M/s Karnataka State Beverages Corporation Limited , Bangalore V. Deputy Commissioner of Income TAx Circle-4(1)(1), Bangalore

ITA 973/BANG/2018

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 6738 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 8 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-12-2021
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 27-03-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A; 207; 48; 119

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER ITA No.973/Bang/2018 Assessment year : 2012-13 M/s. Karnataka State Beverages Corporation Lt., 4 th Floor, TTMC Building, ‘A’ Block, BMTC, Shanthinagar, Bangalore – 560 027. PAN: AACCK 1421A Vs. The Deputy Commissioner of Income Tax, Circle 4(1)(1), Bangalore. APPELLANT RESPONDENT Appellant by : Shri S.V. Ravishankar, Advocate Respondent by : Shri Chetan R., Addl. CIT(DR)(ITAT), Bengaluru. Date of hearing : 30.11.2021 Date of Pronouncement : 09.12.2021 O R D E R Per Chandra Poojari, Accountant Member This appeal is directed against the order of the CIT(Appeals)-4, Bangalore dated 9.5.2016 giving effect to the order of the High Court dated 18.2.2016 in Writ Petition No.15910 of 2015 for the AY 2012-13. 2. The assessee has raised the following grounds of appeal :- “1. The order of the learned Commissioner of Income-tax (Appeals) in so far as it is against the appellant is opposed to law, facts, equity circumstances of the case. 2. The learned Commissioner of Income-tax (Appeals) is not justified in law confirming the additions made of ITA No.973/Bang/2018 Page 2 of 12 Rs,60,30,758/- made by the learned Assessing Officer under section 14A r.w.r 8D of the Act on the facts and circumstances of the case. 3. The learned Commissioner of Income-tax (Appeals) failed to appreciate that the provisions of section 14A of the Act are not automatic and the learned Assessing Officer is not justified in summarily resorting to application of Rule 8D of the Rules. 4. The learned Commissioner of Income-tax (Appeals) failed to appreciate the ground of the appellant that the learned Assessing Officer having failed to conduct an examination of the books of -account and derive satisfaction in negative on the claim of the Appellant that no expenditure has been incurred towards earning any exempt income. disallowance made is not sustainable in law. 5. The learned Commissioner of Income-tax (Appeals) failed to appreciate that since the Appellant used its own funds for the purpose of making the investment, the question of disallowance of any by invoking section 14A of the Act does not arise. 6. The learned Commissioner of Income-tax (Appeals) failed to appreciate that since no expenditure has in fact been incurred by the Appellant during the impugned period, disallowance made under section 14A r.w.r 8D is a hypothetical one and consequently erroneous and not sustainable in law. 7. The appellant craves leave to add, alter, modify or amend and delete any of the above grounds of appeal. 8. For the above and other grounds that may be urged at the time of hearing of the appeal the appellant prays that the appeal may by allowed and relief may be granted as prayed for the advancement of substantial cause of justice.” 3. The facts of the issue are that the assessee in the assessment year under consideration earned exempt income of Rs.7,70,76,407. On this count, the AO invoked the provisions of section 14A r.w. Rule 8D(2)(iii) ITA No.973/Bang/2018 Page 3 of 12 and worked out the disallowance at 0.5% of the average amount of tax exempt investments at Rs.60,30,758. Against this, the assessee went in appeal before the CIT(Appeals). The CIT(Appeals) confirmed the disallowance. Against this, the assessee is in appeal before us. 4. The ld. AR submitted that section 14A r.w. Rule 8D cannot be applied automatically and the AO is required to conduct an examination of the accounts of the assessee and arrive at an objective satisfaction with regard to the correctness of expenditure claimed or that the claim that no expenditure has been incurred. He could disallow the expenditure only when the assessee has incurred it in relation to the exempt income and where no such expenditure is incurred, disallowance cannot be made. The disallowance arises only when the assessee actually earns any exempt income not includible in the total income. Similarly even Rule 8D also clearly provides under sub-rule (1) that it is only after 'having regard to' the conditions mentioned therein, that the disallowance can be calculated by resorting to sub-rule (2). He further submitted that the AO has resorted to Rule 8D without even attempting to carry out the mandatory exercises referred above. The application of section 14A of the Act is subject to satisfaction of the preconditions stipulated therein. 5. The ld. AR further submitted that the AO has not attempted to look into the books of account of the assessee and simply assumed that the assessee would have incurred some expenditure in relation to income not includible under total income earned from certain investments. He has not recorded any satisfaction in the negative about the claim of the assessee that no expenditure has been incurred and has proceeded merely on assumptions, surmises and conjectures. The AO failed to appreciate the above and erroneously invoked the rigors of Rule 8D, despite having not found anything in the accounts of the assessee to suggest that expenditure was indeed incurred by the assessee. ITA No.973/Bang/2018 Page 4 of 12 6. Reliance is placed on the following decisions:- • Relaxo Footwears Ltd. v. ACIT reported in 50 SOT 102 (Delhi); • Priya Exhibitors (P) Ltd. v. ACIT reported in 54 SOT 356 (Delhi); • DCIT vs. Ashish Jhunjhunwala- ITA No.1890/Ko1/2012 (Kolkata Bench ITAT); • Kalyani Steels Ltd. v. Addl.CIT - ITA No.1733/PN/2012 (Pune Bench-B, ITAT); • REI Agro Ltd., v. DCIT reported in 160 TTJ 107 (Kolkata); • ACIT v. Magarpatta Township Development & Construction Co.Ltd. - [20141 46 taxrnann.com 284 (Pune) 7. The Hon'ble Punjab and Haryana High court in the case of CIT v. Hero Cycles Limited reported in 323 ITR 518 (P&H) has held that disallowance under section 14A requires finding of incurring of expenditure and where it is found that no expenditure has been incurred, disallowance under section 14A cannot stand and in CIT v. Deepak Mittal reported in 361 ITR 131 has held that the Assessing Officer cannot blindly resort to Rule 8D of the Rules and that where the Assessee claims that no expenditure is incurred, the Assessing Officer must proceed to collect material and evidence to determine the expenditure incurred by the assessee. 8. It is submitted that the disallowance made under section 14A of the Act is that of expenditure in relation to income not forming part of total income. Where the Assessing Officer does not, after examination of the books of account, derive negative satisfaction with regard to the claim of the Assessee that no such expenditure has actually been incurred, then making a disallowance amounts to disallowing expenditure that has in fact been incurred in relation to income which form part of total income. The ITA No.973/Bang/2018 Page 5 of 12 expenditure purported to be disallowed under section 14A is the expenditure in relation to income not forming part of total income. The words “in relation to” indicate that such an expenditure must have direct and proximate connection with the income not forming part of total income. 9. Reliance is placed on the following decisions where it has been held that if the investment is made out of own funds, disallowance under section 14A cannot be made: (a) CIT v. Winsome Textile Industries Ltd. reported in 319 ITR 204 (Punj. &Har.) (b) CIT v. Suzlon Energy Ltd. reported in 354 ITR 630 (Guj) (c) DIT(IT) v.BNP Paribas SA reported in 214 Taxman 548 (Born); (d) Yatish Trading Co. (P.) Ltd. v. Asstt. CIT reported in 129 ITD 237 (Mum.) (e) CIT v. K. Raheja Corpn. (P.) Ltd. [IT Appeal No. 1260 of 2009, dated 8-8-2011] (f) MarutiUdyog Ltd. v. Dy. CIT reported in 92 ITD 119 (Delhi.) (g) ParanjapeAutocast (P.) Ltd. v. Dy. CIT [ITA Nos. 1090 86 1091 (Pune) of 2010, dated 25-6-2012] (h) ITO v. Strides Arcolab Ltd. reported in 138 ITD 323 (Mum.) (i) Yamuna Prasad Peshwa v. Dy. CIT [ITA No. 416 (Jodh.) of 2009, dated 9-12-2011] (j) Dy. CIT v. Maharashtra Seamless Ltd. reported in 48 SOT 160 (URO) (k) BalarampurChini Mills Ltd. v. Dy. CIT reported in 140 TTJ 73 (Kol.) (l) Garware Wall Ropes Limited v. ACIT reported in 65 SOT 86 (Mum); (m) J. M. Financial Ltd. u. ACIT in ITA No.4521/Mum(J)/2012 dated 26.03.2014); ITA No.973/Bang/2018 Page 6 of 12 10. Thus it is submitted that the revenue authorities are not justified in invoking the provisions of Section 14A of the Act and Rule 8D of the Rules and making the disallowance of an amount of Rs. 60,30,758/- on the facts and circumstances of case. 11. The ld. AR drew our attention to the judgment of the Hon’ble Bombay High Court in the case of CIT v. Sociedade De Fomento Industrial (P.) Ltd., 429 ITR 207 (Bom) wherein it was held that where assessee invested certain own funds in exempted categories such as mutual funds and earned income and, had not incurred any expenditure in earning said income, assessee would be entitled to exemption under section 14A, read with rule 8D. In Maxopp Investment Ltd. v. CIT, 402 ITR 640 (SC) it was held as under:- “41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.” 12. According to the ld. AR, only the actual expenses incurred to earn exempt income could be disallowed. Thus since the AO has failed to carry out procedure as prescribed under section 14A of the Act the disallowance made is thus not on proper footing and requires to be deleted. 13. On the other hand, the ld. DR submitted that Rule 8D(2)(iii) is applicable for the assessment year under consideration. Accordingly the ITA No.973/Bang/2018 Page 7 of 12 AO applied the formula prescribed in the said Rule for the purpose of computation of expenditure incurred in earning the exempt income and the AO has no discretionary power to alter the said rule. He supported the orders of lower authorities. 14. We have heard both the parties and perused the material on record. In the present case, the AO applied section 14A r.w. Rule 8D(2)(iii) for determining the amount of expenditure in relation to income not includible in the total income. in terms of the provisions of section 14A(2), the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed and rule 8D prescribes this method as follows: Method for determining amount of expenditure in relation to income not includible in total income.- (1) ** ** ** (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :- (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :- A x B C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the ITA No.973/Bang/2018 Page 8 of 12 previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year." (3) For the purposes of this rule, the 'total assets' shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. 15. The stand of the assessee is that the disallowance under Rule 8D(2)(iii) shall be equal only to the actual expenditure incurred and in this regard the AO cannot apply the above formula automatically. However, in our opinion, as is evident from a reading of the Rule 8D(2)(iii) of the I.T. Rules, the AO has to apply the formula prescribed under the said Rule for the purpose of computation of expenditure incurred in earning of exempt income and the authorities have no discretionary power to tinker that formula so as to meet the needs of the assessee. We do not find any merit in the arguments of the ld. AR. 16. One more argument of the ld. AR is that the AO failed to conduct examination of books of account and derive satisfaction in the negative on the claim of the assessee that no expenditure has been incurred towards earning any exempt income and the disallowance is not sustainable. 17. The computation under Rule 8D(2)(iii) deals with a situation in which the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or ITA No.973/Bang/2018 Page 9 of 12 receipt. Therefore, this sub-clause seeks to allocate “common interest expenses” to taxable income and tax the exempt income. In other words, going by the plain words of Rule 8D(2)(iii), what is sought to be allocated is “expenditure by way of interest ................. which is not directly attributable to any particular income or receipt” and the only categories of income and receipt so far as scheme of Rule 8D is concerned, are mutually exclusive categories of ‘tax exempt income and receipt’ and ‘taxable income and receipt’. However, the definition of variable ‘A’ in the formula under Rule 8D(2)(ii) is clearly incongruous inasmuch as while it specifically excludes interest expenditure directly related to tax exempt income, it does not exclude interest expenditure directly related to taxable income. Consequently while Rule 8D(2)(iii) admittedly seeks to allocate “expenditure by way of interest, which is not directly attributable to any particular income or receipt”, it ends up allocating “expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income”. 18. Now the question before us is whether the AO could tinker with that formula prescribed under Rule 8D(2)(iii) of the I.T. Rules or interpret in any other manner other than what is mentioned by the plain words of the said Rule. This issue came up before the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT, 328 ITR 81 (Bom) wherein constitutional validity of Rule 8D(2)(iii) was challenged. The Court observed that it is only the interest on borrowed funds that will be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt. Therefore it is not only the interest directly attributable to tax exempt income i.e., under Rule 8D(2)(i), but also directly relatable to taxable income which has to be excluded from the definition of variable ‘A’ in the ITA No.973/Bang/2018 Page 10 of 12 formula as per Rule 8D(2)(ii) and rightly so, because it is only then that common interest expenses which are to be allocated as indirectly relatable to taxable income and tax exempt income can be computed. This is clear from the following observations :- “60. In the affidavit in reply that has been filed on behalf of the revenue an Explanation has been provided of the rationale underlying rule 8D. In the written submissions which have been filed by the Additional Solicitor General it has been stated, with reference to rule 8D(2)(ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax-free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example - any aspect of the assessee's business such as plant/machinery etc.) ........ The justification that has been offered in support of the rationale for rule 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in the method'.” 19. When the above is the proposition of law upheld by the Bombay High Court, it cannot be open to either the revenue authorities or the assessee to take any other stand on this issue of actual implementation of the formula set out in Rule 8D(2)(ii), which has been noted by the Bombay High Court in the above judgment as follows:- “... the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example - any aspect of the assessee's business such as plant/machinery etc.) ...”. ITA No.973/Bang/2018 Page 11 of 12 20. That apart, when assessee is paying interest on borrowings and the assessee is not able to show that investment in shares are out of internal accruals or non-interest bearing funds, and in the light of by Hon'ble Calcutta High Court decision x in the case of Dhanuka & Sons v. CIT [2011] 339 ITR 319/201 Taxman 105/12 taxmann.com 227 (Cal.) (Mag.), disallowance under section 14 A can indeed be made. In Dhanuka & Sons' case (supra), Their Lordships have, inter alia, observed as follows: 9. In the case before us, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired ................ 10. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment.” 21. Thus, interest expenses directly attributable to tax exempt income is also directly attributable to taxable income are required to be excluded ITA No.973/Bang/2018 Page 12 of 12 from the computation of common interest expenses to be allocated under Rule 8D(2)(ii). 22. Further, in the present case, wherein the assessee does not offer any disallowance under Rule 8D(2)(ii) in respect of exempt income, then the provisions of section 14A(2) r.w. Rule 8D(2) can be invoked u/s. 14A(3) of the Act by the AO and there is no necessity of recording further satisfaction by the AO. In other words, when the assessee itself fails to make disallowance suo motu u/s. 14A r.w. Rule 8D, then the AO is at liberty to invoke these provisions. We find no infirmity in the action of the lower authorities on this issue and the same is confirmed. 23. In the result, the appeal of the assessee is dismissed. Pronounced in the open court on this 9 th day of December, 2021. Sd/- Sd/- ( GEORGE GEORGE K. ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 9 th December, 2021. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.