TMI Blog2016 (9) TMI 1270X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest expenses can be disallowed, does not require any adjudication, in view of the above conclusion. As far as disallowance of other expenses u/r 8D(2)(iii) of the rules is concerned, shows expenditure on account of staff and office expenses. The claim of the Assessee that no other expenses were incurred to earn the tax free income cannot be accepted. There is no other basis on which the disallowance can be quantified. Having regard to the books of accounts of the Assessee, the disallowance as worked out above of ₹ 40,583.66 Ps., in my view would be just and appropriate, in the facts and circumstances of the present case. Thus accordingly, restrict the disallowance u/s.14A of the Act to a sum of ₹ 40,583.66 Ps. - Decided in favour of assessee in part. There can be no disallowance of expenses u/s.14A of the Act for AY 2009-10, as the Assessee has not earned any tax free income in the said AY. - I.T.A Nos.1983 & 1984/Kol/2014 - - - Dated:- 2-9-2016 - Sri N.V.Vasudevan, JM For The Appellant : Shri U.Dasgupta, Advocate For The Respondent : Shri Rajat Kumar Kureel, JCIT.Sr.DR ORDER These are appeals by the Assessee against two different orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.3,52,734/- Total Rs.6,48,411/- Addition Rs..6,48,411/- 4. Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(A). Before CIT(A), the Assessee contended vide submission dated 21.5.2011 that 1. The appellant is a 'Co-operative Bank. operating in and around the PS limits of Raniganj area under a banking license granted by the Reserve Bank of India. 2. The bank under instructions from the Reserve Rank of India Under section 24(i) of the Banking Regulation Act and Section 6 of the Banking Regulation Act. have to make investments of a certain percentage of its deposits in other financial institutions VIZ. Government securities/Mutual Fund. Accordmgly, the bank made investment in Government securities, Mutual fund and in State Government securities. During the beginning of the year the investment in Mutual Fund was ₹ 56,33,712.76 while due to increase in its deposits it had to enhance the investment to ₹ 1,05,99,750/- at the end of the year. The entire investments have been made out of compulsion be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is seen that the investment in Mutual Funds are more than covered by the appellants own funds and there is absolutely no nexus or linkage between the funds borrowed by assessee and the alleged disputed investments. The provisions of Sec 14A is not attracted in this case and Rule 8D cannot be invoked. The addition of ₹ 6,48,411/- made by invoking the provisions of Rule 8D under on assumption and presumption may please be deleted. The AO filed a remand report dated 15.7.2014 on the above figures furnished by the Assessee before the CIT(A) in which the AO contended as follows: In this context, it is stated that the arguments taken by the assessee in its written submission before your honour is not acceptable for the following reasons: i) The assessee has compared the figure of investment in mutual fund of ₹ 1.16 crores with the total figure of ₹ 2,01 crores ( paid up capital of ₹ 1.05 crore and ₹ 84.91 lacs under heading Reserve and other fund) as per audited balance sheet as on 31/03/2008 i.e. on the last day of the financial year 2007-08 relevant to A.Y. 2008-09 stating it to be more that adequate to cover the said investment in Mutual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT(A), the Assessee is in appeal before the Tribunal. The grounds of appeal raised by the Assessee reads as follows: 1) For that the order of the Ld. CIT(Appeals) is arbitrary, excessive and hence bad in law, because the provisions of sec 14A of the Act' 61. is not applicable to the facts of the instant case. 2) For that on the facts of the case the Ld. CIT ( A ) , Asansol. was not legally justified in sustaining the addition of ₹ 6,48,411/- u/s 14A of the Act' 61, and the said addition is without any legal sanction and may please be deleted. 3) For that on the fact of the case neither the Ld. CIT(A) , nor the Ld. A.O. has made out a case, regarding applicability of provisions of sec 14A of the Act' 61, and additions sustained merely on presumptions and assumptions may please be deleted. 4) For that the Ld. CIT(A) failed to give cognizance to the written submissions / arguments, filed by the appellant, in course of hearing, and has passed a very cryptic order, without any application of mind, and without any discussions, to the submissions of the ppellant, and the appeal order is legally erroneous on this count. 5) For that the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid only ₹ 71,15,579. He drew our attention to decision of ITAT Kolkata Bench in the case of DCIT Vs. M/S.Trade Apartments Ltd. ITA No.1277/Kol/2011 dated 30.3.2012 and the decision of ITAT Ahmedabad Bench in the case of ITO Vs. Karnavati Petrochem Pvt.Ltd. ITA No.2228/Ahd/2012 dated 5.7.2013. In both the aforesaid decisions it has been held that if there is no net interest expenses after setting off the interest expenses with the interest income, then there can be no disallowance of interest expenses u/s.14A of the Act, as in such a situation, it cannot be said that expenditure by way of interest has been claimed by the Assessee. 11. The learned DR relied on the order of the CIT(A) and the remand report filed by the AO before the CIT(A). He submitted that the very fact that the AO has invoked Sec.14A of the Act to make the impugned disallowance can only lead to an inference that the AO was not satisfied with the claim of the Assessee that no expenditure was incurred to earn exempt income. 12. I have given a very careful consideration to the rival submissions. By the Finance Act of 2001, Parliament enacted section 14A with retrospective effect from April 1, 1962. Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year beginning on or before the 1st day of April, 2001. 15. The circumstances in which the provisions of sub-sections (2) and (3) were introduced by an amendment have been adverted to in a circular of the Central Board of Direct Taxes dated December 28, 2006 (Circular No. 14 of 2006-[2006] 288 ITR (St.) 9). The circular notes that in the existing provisions of section 14A no method for computing the expenditure incurred in relation to income which does not form part of the total income had been provided. As a result there was a considerable dispute between taxpayers and the Revenue on the method of determining such expenditure. In this background, sub-section (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he disallowance u/s.14A of the Act? A plain reading of Sec.14A(2) of the Act shows that the legislature has used the words 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 therefore the AO has to resort to the provisions of Rule 8D of the Rules, if the claim of the Assessee regarding expenditure incurred in earning exempt income is not accepted by the AO. If such an interpretation is adopted than that would result absurd results, as in the present case, the exempt income is a sum of ₹ 5,60,301/- and the disallowance u/s.14A of the Act is a sum of ₹ 6,48,411/-. We are of the view that even in a case where the AO rejects the claim of the assessee that no expenses were incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. If Rule 8D of the Rules is blindly by the AO sometimes it will lead to absurd results. The AO examining the claim of the assessee regarding ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n claimed by the Assessee that the availability of own funds of the Assessee was ₹ 68.19 lacs. This has not been rebutted on a proper basis by the CIT(A). Therefore it can safely be concluded that there was sufficient availability of own funds from and out which investments in UTI mutual funds were made by the Assessee and therefore disallowance of interest expenses by applying Rule 8D(2)(ii) of the rules of ₹ 2,95,677/- is deleted. I am also of the view that the argument that interest income is more than the interest expenses debited in the profit and loss account and therefore no interest expenses can be disallowed, does not require any adjudication, in view of the above conclusion. 20. As far as disallowance of other expenses u/r 8D(2)(iii) of the rules is concerned, shows expenditure on account of staff and office expenses of ₹ 14,97,132 and ₹ 28,22,543.16 Ps. respectively. A look at Schedule-14 and 15 of schedules to profit and loss account (a copy of which is given as an annexure to this order), ..shows that except salary of ₹ 11,72,889, no other expenditure can be said to be attributable to earning of exempt income. In applying the formula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr.M.Baskaran ITA No.1717/Mds.2013 order dated 31.7.2014 wherein the Chennai Bench held that there can be no disallowance of expenses u/s.14A of the Act when there is no exempt income earned in the previous year. In coming to the above conclusion, the Chennai Bench has relied on several High Court decisions in which a view contrary to the view expressed by the Special Bench in the case of Cheminvest (supra) has been taken. The following are the relevant observations of the Chennai Bench of the ITAT: 5. Heard both sides. Perused orders of lower authorities and submissions made by the assessee and the decisions in relied on. No doubt in the decision of the Special Bench of Delhi Tribunal in the case of Cheminvest Ltd. Vs. ITO (supra), the Special Bench held that disallowance' under section 14A can be made even in the year in which no exempt income has been earned or received by the assessee. This decision of Special Bench of the Tribunal has been impliedly overruled by the decisions of High Courts in the following cases: 6. In the case of M/s. Shivam Motors P.Ltd. (supra), before the Hon'ble Allahabad High Court, the Revenue raised the following question of law:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Assessing Officer as well as CIT(Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 2009-2010 Since in the present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that subsection (1) of section 14A provides that for the purpose of computing total income under chapter IV of the Act, 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 the Act.' In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in cese of Commissioner of Income Tax v Winsome Textile Industries Ltd reported in (2009) 319 ITR 204 (Punj Har) in which also the Court had observed as under: 7. We do not find any merit in this submission. The judgement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r consideration in these apepals is whether the CfT(A) as well as the Tribunal were right in allowing deduction of interest liability out of other income and the claim of the revenue to disallow the same under section 14A of the Act was justified. . 9. The CIT(A) vide order dated 24.6.2004 annexure A. 11 recorded as under:- 7.2 Keeping in view the above facts and circumstances of the case it is held that the AO was not correct in applying section 14A of the IT Act in disallowing the expenditure on account of interest amounting to ₹ 46,91,684,-. It was incumbent on the AO to establish a nexus between the 'expenditure incurred and the income which was exempt under the Act. Facts clearly do not support the action of the AD. Disallowance is accordingly deleted. The AO is directed to recompute the income accordingly. 10 Vide order dated 16.5.2008. Annexure A. III the Tribunal on appeal by the revenue while upholding the finding recorded by the CIT(A) noticed as under.: We have heard rival submissions and have perused the material on record. From the reading of section 14A of the Act it is clear that before making any disallowance the following condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, we see no reason to interfere with the order of CIT(A) concerning assessment year 2000-01 and 2001-02 and hence the decision of CIT (A) in deleting the disallowance of interest by invoking section 14A of the Act is correct and in' accordance with law. 11. In view of the aforesaid findings, which could not be shown to be erroneous, the plea of the revenue cannot be accepted. 11. In the case of CIT Vs. Winsome Textiles Industries Ltd. (319 ITR 204) the Hon'ble Punjab Haryana High Court held that when there is no claim for exemption of income in such situation section 14A has no application. Respectfully following the above decisions, we delete the disallowance made under section 14A as the assessee has not earned /received for exempt income during the previous year relevant to the assessment year under appeal. Thus, we sustain the order of the Commissioner of Income Tax (Appeals) on this issue. 25. Following the said order, I hold that there can be no disallowance of expenses u/s.14A of the Act for AY 2009-10, as the Assessee has not earned any tax free income in the said AY. I accordingly allow the appeal for AY 2009-10. 26. In the result, ITA No ..... X X X X Extracts X X X X X X X X Extracts X X X X
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