Superhouse Limited, Kanpur vs Assessee

Both these appeals are filed by the assessee, which are directed against two separate orders of learned CIT(A)-I, Kanpur dated 25/04/2013 for the assessment year 2008-2009 and dated 28/03/2013 for the assessment year 2009-10. Both the appeals were heard together and are being disposed of by way of this common order for the sake of convenience.

2. First we take up the appeal of the assessee for assessment year 2008-09 i.e. I.T.A. No.471/Lkw/2013. In this appeal, the assessee has raised the following grounds:

"1. BECAUSE the "CIT(Appeals)" has erred in law and on facts in upholding disallowance of Rs.8,98,035/- as had been made in the assessment out of expenditure, by invoking the provisions of section 14A of the Act.

2 2. BECAUSE the "CIT(A)" has failed to appreciate that as per the provisions contained in section 14A for the purposes of invoking section 14A and applicability of rule 8D, the Ld. Assessing Officer has to cross the barrier of the 'satisfaction' with the correctness of the claim, this having not done so no addition even for Rs.8,98,035/- could have been sustained in the hands of the "appellant".

3. BECUAE for the applicability of provisions of section 14A there should be a proximate relationship between the expenditure and the tax free income and Id. Assessing Officer failed to determine as to whether the "appellant" had incurred any expenditure in relation to the tax free income and, if so, to quantify the extent of disallowance, this having been not done in statutory perspective, the disallowance/ addition made by the Ld. Assessing Officer as also confirmed by "CIT(A)" deserves to be deleted.

4. BECAUSE looking to the nature of investment and the income yielded there from (with reference to which the provisions of section 14A had been invoked) no such expenditure as has been disallowed in the assessment, can be said to have been incurred by the "appellant.

5. BECAUSE in any case the computation of disallowance under section 14A read with Rule 8D is erroneous as no interest bearing funds were involved in the investment referred to in the assessment order.

6. BECAUSE otherwise also Dividend Income cannot be treated to be income exempt from taxation, as it is subjected to taxation in the hands of the company paying 'Dividend'.

7. BECAUSE the order appealed against is contrary to the facts, law and principles of natural justice."

3. It was submitted by Learned A.R. of the assessee that as per the judgment of Hon'ble Punjab & Haryana rendered in the case of CIT vs. Deepak Mittal [2014] 361 ITR 131 (P&H), where this is the consistent stand 3

of the assessee that no expenditure was incurred by the assessee for earning dividend income, the Assessing Officer was required to collect relevant material to determine expenditure relating to such exempt income and since in the present case also, it was the consistent stand of the assessee that no expenditure was incurred by the assessee for earning dividend income and no satisfaction has been recorded by the Assessing Officer by examining books of account of the assessee that expenditure was incurred for earning dividend income, no disallowance can be made u/s 14A of the Act. He also placed reliance on a Tribunal decision in the case of Daga Global Chemicals Pvt. Ltd. vs. ACIT in I.T.A. No.5592/Mum/12 dated 01/01/215. He submitted copy of this Tribunal decision and contended that as per this Tribunal decision, the disallowance u/s 14A cannot exceed the amount of exempt dividend income. He also submitted that in assessment year 2005-06 and 2006-07, similar disallowance was made by the Assessing Officer and matter reached to the Tribunal and issue was decided by the Tribunal in I.T.A. No.58 & 126/Lkw/2012 dated 06/02/2015. He submitted copy of this Tribunal decision and drawn our attention to Para 10 wherein it was held that when the cash and bank balance were higher than the total investment, it cannot be said that entire own funds available at the beginning of the assessee was lying invested in some other assets and therefore, not available for making investment and by making these observations, the Tribunal has held that no disallowance is called for u/s 14A out of interest expenditure. He also submitted that the Tribunal has confirmed the disallowance of Rs.50,000/- per annum in respect of administrative expenses in those two years.

4. Learned D.R. of the Revenue supported the orders of the authorities below.

4 5. We have considered the rival submissions. We find that in assessment year 2005-06 and 2006-07 in assessee's own case, it was held by the Tribunal that where the own funds were much in excess of investments and such own funds were available with the assessee in the form of cash and bank balances at the beginning of the year as well as at the end of the year, it cannot be said that own funds were not available for making investment in shares and under these facts, no disallowance is called for u/s 14A of the Act out of interest expenditure.

6. Now we examine the facts of the present years. We find that as per the balance sheet of the assessee company for the year ending on 31/03/2008 available on page No. 6 of the paper book, the investment as on 31/03/2008 were to the tune of Rs.473.30 lac as against investment of Rs.455.59 lac as on 31/03/2007. Hence, there is increase in the investment of Rs.17.71 lac. We also find that the opening cash and bank balances as on 01/04/2007 was to the tune of Rs.1260.20 lac and same as on 31/03/2008 was Rs.794.42 lac. Moreover, the own funds as on 31/03/2007 were Rs.9404.78 lac and Rs.9540.73 lac as on 31/03/2008. Hence, it is seen that in this year also, own funds were many times more than the investment in share and the availability of cash at the beginning and closing of the year was also more than the investment and therefore, in this year also, own funds were available with the assessee company and therefore, in this year also, no disallowance is called for u/s 14A of the Act out of interest expenditure as was held by the Tribunal in assessee's own case in preceding two years for assessment year 2005-06 and 2006-07. However, regarding disallowance out of administrative expenditure, we find that in assessment year 2005-06 and 2006-07, the disallowance was confirmed by the Tribunal to the extent of Rs.50,000/- per annum but in these years, Rule 8D was not applicable. In the present year, Rule 8D is applicable and 5

therefore, disallowance is to be confirmed to the extent of 0.5% of average investment. The same was computed by the Assessing Officer at Rs.2,32,223/- as per page No. 5 of the assessment order. We, therefore, confirm the disallowance under section 14A read with Rule 8D at Rs.2,32,223/- in assessment year 2008-09.

7. Regarding the reliance placed by Learned A.R. of the assessee on the judgment of Hon'ble Punjab & Haryana in the case of Deepak Mittal (supra), we would like to observe that it was held by Hon'ble Punjab & Haryana in this case that when the consistent stand of the assessee was that he had not made any expenditure for earning such income, the Assessing Officer in terms of sub-section (2) of section 14A had to proceed further to collect such material or evidence to determine the expenditure, if any, incurred by the assessee but the Assessing Officer instead, relying on rule 8D of the Rules, applied as a formula, applicable to an assessee who has incurred expenditure by way of interest which was not directly attributable to any particular income or receipt. Hence, it is seen that in this case, the issue in dispute was regarding interest expenditure u/s 14A of the Act. We have already held that no disallowance is called for u/s 14A out of interest and therefore, this judgment is not applicable in the present case.

8. Regarding the reliance placed by Learned A.R. of the assessee on the Tribunal decision in the case of Daga Global Chemicals Pvt. Ltd. (supra), we find that in this case, it was held by the Tribunal that disallowance u/s 14A cannot exceed the exempted limit. In this regard, we have already taken a view in the case of Commercial Auto in I.T.A. No. 156, 180, 315 & 157/Lkw/2010 dated 11.11.2014 by following the judgment of Hon'ble Apex Court in the case of Rajendra Prasad Moody, 115 ITR 519 (SC) that even if there is no dividend income earned during the relevant year, the disallowance has to be made u/s 14A because the expenditure incurred in 6

earning dividend income has to be disallowed irrespective of the fact that there is actual income or not. Since this stand taken by us is by following the judgment of Hon'ble Apex Court in the case of Rajendra Prasad Moody and this judgment of Hon'ble Apex Court was not brought to the notice of the Tribunal, this Tribunal decision does not lay down a binding precedence.

9. As per above discussion, we have seen that although no disallowance is called for u/s 14A out of interest expenditure but the disallowance to the extent of 0.5% of the average investment has to be made in respect of administrative expenses under Rule 8D and therefore, we confirm the disallowance to that extent i.e. to the extent of Rs.2,32,223/- and delete the balance disallowance.

10. In the result, the appeal of the assessee stands partly allowed.

11. Now we take up the appeal of the assessee for assessment year 2009-10 i.e. I.T.A. No.472/Lkw/2013. In this appeal, the assessee has raised the following grounds:

"1. BECAUSE the "CIT(Appeals)" has erred in law and on facts in upholding disallowance of Rs.9,46,794/- as had been made in the assessment out of expenditure/ by invoking the provisions of section 14A of the Act.

2. BECAUSE the "CIT(A)" has failed to appreciate that as per the provisions contained in section 14A for the purposes of invoking section 14A and applicability of rule 8D, the Ld. Assessing Officer has to cross the barrier of the 'satisfaction' with the correctness of the claim, this having not done so no addition even for Rs.9,46,794/- (as have been worked out after allowing relief of Rs.7,83,574/- on account of variation in the method of valuation adopted by the Id. Assessing Officer) could have been sustained in the hands of the "appellant".

7 3. BECUAE for the applicability of provisions of section 14A there should be a proximate relationship between the expenditure and the tax free income and Ld. Assessing Officer failed to determine as to whether the "appellant" had incurred any expenditure in relation to the tax free income and, if so, to quantify the extent of disallowance, this having been not done in statutory perspective, the disallowance/ addition made by the Id. Assessing Officer as also confirmed by "CIT(A)" deserves to be deleted.

4. BECAUSE looking to the nature of investment and the income yielded there from (with reference to which the provisions of section 14A had been invoked) no such expenditure as has been disallowed in the assessment, can be said to have been incurred by the "appellant".

5. BECAUSE in any case the computation of disallowance under section 14A read with Rule 8D is erroneous as no interest bearing funds were involved in the investment referred to in the assessment order.

6. BECAUSE otherwise also Dividend Income cannot be treated to be income exempt from taxation, as it is subjected to taxation in the hands of the company paying 'Dividend'.

7. BECAUSE the order appealed against is contrary to the facts, law and principles of natural justice."

12. Both the sides agreed that the facts of the present case are identical to the facts of assessment year 2008-09 and same can be decided on similar line. In this year, the Assessing Officer has worked out the disallowance in respect of administrative expenses @ 0.5% of average investment at Rs.2.37,659/- and we confirm the disallowance to this extent. With regard to balance disallowance out of interest expenditure, we find that as per the balance sheet of the assessee company as on 31/03/2009 available on page No. 22 in paper book of that year, in this year also, the own funds of the assessee company were to the extent of Rs.10291.88 lac as against investment of Rs.477.33 lac as on 31/03/2009 and availability of 8

cash were Rs.794.42 lac at the beginning of the year and Rs.1327.40 lac at the closing of the year. Hence, it is seen that in this year also, own funds were available for making investment in share in the form of cash and bank balance and therefore, no disallowance is called for out of interest expenditure in this year also. Hence, in this year also, we delete the disallowance u/s 14A out of interest expenditure. The assessee gets part relief and the disallowance is confirmed in this year only to the extent of Rs.2,37,659/-.

13. In the result, both the appeals of the assessee stand partly allowed.

(Order was pronounced in the open court on the date mentioned on the caption page)

Sd/. Sd/.

(SUNIL KUMAR YADAV) ( A. K. GARODIA ) Judicial Member Accountant Member

Dated:31/03/2015 *C.L.Singh

Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) 5. D.R., I.T.A.T., Lucknow Asstt. Registrar