AI Insights
The case involves Kiritkumar Nagindas Shah, the appellant, contesting the additions made to his income under sections 14A and 40(a)(ia) of the Income Tax Act, 1961, by the Assessing Officer and subsequently confirmed by the CIT(A). The primary issues revolved around the disallowance of interest expenses related to exempt income and the non-deduction of tax at source on certain interest payments. The Tribunal examined the applicability of section 14A and the correct interpretation of Rule 8D concerning the disallowance of expenses incurred in relation to earning exempt income. The Tribunal's decision was influenced by the precedent set in Bennett Coleman & Co. Ltd. and the procedural impropriety in the enhancement of addition by the CIT(A).
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 301499 (ITAT-SURAT)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 month(s) 6 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
11-10-2023
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
SMC
Next Hearing Date
04-10-2023
Assessment Year
2014-2015
Appeal Filed On
04-08-2023
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT (SMC) BENCH BEFORE SHRI DR. A. L. SAINI, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.535/SRT/2023 Assessment Year: (2014-15) (Physical Hearing) Kiritkumar Nagindas Shah, A-1103, Regent Residency, Near Saurabh Society, Pal, Surat – 395009, Gujarat Vs. The ITO, Ward – 2(3)(6), Surat èथायीलेखासं./जीआइआरसं./PAN/GIR No.: ANJPS9031P (Appellant) (Respondent) Appellant by Shri Mehul Shah, CA Respondent by Shri Vinod Kumar, Sr. DR Date of Hearing 05/10/2023 Date of Pronouncement 12/10/2023 आदेश / O R D E R PER DR. A. L. SAINI, AM: Captioned appeal filed by the assessee, pertaining to Assessment Year (AY) 2014-15, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals), [in short “the ld. CIT(A)”], National Faceless Appeal Centre (in short ‘the NFAC’), dated 13.06.2023, which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), dated 13.12.2016. 2. The grounds of appeal raised by the assessee are as follows: “1. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in confirming the action of assessing officer of making the addition without rejecting books of account u/s 145 of the I.T. Act. 2. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in confirming the action of Page | 2 ITA.535/SRT/2023/AY.2014-15 Kiritkumar Nagindas Shah Assessing Officer by sustaining the addition of Rs. 7,56,965/- u/s 14A of the Act. 3. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in partly confirming the action of Assessing Officer by making the disallowance of Rs. 11,35,955/- out of total disallowance of Rs. 17,30,151 /- u/s 40(a)(ia). 4. It is therefore prayed that the addition made by the Assessing Officer and partly confirmed by the CIT(A) may kindly be deleted. 5. The appellant craves leave to add or alter or delete any of the ground or grounds of appeal at the time of the hearing before Your Honour.” 3. Brief facts, as discernible from the orders of lower authorities are that assessee filed return of income on 29.11.2014, declaring total income of Rs.11,09,810/- and agriculture income of Rs.1,13,250/- for rate purpose. The return of income was processed u/s 143(1) of the Income-Tax Act, 1961. Since the case was selected for scrutiny through CASS, and notice u/s 143(2) of the Act was issued on 18.09.2015, which was duly served upon the assessee on 26.09.2015. In response to the notices issued u/s 143(2) and 142(1) of the Income- Tax Act, 1961, the assessee, attended the assessment proceedings and submitted the required details from time to time. During tile year under consideration, the assessee was engaged trading of Art Silk coth. The assessee has shown income from business or profession, salary, remuneration and profit from partnership firms, income from of other sources and agriculture income in his return of income filed for the assessment year (A.Y.) 2014-15. 4. During the course of assessment proceedings, it was noticed by the assessing officer that the assessee has shown exempt income from partnership firm, income from dividend and income from agricultural activity. Thus, assessing officer observed that the assessee has incurred expenditure relatable to exempt income. Thus, the provision section 14A applies in the assessee`s case. Section 14A provides that Page | 3 ITA.535/SRT/2023/AY.2014-15 Kiritkumar Nagindas Shah for computing of the Income of an assessee, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the assessee’s total income under the Income Tax Act. Ongoing through the balance sheet of the assessee as on 31.03.2014, it was noted by the assessing officer that the assessee has taken secured loan of Rs. 4,01,749/- and unsecured loan of Rs.1,98,48,805/- and claimed interest expenses of Rs.8,08,065/- in profit and loss account. The exempted investment is attributable towards exempted investment. Accordingly, the assessing officer worked out the disallowance under section 14A of the Act, as follows: WORKING OF INTEREST DISALLOWANCE U/S. 14A:- Page | 4 ITA.535/SRT/2023/AY.2014-15 Kiritkumar Nagindas Shah Therefore, the assessee was asked by assessing officer, vide show cause dated 07.11.2016, to furnish explanation as to why provision of section 14A of the I.T. Act should not be applied and disallowance should not be made according to section 14A of the I.T. Act. 5. In this regard, the assessee has furnished his reply vide letter dated 17.11.2016, stating that interest, expense is completely the interest of various banks and financial institutions. The said loans from banks and financial institutions were used purely in the business activity and it is not covered u/s 14A of the I.T. Act. 6. However, the assessing officer rejected the reply of the assessee and observed that the assessee has shown secured loan of Rs.4,01,749/- and unsecured loan of Rs.1,98,48,805/-. Further, it was noticed that the assessee has made investment of Rs.2,30,62,334/- to earn exempt income and shown exempt income from partnership firm, income from dividend and income from agricultural activity. Thus, assessing officer noted that assessee’s claim for interest expenses of Rs.18,08,065/- is relatable to exempt income. The assessee has not furnished any separate account for expenses incurred to earn exempt income. Therefore, assessing officer noted that section 14A of the I.T. Act applies in the assessee’s case and claim of interest expenses is required to be disallowed u/s 14A of the I.T. Act, as per rule 8D of the Rules. Therefore, interest expenses of Rs.7,56,965/- was disallowed under section 14A of the I.T. Act and added to the total income of the assessee. 7. Further, it was also noticed by the assessing officer that assessee has not deducted tax at source on interest expenses of Rs.17,30,151/- u/s 194A of the I.T. Act. Therefore, assessee’s claim Page | 5 ITA.535/SRT/2023/AY.2014-15 Kiritkumar Nagindas Shah for interest of Rs.17,30,151/- was not allowable as deduction u/s 40(a)(ia) of the I.T. Act. Therefore, further show cause notice was issued, vide notice dated 02.12.2016, which is reproduced as under: “On perusal of your reply dtd. 17.11.2016, it is noticed that you have claimed interest expenses of Rs.18,08,065/- on unsecured/secured loan taken for business purposes. Further, it is seen from your return of income that you have claimed following exempt income: Sr. No. Particulars Amount 1. Share profit 9,60,081 2. Agriculture income 1,13,250 3. Dividend income 23 However, you have not furnished any separate account for expenses incurred for earring of exempt income. Hence, section 14 of the I.T. Act attracts in your case. Therefore, you are asked to furnish explanation as to why expenditure incurred of Rs.7,56,965/- for earning exempt income should not be disallowed u/s 14A of the I.T. Act as worked out of Rs.7,56,965/- as per rule 8D of the income tax. Further, it is noticed that you debited interest expense of Rs.18,08,065/- in profit and loss account. Further, verification of details of interest expenses, it is noticed that you have paid/credited interest in the account of following persons on which tax has not been deducted at source: Sr. No. Name of the person Interest amount (Rs.) 1. Bajaj Finserve Lending 4,25,493 2. Deutsche Bank AG 5,94,196 3. Religare loans 4,94,881 4. Tata Capital 2,15,581 TOTAL 17,30,151 Therefore, deduction claimed for interest expenses of Rs.17,30,151 is not allowable. Therefore, you are asked to furnish explanation as to why interest expenses of Rs.17,30,151/- should not be disallowed and added to your total income for non-deduction of tax.” 8. In response to the above show cause notice, neither the assessee has attended nor furnished any written reply. Further, verification of details furnished by the assessee, it was noticed by the assessing officer that assessee has paid/credited interest to the account of the following party: Page | 6 ITA.535/SRT/2023/AY.2014-15 Kiritkumar Nagindas Shah Name of the person Interest amount (Rs.) Bajaj Finserve Lending 4,25,493 Deutsche Bank AG 5,94,196 Religare loans 4,94,881 Tata Capital 2,15,581 TOTAL 17,30,151 The assessing officer observed that the assessee is responsible to deduct tax u/s 194A of the Income Tax Act on the above interest expenditure of Rs.17,30,151/- at the time of payment/credited to the account of the above mentioned parties. However, the assessee has not furnished any reply for non-deduction of TDS. Therefore, it was presumed by the assessing officer that the assessee has not deducted tax or deducted tax but not deposited tax into Central Government Account. Hence, the assessing officer observed that the claim of interest expenses of Rs.17,30,151/- was not allowable as deduction u/s 40(a)(ia) of the I.T. Act. Therefore, the assessing officer made a disallowance of Rs.9,73,186/- (after reducing of disallowance of Rs.7,56,965/- u/s 14A - Rs.17,30,151) and added to the total income of the assessee. That is, the assessing officer reduced the interest expenses of Rs.17,30,151/- by the disallowance of Rs.7,56,965/- u/s 14A of the Act. Therefore, assessing officer made total disallowance at Rs. Rs.17,30,151/- (Rs.9,73,186 + Rs.7,56,965). Since the assessing officer made a combined disallowance to the tune of Rs.17,30,151/- therefore, these two grounds of appeal raised by the assessee are interconnected and mix, hence I shall adjudicate them together. 9. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the addition of Rs.7,65,965/- made by the Assessing Officer in respect of disallowance under section 14A of the Act and the disallowance Page | 7 ITA.535/SRT/2023/AY.2014-15 Kiritkumar Nagindas Shah under section 40(a) (ia) of the Act has been enhanced by ld CIT(A) from Rs.9,73,186/- to Rs.11,35,955/-. 10. The observations of the ld. CIT(A) in respect of disallowance under section 14A of the Act, are as follows: “4. The first issue is disallowance u/s 14A. During the year under consideration, the assessee declared exempt income from partnership firm, income from dividend and income from agricultural activity. The AO noted that the assessee had incurred expenditure relatable to the exempt income earned and therefore invoked the provisions of section 14A rw rule 8D resulting in addition of Rs.7,65,965. 4.1 In the appellate proceedings, the assessee submitted that the interest and banking charges aggregating to Rs.18,08,065 paid to various banks and financial institutions was purely used for business activity. It was also contended that the investment in partnership firm were strategic investments and therefore to be excluded for the purpose of average investments u/s 14A r.w.r 8D. Accordingly, assessee made a plea to delete the disallowance u/s 14A. 4.2 I have perused the order and the submission of the assessee. To begin with, there was no dispute that assessee did not earn any exempt income during the year. The assessee had investment in firm, the share of profit from which was exempt to tax along with agriculture income and dividend. And, during assessment proceedings, the assessee claimed that she did not incur any expenditure in relation to such exempt income. Under such circumstances, the AO rightly invoked the provisions of section 14A(3) and worked out the quantum of disallowance as provided in rule 8D. Therefore, no fault can be found in the action of the AO. 4.3 As regards the assessee argument that provisions u/s 14A were not applicable to as the strategic investments made in the firm, the same is not acceptable in view of the Apex court's decision in the case of Maxopp Investment Ltd wherein it was held that the dominant purpose for which the investment was made was not the relevant factor in applying section 14A. Therefore, the assessee’s plea to delete the addition u/s 14A is rejected and the addition is confirmed.” 11. Shri Mehul Shah, Learned Counsel for the assessee, argued that average investment worked out by the assessing officer is to the tune of Rs.1,67,23,284/-. However, own funds of the assessee is to the tune of Rs.17,6,80,573.51 as per balance sheet as on 31.03.2014, Page | 8 ITA.535/SRT/2023/AY.2014-15 Kiritkumar Nagindas Shah therefore entire investments was made by the assessee, out of own funds of the assessee. Therefore, no addition should be made on account of interest expenses. However, the disallowance at the rate of 0.5% of average investments can be made. 12. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. 13. I have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee. I note that the assessment year involved in the assessee`s case is the A.Y.2014-15 wherein old Rule 8D of the Rules, is applicable for disallowance under section 14A of the Act. The Rule 8D is amended by the Income Tax (Fourteenth Amendment) Rules, 2016, w.e.f. 02.06.2016, which is not applicable to the assessee under consideration. Section 14A of the Income-Tax Act, 1961, provides for disallowance of expenditure incurred in relation to earning of exempt income. The Central Board of Direct Taxes (CBDT) vide notification no. 43/2016 dated 2 June, 2016, has amended Rule 8D. The new Rule 8D will come into effect from the date of its notification in Official Gazette. In terms of the existing provisions of Rule 8D, the amount to be disallowed shall be the aggregate of (i) expenses directly incurred to earn exempt income; (ii) interest expense (not directly attributable to any exempt income) worked out on the basis of a prescribed formula; and (iii) 0.5% of the average value of investments yielding exempt income. I note that assessee has invested the amount out of own free funds, which is more than the investment, hence no disallowance on account of interest expenses should be made. For that I rely on the judgment of Page | 9 ITA.535/SRT/2023/AY.2014-15 Kiritkumar Nagindas Shah Bennett Coleman & Co. Ltd. vs. Additional Commissioner of Income-tax, Mumbai, [2018] 89 taxmann.com 415 (Mumbai - Trib.), wherein it was held as follows: “Section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to exempt income (Interest) - Assessment year 2008-09 - During relevant year, assessee had earned dividend income from investments in shares and securities and long-term capital gain on sale of mutual funds which it claimed as exempt under section 10(34) and 10(38) respectively - Assessing Officer having invoked section 14A disallowed interest expenses incurred for earning exempt income - It was noted that assessee had furnished details that its own funds were sufficient to cover investments yielding exempt income - Borrowings of assessee were utilised for other business requirements and not for making said investments - Whether, on facts, impugned disallowance of interest paid on borrowed funds was to be deleted - Held, yes [Para 6] [In favour of assessee]IT : Where assessee had furnished details that it had surplus own funds to make investments in shares and mutual funds and it had not used borrowed funds for such purpose, disallowance of interest expenses under section 14A was to be deleted IT: Where assessee had transferred its business division to its subsidiary against shares and debentures, same was not a 'slump sale' but an 'exchange'; thus, provisions of section 50B not would be applied” 14. From the above judgment of Coordinate Bench of ITAT, Mumbai in the case of Bennett Coleman & Co. Ltd. (supra), it is vivid that where assessee had furnished details that it had surplus own funds to make investments in shares and mutual funds and it had not used borrowed funds for such purpose, the disallowance of interest expenses of Rs.6,73,350/-, under section 14A of the Act, is to be deleted. Therefore, respectfully following the binding precedent, in the case of Bennett Coleman & Co. Ltd(supra), I delete the addition of Rs.6,73,350/- made by the Assessing Officer in respect of interest disallowance under section 14A of the Act. 15. However, I direct the assessing officer to make the disallowance (addition) at Rs.83,616/- (being 0.50% of average investment of Rs.1,67,23,284/-) Page | 10 ITA.535/SRT/2023/AY.2014-15 Kiritkumar Nagindas Shah 16. In the result, ground No.1 raised by the assessee is partly allowed. 17. Regarding ground No.2 raised by the assessee, I note that assessee paid interest charges of Rs.17,30,151/- to four different financial institutions without deducting tax u/s 194A of the Act. Since part of the interest amounting to Rs.7,56,965/- was already disallowed u/s 14A, therefore, the assessing officer (AO) considered only the balance interest of Rs.9,73,186/- (Rs.17,30,151 - Rs.7,56,965) for disallowance u/s 40(a)(ia) for non-deduction of tax at source. On appeal by the assessee, the ld CIT(A) has enhanced the addition from Rs.9,73,186/- to Rs. 11,35,955/-, without giving notice of enhancement. However, I note that during the appellate proceedings, the assessee submitted before ld CIT(A) that out of the total interest of Rs.17,30,151/-, the interest of Rs.5,94,196/- was paid to M/s Deutsche Bank AG and since the entity was a banking company, the provisions of section 194A were not applicable. This argument of the assessee was accepted by ld CIT(A), as M/s Deutsche Bank AG is a banking company and hence the corresponding disallowance was deleted by ld CIT(A). The ld Counsel stated that despite of this, ld CIT(A) had enhanced the addition from Rs.9,73,186/- to Rs.11,35,955/-, without issuing notice to the assessee for enhancement and without giving opportunity to the assessee. Therefore, enhancement made by the ld CIT(A) is bad in law and needs to be deleted. In this regard, reliance can be placed on the judgment of Hon`ble Madras High Court in the case of CIT Vs. Lotte India Corporation Ltd (2007) 290 ITR 248 (Mad). Hence, I note that ld. CIT(A) without giving an opportunity to the assessee, has Page | 11 ITA.535/SRT/2023/AY.2014-15 Kiritkumar Nagindas Shah enhanced the assessment, therefore addition made by the ld CIT(A) to the tune of Rs. 11,35,955/-, is hereby deleted. 18. In the result, ground No.2 raised by the assessee is allowed. 19. In the result, the appeal filed by the assessee is partly allowed. Order is pronounced on 12/10/2023 in the open court. Sd/- (Dr. A.L. SAINI) ACCOUNTANT MEMBER lwjr /Surat Ǒदनांक/ Date: 12/10/2023 SAMANTA Copy of the Order forwarded to 1. The Assessee 2. The Respondent 3. The CIT(A) 4. CIT 5. DR/AR, ITAT, Surat 6. Guard File By Order // TRUE COPY // Assistant Registrar/Sr. PS/PS ITAT, Surat
Other Referred Cases
Maxopp Investment Ltd vs. CIT, Bennett Coleman & Co. Ltd. vs. Additional Commissioner of Income-tax, Mumbai, CIT Vs. Lotte India Corporation Ltd
Laws Referred To
Income Tax Act, 1961
1:1 Consultation on Business Development
₹1
Consultation on Entity Formation
₹0
Guide to Charitable Trusts: Formation, Benefits, and Compliance
₹0
Contractor Indemnity Agreement
₹0
Co-Founder Separation Agreement
₹0
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