M/s. Pai & Pai Enterprises, Bengaluru V. Assistant Commissioner Of Income Tax, Circle- 2(2)(1), Bangalore

ITA 2302/BANG/2019

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 0103 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-06-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 04-11-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Proportionate interest; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B R BASKARAN , ACCOUNTANT MEMBER IT A NO. 2302/BANG/2019 ASSESSMENT YEAR: M/S. PAI & PAI ENTERPRISES, # 438/1, 20 TH MAIN, 1 ST BLOCK, RAJAJINAGAR, BENGALURU 560 010. PAN: AABFP 0658G VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(2)(1), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI PRANAV KRISHNA, ADVOCATE RESPONDENT BY : SHRI PRIYADAR SHI MISHRA, JT.C IT(DR)(I TAT ), BENGALURU. DATE OF HEARING : 24.06 .2020 DATE OF PRONOUNCEMENT : 26 .0 6 .2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER D ATED 20.08.2019 OF THE CIT(APPEALS)-2, BENGALURU RELATING TO ASSESS MENT YEAR 2013-14. 2. THE ONLY ISSUE THAT NEEDS TO BE ADJUDICATED IN THIS APPEAL IS WITH REGARD TO THE CORRECTNESS OF THE QUANTUM OF SUM DIS ALLOWED U/S. 14A OF THE INCOME-TAX ACT, 1961 [THE ACT]. 3. THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN TH E BUSINESS OF TRADING IN PACKING MATERIALS. THE AO NOTICED THAT THE ASSESSEE RECEIVED DIVIDEND INCOME OF RS.4,93,472 WHICH DID NOT FORM P ART O F TOTAL INCOME UNDER CHAPTER III OF THE ACT. IN VIEW OF THE PROVI SIONS OF SECTION 14A OF THE ACT, ANY EXPENDITURE IN EARNING INCOME WHICH DOES N OT FORM PART OF THE ITA NO.2302/BANG/2019 PAGE 2 OF 4 TOTAL INCOME UNDER CHAPTER III OF THE ACT SHOULD BE DISALLOWED AND ADDED TO THE TOTAL INCOME OF ASSESSEE. 4. THE AO COMPUTED THE DISALLOWANCE U/S. 14A OF THE ACT BY APPLYING THE FORMULA LAID DOWN IN RULE 8D(2)(II & (III) OF T HE INCOME-TAX RULES, 1961 [THE RULES] AS FOLLOWS:- TOTAL AMOUNT OF INTEREST DEBITED IN P&L ACCOUNT 17,40,670 VALUE O F INVESTMENT AS O N 31.03.2012 1,94,83,523 V A LUE OF INVESTMENT AS ON 31.03.2013 1,99,66,163 AVERAGE VALUE OF INVESTMENTS [A] 1,97,24,843 ASSETS AS ON 31.03.2012 6,10,81,044 ASSETS AS ON 31.03.201 3 7,84,75,331 AVERAGE VALUE OF ASSETS [B] 2,97,78,188 0.5% OF THE AVERAGE VALUE OF INVESTMENTS [A * 0.5%] 98,624 PROPORTIONATE INTEREST ON B 4,92,051 TOTAL INTEREST DISALLOWED U/S. 14A 5,90,675 5. BEFORE THE CIT(APPEALS), THE ASSESSEE SUBMITTED THAT THERE CANNOT BE ANY DISALLOWANCE IN TERMS OF RULE 8D(2)(II) OF T HE RULES TOWARDS INTEREST EXPENSES BECAUSE THE ASSESSEE HAD SUFFICIENT INTERE ST-FREE FUNDS WHICH WERE MUCH MORE THAN THE INVESTMENTS WHICH WOULD YIE LD EXEMPT INCOME. WITH REGARD TO DISALLOWANCE UNDER RULE 8D(2)(III) O F THE RULES, THE CONTENTION OF ASSESSEE WAS THAT ONLY THOSE INVESTME NTS WHICH YIELDED EXEMPT INCOME SHOULD BE TAKEN INTO CONSIDERATION FO R THE PURPOSE OF ARRIVING AT THE AVERAGE VALUE OF INVESTMENTS BEFORE APPLYING THE FORMULA UNDER RULE 8D(2)(III) OF THE RULES. THE CIT(A), HO WEVER, DID NOT DEAL WITH THE CONTENTION OF ASSESSEE, BUT GAVE RELIEF TO THE ASSESSEE BY RESTRICTING THE DISALLOWANCE U/S. 14A OF THE ACT TO THE EXTENT OF EXEMPT INCOME EARNED BY THE ASSESSEE I.E., RS.4,93,477 AS AGAINST THE DI SALLOWANCE MADE BY THE AO U/S.14A AT RS.5,90,675. ITA NO.2302/BANG/2019 PAGE 3 OF 4 6. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE HAVE ALS O PERUSED THE BALANCE SHEET OF THE ASSESSEE AS ON 31.3.2012 & 31. 3.2013, A COPY OF WHICH IS PLACED AT PAGE 12 OF THE ASSESSEES PB. A PERUSAL OF THE SAME WOULD SHOW THAT OWN FUNDS AVAILABLE WITH THE ASSESS EE IS A SUM OF RS.5.58 CRORES (APPROX..), WHEREAS THE TOTAL VALUE OF THE I NVESTMENTS IS ONLY A SUM OF RS.1,99,66,164. IT IS THUS CLEAR THAT INTEREST- FREE OWN FUNDS AVAILABLE WITH THE ASSESSEE WAS MUCH MORE THAN THE VALUE OF I NVESTMENTS. THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. MICRO LABS LTD., 383 ITR 490 (KAR) HAS TAKEN THE VIEW THAT IF INTEREST-FREE OWN FUNDS ARE MUCH MORE THAN THE VALUE OF INVESTMENTS, THEN FOR THE PU RPOSE OF DISALLOWANCE U/S. 14A OF THE ACT IT HAS TO BE PRESUMED THAT OWN FUNDS WERE USED FOR THE PURPOSE OF MAKING INVESTMENTS AND THEREFORE NO DISA LLOWANCE IN TERMS OF RULE 8D2(II) OF THE ACT SHOULD BE MADE TOWARDS INTE REST EXPENSES. IN VIEW OF THE AFORESAID DECISION OF THE HONBLE HIGH COURT OF KARNATAKA, WE ARE OF THE VIEW THAT THE DISALLOWANCE IN TERMS OF RULE 8D( 2)(II) OF THE RULES SHOULD BE DELETED. WE HOLD AND DIRECT ACCORDINGLY. 8. INSOFAR AS DISALLOWANCE IN TERMS OF RULE 8D(2)(I II) OF THE RULES IS CONCERNED, THE LIMITED PRAYER MADE BY THE LD. COUNS EL FOR THE ASSESSEE IS THAT FOR WORKING OUT THE AVERAGE VALUE OF INVESTMEN TS BEFORE APPLYING FORMULA IN TERMS OF RULE 8D(2)(III), ONLY THE INVES TMENTS WHICH YIELDED TAX- FREE EXEMPT INCOME SHOULD BE CONSIDERED AND NOT THE ENTIRE VALUE OF INVESTMENTS. IN SUPPORT OF THIS STAND, RELIANCE WA S PLACED ON THE DECISION OF THE DELHI SPECIAL BENCH OF THE ITAT IN THE CASE OF ACIT V VIREET INVESTMENTS PVT LTD., 58 ITR (TRIB) 313 / 165 ITD 2 5 (SB)(DEL) . 9. WE HAVE CONSIDERED THE SUBMISSIONS MADE ON BEHAL F OF THE ASSESSEE AND THE LD. DR. IN THE CASE OF VIREET INVESTMENTS PVT LTD. ITA NO.2302/BANG/2019 PAGE 4 OF 4 (SUPRA) , ONE OF THE QUESTIONS THAT AROSE FOR CONSIDERATION WAS, WHETHER FOR APPLYING RULE 8D ONLY DIVIDEND YIELDING INVESTMENTS SHOULD BE TAKEN INTO CONSIDERATION FOR COMPUTING THE AVERAGE VALUE OF IN VESTMENTS. THE SPECIAL BENCH HELD THAT ONLY THOSE INVESTMENTS WHICH YIELDE D EXEMPT INCOME SHOULD BE CONSIDERED FOR COMPUTING THE AVERAGE VALU E OF INVESTMENTS WHILE APPLYING FORMULA UNDER RULE 8D(2)(III) OF THE RULES . 10. IN VIEW OF THE AFORESAID DECISION OF THE SPECIA L BENCH, WE DIRECT THE AO TO MAKE DISALLOWANCE IN TERMS OF RULE 8D(2)(III) OF THE RULES BY TAKING ONLY THE INVESTMENTS WHICH YIELDED EXEMPT INCOME WH ILE COMPUTING THE AVERAGE VALUE OF INVESTMENTS. 11. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 26 TH DAY OF JUNE, 2020. SD/- SD/- ( B R BASKARAN ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 24 TH JUNE, 2020. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.