Hero Moto Corp. Ltd., New Delhi vs Department Of Income Tax

DCIT, Vs. Hero Moto Corp. Ltd., Circle 12(1), 34, Community Centre, New Delhi. Basant Lok, Vasant Vihar, New Delhi - 110 057.

PAN: AAACH0812J

ITA No.5278/Del/2013 Assessment Year: 2000-01

Hero Moto Corp. Ltd., Vs. ACIT, 34, Community Centre, Circle 12(1), Basant Lok, Vasant Vihar, New Delhi. New Delhi - 110 057.

PAN: AAACH0812J

(Appellant) (Respondent)

Assessee By : Shri Gaurav Jain, Advocate Department By : Shri RIS Gill, CIT, DR ITA Nos.5538 & 5278/Del/2013.

Date of Hearing : 17.03.2015 Date of Pronouncement : 18 .03.2015

ORDER PER R.S. SYAL, AM:

These two cross appeals - one by the assessee and the other by the

Revenue - arise out of the order passed by the CIT(A) on 23.7.2013 in

relation to the assessment years 2000-01.

2. The only issue raised by the Revenue in its appeal is against

restricting the addition u/s 14A of the Income-tax Act, 1961 (hereinafter

also called 'the Act') from Rs.1,43,06,087/- to Rs.26.21 lac. The

assessee is also aggrieved against the sustenance of addition u/s 14A to

the level upheld in the first appeal.

3. Briefly stated, the facts of the case are that this is second round of

proceedings. The assessee filed its return declaring total income of

Rs.239.92 crore. The case was processed u/s 143(1). Thereafter, notice

u/s 148 was issued on 30.3.2006, pursuant to which assessment was

completed u/s 143(3) read with section 147, making addition, inter alia,

u/s 14A @ 25% of the exempt income. The assessee challenged the 2 ITA Nos.5538 & 5278/Del/2013.

assessment order before the ld. CIT(A), inter alia, against the initiation

of reassessment. The ld. CIT(A) vide his order dated 5.2.2008 rejected

the assessee's claim of the alleged invalid initiation of reassessment u/s

147. He, however, restricted the disallowance u/s 14A of the Act from

25% to 10% of exempt income. Though, both the assessee as well as the

Revenue preferred their respective appeals against the CIT(A)'s order,

but the Revenue did not challenge the relief allowed by the ld. CIT(A)

on section 14A disallowance. The Tribunal vide its order dated

16.4.2010 remitted the question of disallowance u/s 14A to the file of

the AO. The assessee chose not to press the ground about reopening of

assessment u/s 148 before the tribunal, as a result of which the ground

was dismissed as 'Not pressed'.

4. Pursuant to the Tribunal order, the AO took up the instant

proceedings. The AO computed disallowance u/s 14A at Rs.1.43 crore

by applying Rule 8D of the Income-tax Rules, 1962. Such disallowance

was made up of two figures, namely, disallowance of interest at Rs.79

lac and disallowance of other expenses @ 0.5% of the average value of

3 ITA Nos.5538 & 5278/Del/2013.

investments at Rs.64 lac. In the first appeal, the assessee once again

challenged the initiation of re-assessment proceedings u/s 147, which

ground came to be dismissed by the ld. CIT(A) on the reason that the

assessee had not pressed this issue before the Tribunal. As regards the

computation of disallowance u/s 14A, the ld. CIT(A) held that the

provisions of rule 8D were not applicable to the year under

consideration. He further held that the AO should have restricted the

addition to 10% of exempt income, being the amount of disallowance

sustained by the ld. CIT(A) during the first round of proceedings against

which only the assessee challenged the disallowance before the Tribunal

and the Revenue accepted this disallowance. He further observed that

out of total expenses of Rs.1942.45 crore debited to the Profit & Loss

Account, only a sum of Rs.80.23 crore could be said to have some

relation with the exempt income. By apportioning this expenditure of

Rs.80.23 crore in the ratio of Dividend income (Rs.7.43 crore) to the

Total turnover of the assessee company (Rs.2269 crore), he sustained the

disallowance at Rs.26,21,424/-. Both sides are in appeal against the

impugned order to the extent it is prejudicial to their respective interests. 4

ITA Nos.5538 & 5278/Del/2013.

5. We have heard the rival submissions and perused the relevant

material on record. One of the issues in the assessee's appeal is against

the error in the jurisdiction of the AO to initiate proceedings u/s 147 in

view of the bar contained in the proviso to section 14A of the Act. The

ld. AR vehemently argued that the AO ought not to have initiated re-

assessment proceedings and made disallowance u/s 14A vide his order

passed u/s 147. In our considered opinion, it is too late in the day for the

assessee to come up against the initiation of re-assessment proceedings

during the second round of assessment, after having not pressed this

ground about the invalid initiation of re-assessment u/s 147 before the

Tribunal in the first round. It is apparent from the Tribunal order in the

first round, a copy of which is available on record, that the assessee did

not press the issue of reopening of assessment u/s 148. Relevant finding

in this regard is contained in para 7.21 of the Tribunal order. Once the

assessee did not press the issue of initiation of re-assessment

proceedings before the Tribunal and allowed the decision to be taken on

all issues on merits, we now cannot unsettle the earlier tribunal order by

entertaining any ground about the initiation of re-assessment. The ld. AR 5 ITA Nos.5538 & 5278/Del/2013.

fairly admitted that the order of the tribunal in the first round has been

accepted by the assessee. In this view of the matter, we cannot permit

the assessee to raise the ground against the initiation of reassessment

once again, after having not pressed the same in the first round before

the tribunal. This ground is, therefore, not allowed.

6. Coming to the issue of disallowance u/s 14A on merits, we find

that the AO was not correct in applying the provisions of Rule 8D for

computing disallowance u/s 14A. Our view is fortified by the judgment

of the Hon'ble jurisdictional High Court in the case of Maxopp

Investments Ltd. Vs. CIT (2012) 347 ITR 272 (Del) in which it has been

held that the provisions of Rule 8D can apply only from the assessment

year 2008-09 and in the earlier periods, the disallowance is required to

be made on a reasonable and acceptable method of apportionment.

7. It can be seen that the AO has made total disallowance u/s 14A at

Rs.1.43 crore comprising of two amounts, namely, Rs.79 lac towards

interest and Rs.64 lac towards expenses at ½% of the average value of

investments.

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ITA Nos.5538 & 5278/Del/2013.

8. In so far as the interest aspect is concerned, it is vivid from the

assessee's balance sheet that total investments at the end of the year

stand at Rs.167.74 crore. The assessee's capital along with reserve and

surpluses stand at Rs.448.33 crore. This shows that the assessee's

Shareholders' funds is far in excess of the investment made in securities

yielding exempt income. The Hon'ble Bombay High Court in CIT vs.

Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), has held

that if there are interest free funds available with the assessee sufficient

to meet its investment and, at the same time, loan has been raised, it can

be presumed that the investments were from interest free funds and,

resultantly, no disallowance of interest can be made. Recently, the

Hon'ble Bombay High Court in CIT vs. HDFC Bank Ltd. (2014) 366

ITR 505 (Bom), has held that no disallowance of interest can be made u/s

14A if the assessee's own capital is more than the investments fetching

exempt income. Similar view has been taken by the Hon'ble Gujarat

High Court in the case of CIT vs. Suzlon Energy Ltd. (2013) 354 ITR

630 (Guj). In view of the above judgments, it is patent that the

7 ITA Nos.5538 & 5278/Del/2013.

disallowance u/s 14A on account of interest was not rightly made by the

AO.

9. Coming to the remaining disallowance towards expenses incurred

for earning exempt income, we find that the AO made addition at Rs.64

lac by applying the mandate of Rule 8D(2) (iii). On the other hand, the

ld. CIT(A) bifurcated total expenses into those exclusively relating to

the manufacturing activity and those which are common to both

manufacturing activity and exempt income. Such amount of common

expenses was determined by the ld. CIT(A) at Rs.80.23 crore. The ld.

DR could not point out any deficiency in computing the base amount of

expenses at Rs.80.23 crore.

10. As regards the apportionment of expenses, we are satisfied that the

ld. CIT(A) was not justified in allocating Rs.26.21 lac towards exempt

income by apportioning such total expenditure of Rs.80.23 crore in the

ratio of dividend income to the total turnover of the company. There can

be no comparison between dividend income on the one hand and total

turnover on the other, which contains only a part as income. On the

8 ITA Nos.5538 & 5278/Del/2013.

contrary, a valid base for apportionment is exempt income to taxable

income. The Delhi Benches of the Tribunal in ACIT vs. HT Media Ltd.

(ITA Nos.2508, 2507/Del/2013) has also approved the apportionment of

common expenses in the ratio of exempt income to total income. To this

extent, the impugned order is set aside and the matter is sent back to the

AO. We direct the AO to compute disallowance u/s 14A by

apportioning total expenses of Rs.80.23 crore in the ratio of exempt

income to total income. However, it is made clear that the total

disallowance should not exceed 10% of the exempt income, being the

amount of disallowance sustained in the first appeal in the original

round, against which the Revenue did not choose to prefer any appeal.

11. In the result, the appeal of the Revenue is partly allowed for

statistical purposes and that of the assessee is dismissed.

The order pronounced in the open court on 18.03.2015.

Sd/- Sd/- [C.M. GARG] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated, 18th March, 2015. 9 ITA Nos.5538 & 5278/Del/2013.

dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT

AR, ITAT, NEW DELHI.

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