Disallowance us 14A(2)-AO need not resort to Rule 8D always. AO is entitled to make disallowance u/s 14A(2), Rules cannot prevail over the Act – ITAT
ABCAUS Case Law Citation:
ABCAUS 1172 (2017) (03) ITAT
The assessee had challemged the order of the CIT invoking revisionary jurisdiction u/s 263 of the Income Tax Act, 1961 (‘the Act’)
Assessment Year : 2011-12
Date/Month of Pronouncement: March, 2017
Important Case Laws Cited/relied upon:
CIT vs J.L.Morrison (India) Ltd
CIT vs Mulchand Bagri
CIT (Central) vs Max India Ltd
Brief Facts of the Case:
The appellant assessee was a Non-Banking Finance Company (NBFC) registered with the Reserve Bank of India (RBI) and engaged in the activity of investment in shares and also granting of loans. The assessee company was having tax free income in the form of dividend on shares and also taxable income in the form of interest income on loans granted. The appellant assessee had filed its return of income declaring loss of Rs. 7,13,40,514/- and Book Profit to the tune of Rs. 20,88,02,973/-. The case was selected for scrutiny and during the course of assessment proceedings, the AO observed that the assessee was in receipt of dividend of Rs. 9,45,55,748/- ; profit on sale of long term investments of Rs. 28,65,62,101/- and Profit on sale of current investments of Rs. 62,60,745/-. The AO observed that the assessee had voluntarily disallowed a sum of Rs. 9,95,65,228/- u/s 14A of the Act as expenditure incurred for the purpose of earning income which do not form part of the total income as under:
Demat Account charges (direct expenses) Rs. 552/-
Interest expenses relatable to investment Rs. 9,91,24,091/-
25% of total administrative expenses Rs. 4,40,585/-
The AO in the course of scrutiny proceedings u/s 143(3) of the Act discussed the issue of disallowance u/s 14A of the Act having regard to the accounts of the assessee by looking into the net worth of the assessee and investments in securities made by the assessee. Based on these examination of accounts, the AO accepted the disallowance made by the assessee in the sum of Rs. 9,95,65,228/- The AO had also discussed this issue of disallowance u/s 14A of the Act in detail in the assessment order.
However, The ld CIT sought to invoke revisionary jurisdiction u/s 263 of the Act on the ground that the said order passed by the ld AO was erroneous in as much as it is prejudicial to the interests of the revenue . According to ld CIT, the disallowance made u/s 14A of the Act was to be increased to Rs. 18,83,15,804/- under Rule 8D(2)(ii) as against Rs. 9,91,24,091/- made by the AO.
In response to show cause notice, the assessee replied that as on the last day of the financial year, investment in securities yielding tax free income was excess by Rs. 77.40 crores when compared to the net worth of the company. Thus, average investment in securities yielding tax free income in excess of net worth during the financial year 2010-11 stood at Rs. 99.12 crores and the excess has been financed out of borrowings on which interest has been paid which interest needs to be disallowed. The assessee had adopted the weighted average interest rate of borrowings made by the company during the financial year 2010-11 at 10% and applied the said interest rate on Rs 99.12 crores and arrived at the disallowance of interest figure at Rs. 9,91,24,091/- which was disallowed suo moto while filing the return of income, in addition to other direct and indirect expenses including 25% of total administrative expenses.
It was pleaded that the assessee had utilized borrowings of Rs 150 crores specifically towards purchase of bonds in March 2010. The said bonds were held during the financial year 2010-11 and were sold only in December 2010 and Feb 2011. Thus excluding the interest on borrowings of Rs. 150 crores, in respect of disallowance of interest as per Rule 8D(2)(ii) of the Rules, the figure worked out was Rs. 7,20,14,634/- but whereas the assessee company itself had voluntarily disallowed Rs. 9,91,24,091/-. In respect of disallowance of indirect expenses as per Rule 8D(2)(iii) of the Rules, the figure worked out above comes to Rs. 2,80,679/- but whereas the assessee company itself had voluntarily disallowed Rs. 4,40,585/-. Based on these submissions, it was pleaded that there was no error in the order of the ld AO accepting the disallowance u/s 14A of the Act made by the assessee and hence the order of the ld AO could not be termed as erroneous and prejudicial to the interests of the revenue.
The CIT however proceeded to ignore the aforesaid submissions arrived at the disallowance figure thereon at Rs. 18,83,15,804/- . He further adopted 0.5% of average value of total investments of the assessee company and arrived at the disallowance figure of Rs. 98,53,465/- under Rule 8D(2)(iii) of the Rules. Accordingly, he proposed to make additional disallowance of Rs. 9,86,04,041/- (18,83,15,804 + 98,53,465 – 9,95,65,228) and non-consideration of the said additional disallowance resulted in the order of the AO as erroneous and prejudicial to the interest of the revenue.
Aggrieved, by the order of CIT u/s 263, the assessee was in appeal before the Tribunal.
Contentions of the Appellant assessee:
The assessee contended that the AO after having elaborate enquiries on the issue of disallowance u/s 14A of the Act thought it fit that the disallowance made thereon by the assessee itself is much more though the same is not in accordance with Rule 8D of the Rules. This view had been taken by him taking into consideration the accounts of the assessee in terms of section 14A(2) of the Act and accordingly it could be safely concluded that he had taken a possible view thereon which cannot be subject matter of revision u/s 263 of the Act.
Observations made by the Tribunal:
The Tribunal observed that interest income from bonds was offered to tax by the assessee. Hence the investment in bonds had yielded only taxable income and not any exempt income to the assessee. Hence the argument that the said investment should be excluded while calculating the total value of investments and total value of assets was logical and since it was not in dispute that the said bonds were purchased out of borrowed funds, the proportionate interest element attributable to Rs 150 crores loan deserved to be eliminated from the gross interest paid by the assessee. Only interest paid on loans relatable to investments yielding tax free income alone would be the subject matter of disallowance under Rule 8D(2)(ii) of the Rules.
The ITAT also did not find any infirmity in the computation of book profits u/s 115JB.
It was observed that, in the course of assessment proceedings, the assessee had duly replied before the AO giving the party wise details of loans given and loans granted by the assessee together with its interest, TDS details, repayments , if any, made thereon etc. Hence the AO had duly examined the aspect of interest paid on loans and interest received on loans in the assessment proceedings. The AO had also sent notices u/s 133(6) of the Act to those parties and cross verified the loan statements with their records and no adverse inferences were drawn in the assessment proceedings.
The Tribunal opined that the AO had sought to make disallowance u/s 14A of the Act having regard to the accounts of the assessee in terms of section 14A(2) of the Act and he need not resort to Rule 8D always for the purpose of making disallowance. Admittedly, the Rules cannot prevail over the Act as it is only a subordinate piece of legislation. When the Act clearly stipulates the point that the AO is entitled to make disallowance u/s 14A(2) of the Act having regard to the accounts of the assessee , then no error could be attributed on that aspect in the order of the AO.
Moreover, the ITAT observed that if Rule 8D was adopted , then it would only result in lesser disallowance figure u/s 14A of the Act as enumerated in the detailed factual workings given by the assessee before the CIT. Hence it could be safely concluded that the assessee had erred on the revenue side and offered more amount of disallowance u/s 14A of the Act which has been accepted by the AO. Hence it could be safely concluded that the AO had taken a possible view and this action had not caused any prejudice to the interest of the revenue but on the contrary as stated above, it had only caused prejudice to the interest of the assessee. Hence, the dual conditions stipulated in section 263 of the Act were not satisfied cumulatively.
It was held that revision order passed by the CIT u/s 263 had no legs to stand in the eyes of law and deserved to be quashed.