AI Insights
The case involves an appeal by the Revenue against the order of the National Faceless Appeal Centre (NFAC), which had deleted a disallowance made under Section 14A of the Income Tax Act, 1961, by the Assessing Officer (AO). The disallowance pertained to Rs.11,09,333, which was initially added to the assessee's income for the Assessment Year 2011-12, under the premise that it was related to exempt income. The Tribunal examined whether the assessee had utilized interest-bearing funds for making investments that yielded exempt income. The Tribunal found that the assessee had sufficient interest-free funds to cover the investments and thus no disallowance was necessary. The Tribunal also referenced a similar case for A.Y. 2013-14, where a Co-ordinate Bench had made a similar ruling in favor of the assessee.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 124719 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
1 year(s) 5 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
04-07-2023
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
A
Next Hearing Date
29-05-2023
Assessment Year
2011-2012
Appeal Filed On
29-06-2022
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, AHMEDABAD BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER & Ms. MADHUMITA ROY, JUDICIAL MEMBER आयकर अपील सं./ I. T. A. No . 267/Ahd/20 22 ( नधा रण वष / A ss es sment Year : 2011-12) D C I T C ir cl e - 1 ( 1 ) ( 1 ) , Va d o da r a बनाम/ Vs . B a s e M et a l C h lo rin a t io ns Pv t . L t d . 1 0 1, S yn e r g y H o u s e , G o r w a S u bh a n p ur a Ro ad , S u ph an p ur a, V a d od ar a - 3 9 00 23 थायी लेखा सं./जीआइआर सं./P A N/ G I R N o . : A A A C B 7 6 2 8 L (अपीलाथ /Appellant) . . ( यथ / Respondent) अपीलाथ ओर से /Appellant by : Shri Dileep Kumar, Sr. DR यथ क ओर से/Respondent by : Shri M. K. Patel, A.R. स ु नवाई क तार ख / D a t e o f H e a r i ng 30/05/2023 घोषणा क तार ख /D a t e o f P ro n o u nc e me n t 05/07/2023 O R D E R PER Ms. MADHUMITA ROY - JM: The instant appeal filed by the Revenue is directed against the order dated 02.05.2022 passed by the National Faceless Appeal Centre (NFAC), Delhi, arising out of the order dated 27.12.2019 passed by the DCIT, Circle- 1(1)(1), Vadodara under section 143(3) r.w.s. 263 of the Income Tax Act, 1961 (hereinafter referred as to ‘the Act’) for Assessment Year 2011-12. ITA No. 267/Ahd/2022 (DCIT vs. Base Metal Chlorinations Pvt. Ltd.) A.Y.– 2011-12 - 2 - 2. We have heard the rival submissions made by the respective parties and we have also perused the relevant materials available on record. 3. The deletion of addition of Rs.11,09,333/- made on account of disallowance under Section 14A of the Act is subject matter before us. 4. The brief facts leading to the case is this that the assessee filed its return of income on 24.09.2011 declaring total income of Rs. Nil after set off brought forward losses and tax paid under Section 115JB of the Act on Book Profit of Rs.39,18,065/-. The assessment order under Section 143(3) of the Act was finalized on 14.02.2014 accepting return. However, the case was reopened under Section 143(3) r.w.s. 147 of the Act and finalized on 18.11.2016 at Book Profit of Rs.48,73,639/- accepting the normal income of the assessee. The Ld. PCIT, Vadodara-1, considered that particular order passed under Section 143(3) r.w.s. 147 of the Act erroneous under Section 263 of the Act and on 04.09.2018 directed the Ld. AO to reframe the assessment order afresh. 5. Consequent to the above direction passed under Section 263 of the Act, while verifying the records, the Ld. AO found that Rs.65,714/- has been disallowed under Section 14A of the Act in the return of income at 0.5% of the average value of investments. As per disallowance under Rule 8D of the IT Rules, there was a short disallowance under Section 14A of the Act to the tune of Rs.11,09,333/-. The Ld. AO made disallowance under Section 147 r.w. Rule 8D with the following observation: ITA No. 267/Ahd/2022 (DCIT vs. Base Metal Chlorinations Pvt. Ltd.) A.Y.– 2011-12 - 3 - "As per Section 14A of the IT Act, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Further, as per Section 14A(2) of the IT Act, AO shall determine the amount of expenditure incurred in relation to such exempted income by applying the Rule 8D of Income Tax Rules. It is revealed from record that AO has not considered other investments for Rule 8D. In terms of Rule 8D, investments. income from which does not form part of total income, are to be considered for Rule 8D. As share of profit from partnership firm etc (other investment) does not from part of total income, these are also to be considered for Rule 8D". Perusal of records for the relevant period in question shows that, there exist a huge amount of borrowed funds outstanding in the books of the assessee, so even if mixed funds were diverted, interest is not allowable. In view of the above discussion and in light of the facts of the case, it is construed without a doubt that in order to earn the exempt income in the form of share of profit from partnership firm, the assessee has incurred various expenditures including maintaining of accounts, bank charges, administrative charges, interest expenses etc. It is also held that even if the investment is made in earlier years, since the assessee does not have own sufficient funds with it, the interest expenditure has also been incurred by the assessee to derive exempt income. As held supra, since, the assessee is held to have been incurring expenditures to derive exempt income, disallowance is required to be determined and made u/s 14A r.w. Rule 8D.” 6. The total disallowance was computed at Rs.11,75,047/-. Since, the assessee has already disallowed Rs.65,714/-, the further disallowance made by the Ld. AO was of Rs.11,09,333/-, which stood deleted by the Ld. CIT(A) in the appeal preferred by the assessee. Hence, the instant appeal before us. 7. The submission of the assessee before the Ld. CIT(A) and before us is this that the appellant company has not made any investments, thus, not used any interest bearing funds of investment, the income of which does not form a part of the total income. Further that, the balance in capital account of the partnership firm comprises of share of profits earned and interest on capital account earned, which has been demonstrated by the assessee through the capital accounts furnished by the Company. It is the case of the appellant that ITA No. 267/Ahd/2022 (DCIT vs. Base Metal Chlorinations Pvt. Ltd.) A.Y.– 2011-12 - 4 - it has not made any investment of funds on which interest is paid by the appellant and in that view of the matter, no interest can be attributed to the investing activity the income of which does not form a part of the total income. There is no utilization of funds on which interest is paid by the appellant company and thus disallowance is not called for. Deleting of such disallowance made by the Ld. CIT(A) is, therefore, justified as of the main argument advanced by the Ld. Counsel before us. It was further argued that the disallowance to the tune of Rs.65,714/- made by the assessee suo motto under Section 14A r.w. Rule 8D has not been controverted by the Ld. AO nor found any inconsistency or inaccuracy in making such calculation made by the appellant company. As there is no expenditure incurred for the purpose of investment in the partnership firm, no disallowance on account of interest attributable to exempt income as contemplated by Clause (2) of Rule 8D be made. The Ld. AR has further drawn our attention to this fact that the assessee had sufficient own funds to make the investments. The share-holders funds at the beginning of the year was to the tune of Rs.1.31 Crores and Rs.2.26 Crores at the end of the financial year. The investment at the beginning of the financial year was 90.86 Lakhs and were Rs.1.71 Crores at the end of the year. Thus, there is an increase in the capital balance from Rs.87.42 Lakhs to Rs.154.76 Lakhs of the appellant partnership firm was on account of credits of share of profit, interest on capital and other credits like transfer of reserves. In fact, the increase in the investment in shares was on account of re-investment of profit on sale of shares. As the interest bearing funds has not been used for the purpose of investments, the formation of opinion and decision made by the Ld. AO in making disallowance of ITA No. 267/Ahd/2022 (DCIT vs. Base Metal Chlorinations Pvt. Ltd.) A.Y.– 2011-12 - 5 - Rs.11,09,333/- has been found to be wrong and thus, rightly deleted by the Ld. CIT(A) with the following observations: “5.2 Ground No. 3 of the appeal is disallowance u/s 14A read with Rule 8D. The appellant has submitted that the appellant company has not made any investments meaning thereby they have not used any interest bearing funds for the purpose of Investments the income of which does not form a part of the total income. The balance in capital account of the partnership firm comprises of share of Profits earned and interest on capital account earned. The entire balance comprises of these items only as can be seen from the capital accounts furnished with this submission. Appellant has not made ANY INVESTMENT of funds on which interest is paid by your appellant and therefore no interest can be attributed to the investing activity the income of which does not form a part of the total income. There is no utilization of funds on which interest is paid by your appellant company and therefore there cannot be any disallowance on account of interest. Appellant had sufficient own funds to make the investments as can be seen from the financial statements. uploaded with this communication. Share-holders funds at the beginning of the year. were to the tune of Rs. 1.31 crores and Rs. 226 crores at the end the financial year. Investments at the beginning of the financial year were Rs.90.86 lakhs and were Rs.1.71 crores at the end of the year. The learned AO was furnished the movement in investments during the year whereby it was pointed out that the increase in the capital balance from Rs.87.42 lakhs to Rs.154.76 lakhs of the appellant in the partnership firm was on account of credits of share of profit, interest on Capital and other credits like transfer of reserves. Increase in the investment in shares was on account of re-investment of profit on sale of shares. These facts can be verified from the computation of income and financial statements uploaded with this communication. In view of the above submission and fact of the case I am of the opinion that AO has failed to make a case that interest bearing funds have been used for the purpose of investments. The AO has already disallowed a sum Rs. 65,714/- on account of direct nexus. Therefore further disallowance is not warranted in view of the facts of the case. Accordingly the disallowance of Rs. 11,09,333/- made u/s 14A is deleted and the Ground of Appeal is allowed.” 8. It was further argued by the Ld. Counsel appearing for the assessee that the assessee in his own case for A.Y 2013-14 on identical issue obtained order from the Co-ordinate Bench whereby and whereunder the addition made by the Ld. AO confirmed by the Ld. CIT(A) has been quashed. The copy of the order passed by Co-ordinate Bench dated 08.12.2022 has already been submitted before us. The Ld. DR, however, has not been able to controvert ITA No. 267/Ahd/2022 (DCIT vs. Base Metal Chlorinations Pvt. Ltd.) A.Y.– 2011-12 - 6 - the submission either on merit or on the order passed by the Co-ordinate Bench passing order in favour of the assessee deleting addition made on the identical issue rather he only supports the order passed by the Ld. AO. 9. Upon perusal of the entire set of documents, we find that the issue is settled in favour of the assessee by the order passed by the Co-ordinate Bench wherein and whereunder with the following observations, the Co-ordinate Bench has been pleased to delete the addition: “5. The assessee is in appeal before us against the aforesaid additions confirmed by Ld. CIT(Appeals). The counsel for the assessee pointed out that the Ld. CIT(Appeals) has relied upon the order for assessment year 2012-13 while dismissing the assessee’s appeal in respect of disallowance under section 14A of the Act. However, he drew our attention to page 5 of the paper book and pointed out that the assessee’s own share capital is ₹ 3.53 crores, and accordingly, the investment in interest free funds were made out of assessee’s own capital and hence, there is no question of disallowance of interest expenditure, so far as interest expenditure is concerned since no I.T.A No. 1625/Ahd/2018 A.Y. 2013-14 Page No. Base Metal Chlorinations Pvt. Ltd. Vs. ITO 4 interest bearing funds were used to make the investment. The counsel for the assessee further drew our attention to page 20 of the paper book to point out that no fresh investment was made during the year under consideration. Therefore, the assessee’s main contention is that since the assessee’s own capital far exceeds the investment in funds bearing exempt income, coupled with the fact that no fresh investments were made during the year under consideration, there is no case for disallowance so far as the disallowance relatable to interest expenditure is concerned. Further, regarding the disallowance so far as administrative expenditure is concerned, the counsel for the assessee submitted that the assessee has itself disallowed a sum of ₹ 1.78 lakhs in it’s return of income and accordingly, no further disallowance is called for in respect of administrative expenditure as well. In response, DR relied upon the observations made by Ld. CIT(Appeals) in the appellate order. 6. We have heard the rival contentions and perused the material on record. In our considered view, since the assessee is having substantial interest free funds in the form of its own share capital available with it, accordingly, there is no reason for disallowance on account of interest expenditure incurred for earning exempt income. In the case of Hitachi Home and Life Solutions (I) Ltd.[2014] 41 taxmann.com 540 (Gujarat), the Gujarat High Court held that where assessee's interest free funds exceeded investment made for earning exempted dividend income, disallowance under section 14A was not justified. Again, in the case of UTI Bank Ltd[2018] 99 taxmann.com 392 (Gujarat), the Gujarat High Court held that ITA No. 267/Ahd/2022 (DCIT vs. Base Metal Chlorinations Pvt. Ltd.) A.Y.– 2011-12 - 7 - no disallowance could be made under section 14A where assessee's I.T.A No. 1625/Ahd/2018 A.Y. 2013-14 Page No. Base Metal Chlorinations Pvt. Ltd. Vs. ITO 5 interest-free funds far exceeded its interest-free investments. In the case of Gujarat Narmada Valley Fertilizers Co. Ltd[2014] 42 taxmann.com 270 (Gujarat), the Gujarat High Court held that where assessee-company received dividend on UTI and shares and investment in same was made in earlier years and interest free funds available with assessee were much larger as compared to investment, disallowance of assessee's claim for interest expenditure by applying section 14A was incorrect. In case of Gujarat Fluoro chemicals Ltd. [2020] 120 taxmann.com 433 (Gujarat), the Gujarat High Court again reiterated that where interest free funds available with assessee were far more than gross investment, it could safely be harboured that interest bearing funds was not invested by assessee and, thus, no disallowance under section 14A to be made. In view of the above, there is no reason for disallowance so far as proportionate interest expenditure of ₹ 14,62,410/- is concerned. 6.1 However, so far as administrative expenses is concerned, we observe that the assessee has itself disallowed a sum of ₹ 1.78 lakhs in its return of income, which as per the counsel is adequate to cover disallowance of administrative expenses. The Ahmedabad Tribunal in the case of Axis Bank Ltd.[2017] 79 taxmann.com 187 (Ahmedabad - Trib.) held that administrative expenses need to be disallowed under section 14A of the Act. The Kolkata Bench of the ITAT in the case of Coal India [I.T.A No. 1032/Kol/2012 decided on 13-5-2015 held that the term ‘expenditure’ as per section 14A would include expenditures that are related to the investment made i.e. administration, capital expenditure, travelling expenses, operating expenses, etc. That such investment decisions are highly I.T.A No. 1625/Ahd/2018 A.Y. 2013-14 Page No. Base Metal Chlorinations Pvt. Ltd. Vs. ITO 6 strategic in nature and are required to be made by highly qualified and experienced professionals, require research and analysis, need to attend board meetings and make policy decisions. By no stretch of imagination it can be assumed that such activities are done without incurring any expenditure. The disallowance of administrative expenditure under section 14A of the Act was again affirmed by the Mumbai ITAT in the case of Zee Entertainment Enterprises Ltd.[2017] 81 taxmann.com 379 (Mumbai). The Ahmedabad ITAT in the case of Sun Pharmaceutical Industries Ltd.[2017] 84 taxmann.com 217 (Ahmedabad - Trib.) directed the A.O. to compute the disallowance for administrative expenditure as per the formula given under Rule 8D. In our view, the law is unanimous on the point that administrative expenses need to be disallowed as per Rule 8D.However, since in the instant facts, the assessee has suo moto disallowed a sum of ₹ 1.78 lakhs in its return of income while making disallowance under section 14A read with Rule 8D, no further disallowance is called for on account of administrative expenditure. 7. In the result, Grounds Number 1 of the assessee’s appeal is allowed. ITA No. 267/Ahd/2022 (DCIT vs. Base Metal Chlorinations Pvt. Ltd.) A.Y.– 2011-12 - 8 - 10. Respectfully relying upon the Co-ordinate Bench’s order, we do not find any reason to deviate from the stand taken by them in assessee’s own case ITA No. 1625/Ahd/2018 for A.Y. 2013-14 dated 08.12.2022 in holding that since the assessee is having interest free funds much larger as compared to the investment, disallowance of assessee’s claim for interest expenditure by applying Section 14A of the Act was incorrect. As the assessee has already disallowed Rs.65,714/- in his return of income by making disallowance under Section 14A r.w. Rule 8D, the Ld. CIT(A) rightly deleted the amount of Rs.11,09,333/- on account of administrative expenditure made by the Ld. AO. The Ground of appeal filed by the Revenue is found to be devoid of merit and, thus, dismissed. 11. The next ground of appeal relates to deleting the addition of Rs.11,09,333/- made in computing the Book Profit under Section 115JB of the Act holding that the addition under Section 14A of the Act has been deleted. 12. The issue is squarely covered in assessee’s own case by the Hon’ble ITAT for A.Y. 2012-13 which has been followed by the Co-ordinate Bench in assessee’s own case in ITA No. 1625/Ahd/2018 for A.Y. 2013-14 relying upon the judgment passed by the Hon’ble Supreme Court in the case of Atria Power Corporation Ltd. [2022] 142 taxmann.com 413 (SC), whereby and whereunder the SLP filed by the Department challenging the order passed by the Hon’ble High Court holding disallowance made under Section 14A of the Act could not be added in assessee company’s income for the purpose of computation of income under Section 115JB of the Act. In fact, relying upon the ratio laid down by the Hon’ble Apex Court, we find that there is no ambiguity in deleting such addition made by the Ld. AO which is found to be ITA No. 267/Ahd/2022 (DCIT vs. Base Metal Chlorinations Pvt. Ltd.) A.Y.– 2011-12 - 9 - just and proper without any ambiguity so as to warrant interference. This ground of appeal, therefore, fails. 13. In the result, Revenue’s appeal is dismissed. This Order pronounced on 05/07/2023 Sd/- Sd/- (ANNAPURNA GUPTA) (MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 05/07/2023 True Copy S. K. SINHA आदेश क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं%धत आयकर आय ु 'त / Concerned CIT 4. आयकर आय ु 'त(अपील) / The CIT(A)- 5. *वभागीय -त-न%ध, आयकर अपील य अ%धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड3 फाईल / Guard file. आदेशान ु सार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील$य अ%धकरण, अहमदाबाद / ITAT, Ahmedabad
Other Referred Cases
Hitachi Home and Life Solutions (I) Ltd. [2014] 41 taxmann.com 540 (Gujarat), UTI Bank Ltd [2018] 99 taxmann.com 392 (Gujarat), Gujarat Narmada Valley Fertilizers Co. Ltd [2014] 42 taxmann.com 270 (Gujarat), Gujarat Fluoro chemicals Ltd. [2020] 120 taxmann.com 433 (Gujarat), Atria Power Corporation Ltd. [2022] 142 taxmann.com 413 (SC)
Laws Referred To
Income Tax Act, 1961
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