M/s. United Spirits Limted, Bangalore V. Joint Commissioner Of Income Tax, Special Range-7, Bangalore

ITA 300/BANG/2020

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 0212 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 05-03-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: C NARAYAN
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A; 250

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. 300/BANG/2020 ASSESSMENT YEAR : 2011 - 12 UNITED SPIRITS LIMITED, UB TOWER, 10 TH FLOOR, NO.24, VITTAL MALLYA ROAD, BANGALORE 560 001. PAN: AACCM 8043J VS. THE JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE 7, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI C. NARAYAN, CA RESPONDENT BY : SHRI MUZAFFAR HUSSAIN, C IT(DR)(ITAT ), BENGALURU. DATE OF HEARING : 18 .0 6 .2020 DATE OF PRONOUNCEMENT : 24 .0 6 .2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 24.01.2020 OF THE CIT(APPEALS)10, BENGALURU RELATIN G TO ASSESSMENT YEAR 2011-12. 2. THE ONLY ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL IS WITH REGARD TO THE CORRECTNESS OF THE DETERMINATION OF Q UANTUM OF DISALLOWANCE MADE BY THE REVENUE AUTHORITIES IN TERMS OF SECTION 14A OF THE INCOME-TAX ACT, 1961 [THE ACT] R.W. RULE 8D OF THE INCOME-TAX RULES, 1962 [THE RULES]. 3. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE AS FOLLOWS:- ITA NO.300/BANG/2020 PAGE 2 OF 7 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE APPELLANT, RESPECTFULLY CRAVES LEAVE TO PREFER AN APPEAL AGAIN ST THE ORDER PASSED BY THE COMMISSIONER OF INCOME TAX APPEALS - 10 [HEREINAFTE R REFERRED TO AS THE 'CIT(A)'] UNDER SECTION 250 OF THE INCOME-TAX ACT, 1961 ('ACT ') FOR ASSESSMENT YEAR ('AY') 2011-12 DATED 24 JANUARY 2020, INTER-ALIA ON THE FO LLOWING GROUNDS, WHICH ARE WITHOUT PREJUDICE TO EACH OTHER: THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW: 1. THE ORDER OF THE LEARNED CIT(A) IS BAD IN LAW AN D HENCE LIABLE TO BE QUASHED. 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE UNDER SECTION 14A READ WITH RULE 8D AMOUNTING TO RS. 28,44,12,626. 3. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS, IN NOT CONSIDERING THE FACT THAT THE DISALLOWANCE UNDER SECTION 14A OF THE ACT, CANNOT E XCEED THE AMOUNT OF ACTUAL EXEMPT INCOME EARNED DURING THE SUBJECT YEAR, I.E. RS. 57,04,390. 4. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS , IN NOT APPRECIATING THAT ONLY THOSE INVESTMENTS WHICH YIELD TAX FREE INCOME DURIN G THE SUBJECT YEAR SHOULD BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE UNDER SE CTION 14A OF THE ACT. 5. THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THAT WHEN ASSESSEE'S OWN FUNDS FAR EXCEEDS THE EXEMPT INCOME YIELDING ASSETS, THE PRES UMPTION IS THAT THE ASSESSEE HAS EARNED EXEMPT INCOME FROM ITS OWN FUNDS AND HEN CE NO DISALLOWANCE UNDER SECTION 14A IS CALLED FOR. 6. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOLDING THAT INTEREST AND OTHER COST OF RS.28,44,12,626 WERE INCURRED FOR PURPOSES OF EARNING EXEMPT INCOME. 7. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT( A) HAS ERRED IN LAW AND ON FACTS, IN NOT EXCLUDING THE INTEREST ON TERM LOANS AND OTH ER INTEREST EXPENSES ON THE BORROWED FUND UTILIZED FOR SPECIFIC PURPOSE, FOR TH E PURPOSE OF DETERMINING DISALLOWANCE UNDER SECTION 14A OF THE ACT, SINCE SU CH TERM LOANS/BORROWED FUNDS WERE OBTAINED FOR SPECIFIC PURPOSE AND WERE NOT TAK EN FOR THE PURPOSE OF EARNING EXEMPT INCOME. 8. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS, IN NOT CONSIDERING THE NET INTEREST EXPENDIT URE (NET OF INTEREST EARNED) INSTEAD OF GROSS INTEREST EXPENDITURE INCURRED BY T HE APPELLANT WHILE APPLYING RULE 8D. THE APPELLANT SUBMITS THAT EACH OF ABOVE GROUNDS IS INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. ITA NO.300/BANG/2020 PAGE 3 OF 7 THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND, VA RY, OMIT OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEAL AT ANY TIME BEFORE OR A T THE TIME OF HEARING OF THE APPEAL, SO AS TO ENABLE THE HON'BLE TRIBUNAL TO DEC IDE ON THE APPEAL IN ACCORDANCE WITH THE LAW. 4. THE ASSESSEE IS A PUBLIC LIMITED COMPANY ENGAGED IN MANUFACTURE, SALE AND DISTRIBUTION OF BEVERAGE ALCOHOL. DURING T HE COURSE OF SCRUTINY PROCEEDINGS, THE AO MADE A DISALLOWANCE UNDER SECTI ON 14A OF THE ACT AMOUNTING TO RS.28,44,12,626 BY APPLYING RULE 8D OF THE RULES. THE AO DISALLOWED INTEREST UNDER SECTION 14A OF THE ACT BY APPLYING RULE 8D BY APPLYING CLAUSE (II) AND (III) OF RULE 8D, ON THE B ASIS THAT INTEREST AND ADMINISTRATIVE COSTS WERE INCURRED TOWARDS INVESTME NTS MADE BY THE COMPANY, WHICH GIVES RISE TO EXEMPT INCOME. 5. ON THE BASIS OF THE ABOVE, DISALLOWANCE OF A SUM OF RS.25,47,78,831 WAS MADE UNDER RULE 8D(II) ON THE G ROSS AMOUNT OF INTEREST IN PROPORTION TO AVERAGE VALUE OF EXEMPTED INVESTMENTS (EXCLUDING INVESTMENTS IN FOREIGN SUBSIDIARIES) WHICH BEARS TO AVERAGE VALUE OF TOTAL ASSETS. FURTHER, DISALLOWANCE OF A SUM OF RS.2,96,3 3,795 WAS MADE UNDER RULE 8D(III) ON 0.5% OF THE AVERAGE VALUE OF EXEMPT ED INVESTMENTS (EXCLUDING INVESTMENTS IN FOREIGN SUBSIDIARIES. THE CIT(APPEALS) CONFIRMED THE ORDER OF THE AO. 6. BEFORE THE TRIBUNAL, IT IS SUBMITTED THAT DURING FY 2010-11, THE COMPANY HAS RECEIVED EXEMPT DIVIDEND INCOME AMOUNTI NG TO RS. 57,04,390. THE QUANTUM OF EXEMPT INCOME BEING RS. 5 7,04,390 IS EVIDENT FROM THE SCHEDULE EL OF THE RETURN OF INCOME AND TH E DETAILED WRITTEN SUBMISSION DATED 17.2.2014 WAS FILED BEFORE THE AO AND CIT(A). IT WAS SUBMITTED THAT FOR THE PURPOSE OF CALCULATING AVERA GE VALUE OF INVESTMENTS UNDER RULE 8D(2)(II) & (III), ONLY THOSE INVESTMENT S WHICH YIELDED DIVIDEND INCOME DURING THE PREVIOUS YEAR SHOULD BE TAKEN. I N THIS CONNECTION IT IS SEEN THAT THE ISSUE OF DISALLOWANCE U/S. 14A WAS AL SO A SUBJECT MATTER OF ITA NO.300/BANG/2020 PAGE 4 OF 7 DISPUTE IN AY 2012-13 IN ASSESSEE'S OWN CASE. THE M ATTER HAS BEEN DECIDED BY THE ITAT VIDE ITS ORDER DATED 29 MAY 202 0 IN IT(TP)A NO.489/BANG/2017, WHEREIN THE ITAT HAS ACCEPTED THE BELOW MENTIONED ARGUMENTS OF USL: DISALLOWANCE UNDER SECTION 14A CANNOT EXCEED THE E XEMPT INCOME EARNED. ONLY THOSE INVESTMENTS TO BE CONSIDERED FOR THE PU RPOSE OF DISALLOWANCE UNDER SECTION 14A WHICH YIELD TAX FREE INCOME DURING THE YEAR. WHERE NO SEPARATE BOOKS OF ACCOUNTS ARE MAINTAINED FOR EARNING TAX FREE INCOME AND TAXABLE INCOME AND VALU E OF OWN FUNDS EXCEED THE VALUE OF INVESTMENTS, THEN NO DISA LLOWANCE UNDER SECTION 14A IS CALLED FOR. 7. THE ITAT HELD AS UNDER:- 36. WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. THE LD A.R MADE VARIOUS CONTENTIONS AND HENCE THIS ISSU E REQUIRES TO BE RESTORED TO THE FILE OF THE AO FOR EXAMINING IT AFRESH IN THE LIGHT OF VARIOUS CONTENTIONS OF LD A. R, WHICH ARE SUMMARIZED BELOW:- (A) IT IS THE CONTENTION OF LD A.R THAT THE OWN FUN DS AVAILABLE WITH IT IS IN EXCESS OF THE INVESTMENTS. THE JURISD ICTIONAL HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. MICROLA BS LIMITED (2016)(383 ITR 490) HAS DEALT WITH AN IDENTICAL ISS UE. THE HIGH COURT EXTRACTED FOLLOWING DECISION RENDERED BY THE TRIBUNAL:- '40. WE HAVE HEARD THE RIVAL SUBMISSIONS. A COPY OF THE AVAILABILITY OF FUNDS AND INVESTMENTS MADE WAS FILE D BEFORE US WHICH IS AT PAGES 38 TO 42 OF THE ASSESSE E'S PAPERBOOK AND THE SAME IS ENCLOSED AS ANNEXURE-ILL TO THIS ORDER. IT IS CLEAR FROM THE SAID STATEMENT THA T THE AVAILABILITY OF PROFIT, SHARE CAPITAL AND RESERVES & SURPLUS WAS MUCH MORE THAN INVESTMENTS MADE BY THE ASSESSEE WHICH COULD YIELD TAX FREE INCOME. 41. THE HON'BLE BOMBAY HIGH COURT IN RELIANCE UTILI TIES & POWER LTD. 313 ITR 340 (BOM) HAS HELD THAT WHERE THE INTEREST FREE FUNDS FAR EXCEED THE VALUE OF INVESTM ENTS, IT ITA NO.300/BANG/2020 PAGE 5 OF 7 SHOULD BE CONSIDERED THAT INVESTMENTS HAVE BEEN MAD E OUT OF INTEREST FREE FUNDS AND NO DISALLOWANCE U/S. 14A TOWARDS ANY INTEREST EXPENDITURE CAN BE MADE. THIS VIEW WAS AGAIN CONFIRMED BY THE HON'BLE BOMBAY HIGH COUR T IN CIT V. HDFC BANK LTD., ITA NO.330 OF 2012, JUDGM ENT DATED 23.7.14, WHEREIN IT WAS HELD THAT WHEN INVEST MENTS ARE MADE OUT OF COMMON POOL OF FUNDS AND NON-INTERE ST BEARING FUNDS WERE MORE THAN THE INVESTMENTS IN TAX FREE SECURITIES, NO DISALLOWANCE OF INTEREST EXPENDITURE U/S. 14A CAN BE MADE. 42. IN THE LIGHT OF ABOVE SAID DECISIONS, WE ARE OF THE VIEW THAT DISALLOWANCE OF INTEREST EXPENSES IN THE PRESE NT CASE OF RS.49,42,473 MADE UNDER RULE 80(2)(II) OF THE I. T RULES SHOULD BE DELETED. WE ORDER ACCORDINGLY.' THEREAFTER, IT WAS HELD BY HON'BLE KARNATAKA HIGH C OURT AS UNDER:- 'THE AFORESAID SHOWS THAT THE TRIBUNAL HAS FOLLOWED A DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CI T V. HDFC BANK LTD. [2014] 366 ITR 505/226 TAXMAN 132 (MAG.)/49 TAXMANN.COM 335. WHEN THE ISSUE IS ALREAD Y COVERED BY A DECISION OF THE HIGH COURT OF BOMBAY W ITH WHICH WE CONCUR, WE DO NOT FIND ANY SUBSTANTIAL QUE STION OF LAW WOULD ARISE FOR CONSIDERATION AS CANVASSED.' ACCORDINGLY, WE DIRECT THE AO TO EXAMINE THE CLAIM OF THE ASSESSEE AND IF IT IS FOUND THAT THE OWN FUNDS AVAI LABLE WITH THE ASSESSEE IS IN EXCESS OF THE VALUE OF INVESTMENTS, THEN NO DISALLOWANCE U/R 8D(2)(II) OUT OF INTEREST EXPENDIT URE IS CALLED FOR. (B) IN THE ALTERNATIVE, THE ASSESSEE HAS ALSO SUBMI TTED THAT THE LOAN FUNDS WERE TAKEN FOR SPECIFIC PURPOSES AND UTILISED THE SAME FOR THOSE PURPOSES. ACCORDINGLY, IT WAS CONTENDED THAT, WHEN THE ASSESSEE WOULD BE ABLE TO SHOW THE NEXUS BETWEEN TH E INTEREST EXPENDITURE AND ITS UTILIZATION FOR SPECIFIC PURPOS ES, NO INTEREST DISALLOWANCE IS CALLED FOR. IN THIS REGARD, IT IS S TATED THAT IT HAS PAID INTEREST ON SECURITY DEPOSITS, CASH CREDITS/OV ERDRAFTS, WORKING CAPITAL DEMAND LOAN, BILL DISCOUNTING FACIL ITIES. WHEN THE DISALLOWANCE IS WORKED OUT UNDER RULE 8D(2)(II) , THIS CONTENTION OF THE ASSESSEE WOULD LOSE ITS SIGNIFICA NCE. ITA NO.300/BANG/2020 PAGE 6 OF 7 (C) THE LD A.R SUBMITTED THAT, FOR THE PURPOSE OF C OMPUTING AVERAGE VALUE OF INVESTMENTS, THE AO SHOULD CONSIDE R ONLY THOSE INVESTMENTS WHICH HAVE ACTUALLY YIELDED EXEMPT DIVI DEND INCOME. WE NOTICE THAT THIS ARGUMENT OF THE ASSESSE E FINDS SUPPORT FROM THE DECISION RENDERED BY THE SPECIAL B ENCH IN THE CASE OF VIREET INVESTMENTS P LTD (165 ITD 27)(DELHI - SB). ACCORDINGLY, WE DIRECT THE AO TO EXCLUDE INVESTMENT S, WHICH DID NOT YIELD EXEMPT INCOME, WHILE COMPUTING AVERAGE VA LUE OF INVESTMENTS. (D) THE LD AR ALSO CONTENDED THAT THE DISALLOWANCE SHOULD NOT EXCEED THE AMOUNT OF EXEMPT INCOME. IN THIS REGARD, HE PLACED HIS RELIANCE ON THE DECISION RENDERED BY JURISDICTI ONAL HIGH COURT IN THE CASE OF PRAGATHI KRISHNA GRAMIN BANK VS. JCI T (2018)(95 TAXMANN.COM 41). WE DIRECT THE AO TO TAKE INTO CONS IDERATION ABOVE SAID BINDING DECISION WHILE EXAMINING THIS IS SUE. ACCORDINGLY, WE RESTORE THIS ISSUE TO THE FILE OF T HE AO FOR EXAMINING IT AFRESH IN THE LIGHT OF DISCUSSIONS MAD E SUPRA. 8. WE ARE OF THE VIEW THAT SIMILAR DIRECTION TO THE AO TO DECIDE THE ISSUE AFRESH IN LINE WITH THE DIRECTIONS OF THE TRI BUNAL IN AY 2012-13 WOULD BE JUST AND APPROPRIATE IN THIS ASSESSMENT YEAR ALS O. WE HOLD AND DIRECT ACCORDINGLY. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TRE ATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 24 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 / ITA NO.300/BANG/2020 PAGE 7 OF 7 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.