 214 to 218/Bang/2021 For sake of convenience, grounds raised by assessee for assessment year 2013-14 are reproduced hereunder: “We submit the following grounds of appeal which are without prejudice to each other: 1. The order u/s Section 143(3) read with 153A of the Income-tax Act, 1961 (-the Act") passed by the Assistant Commissioner of Income-tax, Central Circle Mysuru ("the learned AO") and the appellate order u/s 250 of the Act passed by the Commissioner of Income tax (Appeals)-11 ("the Ld CIT(A)") erred in law and in facts to make an addition in the assessment of income of the Appellant 2. The Ld AO erred and the Ld CIT(A) erred in affirming the assessment in violation of the provisions of section 132 and 153A of the Act and the assessment lacks jurisdiction in law. 3. The learned authorities below erred in observing: a. That the Ld AO/CIT(A) erred in disallowing an amount of Rs. 2.71,03,420/- as being interest attributable to the exempt dividend income which is amenable to disallowance u/s 14A under the Act. b. That the Ld AO/CIT(A) erred in disallowing an amount of Rs. 55.00,000/- as being interest expenses directly attributable to the earning of exempt dividend income and amenable to disallowing u/s 14A of the Act. 4. That the Ld authorities erred in applying section 14A of the Act without appreciating that a. The investments in SBI mutual funds are for the purpose of taxable income which are liable to tax under Income tax Act b. That the investments in SBI mutual funds have been made purely as per directions of SBI bank which required lien or a security for the opening of the LC for import trade of the Company c. That the dividend income from the mutual funds are passive income in nature which are a consequence of the investments by the Company and not expense is attributable to the generation of dividend income d. That dividend income is includible under the head 'Income from other sources'. Only expenses which are wholly and exclusively incurred for earning dividend income can be said to be attributable to the dividend income and disallowable u/s 14A of the Act. This test of Page 3 of 10 ITA Nos. 214 to 218/Bang/2021 attribution has not been passed before invoking provisions of section 14A of the Act. 5. The Ld authorities erred in disallowing the interest of Rs. 2,71,03,420/- u/s 14A of the Act on the following grounds: a. The Company has surplus investible funds from internal accruals and used interest free own funds for investments in the Mutual funds b. The Company has not borrowed funds from the bank for making investments in Mutual funds c. The Company has not incurred any interest expenditure towards the investments in Mutual funds d. The satisfaction recorded by the Ld AO is with a prejudged mind without the basis of any material / evidence in support of the conclusion e. The Ld AO erred in law and facts in invoking Rule 8D of the Income tax Rules and also erred in computing the amount of interest under Rule 8D of the Income tax Rules 6. The Ld authorities erred in disallowing interest expenses of Rs. 55,00,000/- u/s 14A of the Act on the following grounds: a. The Ld AO failed to identify the expenses which are attributable towards the earning of exempt income (if any) and merely recorded a satisfaction that other expenses are attributable towards earning dividend income. That invocation of section 14A requires a proximate or live link between the expense being incurred and the exempt income being earned. That this link has not been identified or established by the Ld authorities. b. The Company made investments in Mutual fund on the directions of the bank holding the surplus funds as security for the issuance of the Letter of Credit for import transactions of the Company. That the Bank did not charge any fee for the investments in the Mutual fund and hence no expense was incurred by the Company for such investments. c. The Company has not incurred any additional expenses towards the investments in Mutual Fund. The Id AO/CIT(A) also failed to identify any specific income which have even a remote connection d. The satisfaction recorded by the Ld AO is with a prejudged mind without the basis of any material / evidence in support of the conclusion e. The Ld AO erred in law and facts in invoking Rule 8D of the Income tax Rules and also erred in computing the amount of interest under Rule 8D of the Income tax Rules Page 4 of 10 ITA Nos. 214 to 218/Bang/2021 7. The Ld authorities erred in not appreciating that the attribution of expenses for the purpose of section 14A disallowance is to be arrived only on basis of Net interest expenditure (after reducing the investment incomes) of the appellant. 8. The order of the learned AO is liable to be quashed for the reason that it is without establishing the jurisdiction as required for initiating assessment proceedings u/s 153A r/w 143(3) of the Act. 9. On the facts and circumstances of the case, the learned AO erred in levying the interest under Section 234A, Section 234B and Section 234C of the Act. 10. Without prejudice, the AO has erred in levying interest without giving an opportunity of being heard to the Appellant. 11. On the facts and circumstances of the case, the learned AO has erred in initiating penalty proceedings under Section 271A, Section 271AA. Section 271BA. Section 271G and Section 271(1)(c) of the Act. 12. Without prejudice. the learned AO also erred in initiating penalty proceedings under both section 271AA and section 271G of the Act without appreciating the varying scope of operation of these provisions. 13. The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal.” 2. Brief facts of the case are as under: The assessee filed return of income on 28/09/2013 declaring NIL income. A search and seizure action u/s 132 of the Act was carried out in the case of the assessee u/s 132 on 04/02/2015 at No. 389, Kaveri Layout, M B Road, Srirangapatna, Mandya. Notice u/s 153A of the IT Act, 1961 dated 26/08/2015 was issued and served on the assessee. In response, the assessee on 19/10/2015 filed a copy of the return of Income filed for AY Page 5 of 10 ITA Nos. 214 to 218/Bang/2021 2013-14 on 28/09/2013 declaring NIL income. A notice u/s 143(2) of the Act dated 15/07/016 was issued and served on the assessee. 2.1 During assessment proceedings, the Ld.AO observed that assessee earned dividend income of Rs. 1,51,44,574/- which is exempt income. However, no expenditure was disallowed in relation to earning of exempt income. The Ld.AO disallowed expenses to the tune of Rs.3,26,03,420/- as per provisions of section 14A r.w. Rule 8D. Aggrieved by the order of Ld.AO, the assessee filed appeal before Ld.CIT(A). The Ld.CIT(A) observed as under: “11. Perusal of assessment order shows that AO had delved into the case minute detail. The AO has left no stone unturned to prove the section 14A needs to be invoked. The assessment order is elaborate and detailed in bringing out the fact that appellant's balance shoot revealed considerable movement in investment portfolios and mutual fund investments The AC) held that such investments and activities will entail expenditure direct or indirect. Hence the AO disallowed Rs. 3,26,03,420/- u/s 14A rwr 8D. 12. During appellate proceedings the appellant company failed to rebut findings of the AO. The appellant company failed to produce documentary evidence to support its contentions. The appellant company failed to substantiate its claims, It may be noted that no prudent business man or entity will make investments without applying resources wisely. Further if and when investment is made, it wilt definitely involve incurring administrative expenditure etc. Moreover the methodology of computing disallowance under Rule 8D shows that disallowance as contemplated is for both direct expenses as well as indirect expenses. Therefore, appellant cannot state that in the absence of expenditure (as claimed), no disallowance can be made u/s 14A. Sub section 3 of section 14A is clear that the section is applicable even in a case where appellant claims that no expenditure was incurred.” Page 6 of 10 ITA Nos. 214 to 218/Bang/2021 Aggrieved by the order of Ld.CIT(A), the assessee is in appeal before us now. 3. The Ld.AR submitted that disallowance u/s. 14A for AY 2013- 14 were on two accounts. a) Interest on borrowed funds allegedly used for earning exempt income and disallowance u/s 14A read with Rule 8D(2)(ii) — Rs. 2,71,03,420 b) Administrative expenses allegedly incurred for earning exempt income and disallowance u/s 14A read with Rule 8D(2)(iii) — Rs. 55,00,000 4. He submitted that, the loan schedule and interest schedule for all the years under consideration is enclosed as Annexure-3 to the paper book. He submitted that the interest paid to SBI is towards Letter of Credit which is attributable to earning of exempt income and all other interest towards term loans / vehicle loans etc., do not have any nexus with the investments from mutual funds that have generated exempt dividend income. 4.1 The Ld.AR submitted that, undisputedly the letter of credit was opened by the bank towards import of goods where the bank would make the payment to the overseas suppliers and then grant the finance which is called the ‘supplier’s credit’. It is also an undisputed fact that investments in mutual funds were granted as security to the bank against the letter of credit that was opened in favour of assessee, based on which the bank granted LC and made payments to the assessee’s suppliers. He has brought to our notice the observation by the Ld.AO that the funds were borrowed for working capital purpose, however, the Ld.AO concluded that, there exist nexus between amount Page 7 of 10 ITA Nos. 214 to 218/Bang/2021 invested in mutual funds and interest claimed on bank on letter of credit. He thus submitted that the mutual funds investment by assessee were made from internal accruals / funds and not from the borrowed interest bearing funds. It is thus the submission of Ld.AR that no expenditure could be attributable to the earning of exempt income. 5. On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have heard the submissions advanced by both sides and perused the records placed before us. 6. The Ld.AO made disallowance by invoking the provisions of section 14A of the I.T. Act r.w. Rule 8D(2)(ii) and Rule 8D(2)(iii) of the I.T. Rules. The disallowance made by invoking Rule 8D(2)(iii) of the I.T. Rules is for administrative and common expenses when the assessee derives exempted income. In the instant case, in each of the assessment year’s huge investments are made which is given rise to exempted dividend income. The details of dividend income earned by assessee for years under consideration are as under: Assessment Year Dividend income earned 2009-10 2,01,500/- 2010-11 5,11,70,144/- 2011-12 47,41,68,210/- 2012-13 27,71,63,289/- 2013-14 1,51,44,574/- 7. Investment decisions are very complex and strategic which requires administrative support. Assessee would have incurred Page 8 of 10 ITA Nos. 214 to 218/Bang/2021 administrative expenses such as salary, wages, general expenses, stationery etc. Therefore, it cannot be said that no expenditure was incurred for making the said investments. Hence, we confirm the disallowance made by the Assessing Officer by invoking provisions of section 14A of the I.T. Act r.w. Rule 8D(2)(iii) of the I.T. Rules. 8. Insofar as the disallowance of indirect interest expenditure by invoking the provisions of section 14A of the I.T. Ac r.w. Rule 8D(2(ii) of the I.T. Rules, is concerned, the contention of the assessee is that it is having interest free funds in the form of reserves and advances from associate concern and no part of the interest bearing funds were diverted for making investments which had yield exempted income. However, this particular contention of the assessee was not demonstrated neither before the Assessing Officer nor before the CIT(A). Admittedly, interest on borrowed funds used for business purposes cannot be computed for disallowance u/s. 14A of the I.T. Act r.w. Rule 8D(2)(ii) of the I.T. Rules. It is the duty of the assessee to prove that interest was incurred on borrowings are used for the specific business purpose and non-interest bearing funds were utilized for making investments which has given rise to exempted income. The assessee to prove that it is having its own funds to make investment which had yielded exempted income, necessarily has to furnish cash flow statement. The cash flow statement would disclose as on the date of making investments, which had given rise to the exempted income, that the assessee had interest free funds available with it. In the interest of justice and equity, we deed it fit to remand the case to the Assessing Officer for fresh Page 9 of 10 ITA Nos. 214 to 218/Bang/2021 consideration. The Ld.AO shall afford reasonable opportunity of being heard to the assessee. The assessee shall prove its case that it is having interest free funds for making investments, by furnishing cash flow state for the respective assessment years. Accordingly, the grounds raised by assessee stands allowed for statistical purposes. As the disallowance made by the Ld.AO are based on identical facts for assessment years 2009-10, 2010-11, 2011-12 and 2012- 13, the view taken for A.Y: 2013-14 hereinabove applies mutatis mutandis. Accordingly we direct assessee to furnish cash flow statement in support of the contention that investment were made during the relevant period out of interest free funds available with assessee. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. Accordingly grounds raised in all these appeals are allowed for statistical purposes. In the result, all the appeals filed by the assessee are allowed for statistical purposes. Order pronounced in open court on 28 th December, 2021. Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 28 th December, 2021. /MS / Page 10 of 10 ITA Nos. 214 to 218/Bang/2021 Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order Assistant Registrar, ITAT, Bangalore