2014 (8) TMI 1249 - AT - Income Tax

Interest disallowance under Section 14A upheld but quantification remitted for fresh calculation by AO

CIT Versus Brindavan Beverages Pvt. Ltd.

ITAT Bangalore upheld CIT(A)'s decision on interest disallowance but remitted quantification aspect back to AO. The assessee had not made voluntary ... Disallowance u/s 14A r.w.r. 8D - Primary contention raised by the assessee is that AO had not recorded his non-satisfaction on its claim that no expenditure was incurred by it for earning tax free income - HELD THAT:- What we note is that assessee had not made any disallowance by itself u/s 14A in its return of income. During the course of assessment through its letter dated 26/7/2011 it did raise a contention on these lines, and relevant part has been reproduced by us at para six above. It had given a break-up of the interest as well, claiming a part thereof to be for its business, leaving a balance on which it was undecided. A reading of the above reply itself would show that assessee was not convinced by its own stand that no expenditure was incurred in relation to the money put in tax free investment. 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. The plea of the assessee that applying the Rule 8D blindly by the AO will lead to absurd results, in our view, is without any basis because while examining the claim of the assessee regarding expenditure incurred in earning the exempt income including a claim that no expenses were incurred, the AO is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by Rule 8D(2) of the Rules. In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to Rule 8D(2) can be had by the AO. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income. Here on the other hand, it is a disallowance under rule 8D(2)(ii) and not 8D(2)(iii). Assessee has raised no grievance on the disallowance under rule 8D(2)(iii), either before CIT(A) or us. Hence, this case in our opinion, will not be of help to the assessee. Interest free own funds were there to cover the investments - Assessee has not been able to show that no part of the working capital loans raised by it at Bangalore, were used for making tax free investment. On the other, it is by itself not sure whether any part of the working capital was used for such investment. Thus, its claim that interest free own funds alone were used for making tax free investments is oppugnant to the admission before the CIT(A). The often quoted principle viz. “alligus contaria non-est audientus” has to apply. As for the decision of HDFC Bank [2014 (8) TMI 119 - BOMBAY HIGH COURT] relied on by the AR, in the first place it was a Bank and investments were made out of pooled funds. Here on the other hand, by assessee's own admission at least a part of its investment had gone out of the working capital loan, and hence not pooled funds. Hence, in our opinion this contention also has no merits. Bifurcation of gross interest is required to be made between those directly attributable to business and those not so attributable, before applying Rule 8D, does in our opinion, needs attention - Clearly interest expenditure not attributable to any particular income or receipt can be considered for apportionment under rule 8D(2)(ii). Nevertheless, the assessee had given submissions supporting its claim that part of interest was on term loans & working capital directly relatable to its business only before CIT(A). Neither CIT(A) nor AO had verified the work out furnished by the assessee. Therefore, the aspect of quantification of disallowance required to be made under 8D(2)(ii) does require a fresh look by the AO. Hence we set aside the orders of the lower authorities for the limited aspect of the quantification of disallowance required under rule 8D(2)(ii) and remit it back to the AO, for working it out afresh after hearing the assessee. Interest addition - no interest was charged on loans and advances given by it - HELD THAT:- There cannot be any dispute that at least share capital and reserves are own funds of the assessee. Not only had assessee own funds, well covering the loans and advances, but in the previous year the advances had gone down. In none of the earlier assessment year viz. by 2003-04, 2004-05,2005-06,2006-07,2007-08 & 2008-09 were any disallowance for interest on loans for non-business purpose made. As for the decision of the Hon'ble P & H High Court in Abhishek Industries Ltd [2006 (8) TMI 123 - PUNJAB AND HARYANA HIGH COURT] this was followed by the very same High Court, while confirming a similar disallowance in the case of Munilal Sales Corpn [2006 (10) TMI 89 - PUNJAB AND HARYANA HIGH COURT] Hon'ble Apex Court reversed the latter [2008 (2) TMI 19 - SUPREME COURT] and hence judgment in Abhishek Industries Ltd., will not further revenue's case any way. On the other hand, assessee is well supported by the decision of Reliance Utilities & Power Ltd [2009 (1) TMI 4 - BOMBAY HIGH COURT] as well as Hon'ble Gujarat High Court in the case of Raghuvir Synthetics Ltd [2013 (7) TMI 806 - GUJARAT HIGH COURT] We thus, do not find any reason to interfere with the order of the CIT(A) in this regard. In the result, ground 4 of the revenue is dismissed. Issues Involved:1. Disallowance under Section 14A of the IT Act.2. Deletion of disallowance of interest made by the AO.Detailed Analysis:1. Disallowance under Section 14A of the IT Act:Background:- The assessee, engaged in the manufacture and sale of aerated water, packaged water, and packaged fruit juice, filed a return showing 'nil' income.- The AO noted the assessee's investments that could yield tax-free income and proposed a disallowance of expenditure under Section 14A read with Rule 8D, amounting to Rs. 88,19,819/-.- The assessee objected, stating that the investments were made from surplus funds and no expenditure, including interest, pertained to these investments.CIT(A) Findings:- The CIT(A) held that the invocation of Section 14A was justified but found merit in the assessee's contention regarding the quantification of interest expenditure.- The CIT(A) noted that the total interest paid was Rs. 22,29,88,953/-, not Rs. 20,61,93,983/- as considered by the AO, and excluded interest attributable to the business.Tribunal Analysis:- The Tribunal noted that the AO did not record dissatisfaction with the assessee's claim of no expenditure incurred for earning tax-free income, which is a prerequisite for applying Rule 8D.- The Tribunal found that the AO's reason for disregarding the assessee's claim was cogent, given the assessee's inconsistent stance.- The Tribunal distinguished the case from Bharatiya Reserve Bank Pvt. Ltd., emphasizing that the disallowance was under Rule 8D(2)(ii) and not 8D(2)(iii).- The Tribunal found no merit in the assessee's claim that interest-free own funds were used for tax-free investments, as the assessee admitted that part of the working capital loan was used for such investments.- The Tribunal agreed that bifurcation of gross interest into business and non-business attributable interest was necessary before applying Rule 8D.Conclusion:- The Tribunal set aside the orders of the lower authorities regarding the quantification of disallowance under Rule 8D(2)(ii) and remitted it back to the AO for fresh determination after hearing the assessee.- Grounds 2 & 3 of the revenue's appeal and ground 2 of the assessee's cross-objections were allowed for statistical purposes.2. Deletion of Disallowance of Interest Made by the AO:Background:- The AO questioned why no interest was charged on loans and advances amounting to Rs. 197,15,19,812/- given by the assessee.- The assessee claimed that these advances were made out of surplus funds for commercial expediency, given the bleak prospects of the soft drink industry.CIT(A) Findings:- The CIT(A) accepted the assessee's contention, noting that the advances had reduced during the year and were made from substantial income from the preceding year.- The CIT(A) relied on the decision of the jurisdictional High Court in CIT v. Sridevi Enterprises to delete the disallowance.Tribunal Analysis:- The Tribunal noted that the assessee's share capital and reserves were substantial and well-covered the loans and advances.- The Tribunal observed that no disallowance for interest on loans for non-business purposes was made in earlier assessment years.- The Tribunal found that the decision of the P & H High Court in Abhishek Industries Ltd. was reversed by the Apex Court in Munilal Sales Corpn. v. CIT.- The Tribunal upheld the CIT(A)'s order, finding no reason to interfere.Conclusion:- Ground 4 of the revenue's appeal was dismissed.Final Outcome:- The appeal of the revenue and the cross-objection of the assessee were partly allowed for statistical purposes.