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TMI Blog2018 (1) TMI 1508X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 8,12,65,800/-on the dividend earned & Rs. 9,49,770/-on the interest income. The Assessing Officer disallowed the claim by applying the provisions of section 14A r.w.r 8D of the Income Tax Rules,1962 and thereby reducing the expenses incurred for earning the same. 3. The matter was carried in appeal before the Ld.CIT(Appeals), who, following his order passed in assessee's case for assessment year 2009-10, upheld the applicability of section 14A r.w.r. 8D for the purpose of computing the disallowance of expenses to be made ,but at the same time directed restricting the disallowance, computed as per rule 8D(2)(ii) & (iii), by taking into account the average value of only those investments which had yielded interest and dividend income during the year. 4. Aggrieved by the same the assessee has come up in appeal before us in ITA No.1269/Chd challenging the applicability of the provisions of section 14A to deduction claimed u/s 80P(2)(d) and in upholding the disallowance of interest expenses computed as per Rule 8D(2)(ii) of the Income Tax Rules,1962 raising the following grounds: 1. That the order of the Worthy CIT(A) is being challenged on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t years also. It was also pointed out by the Ld. DR that the Hon'ble jurisdictional High Court in the case of Punjab State Cooperative Milk Producers Federation Ltd. vs Commissioner of Income Tax & Anr. reported in 336 ITR 495 had upheld the applicability of section 14A while calculating the eligible deduction u/s 80P(2)(d) of the Act. As far the assessee's contention of no disallowance to be made as per rule 8D(2)(ii) on account of interest, the Ld. DR contended that on account of the mixed funds available with the assessee the provisions of rule 8D(2)(ii) were clearly applicable. 9. We have heard the contentions of both the parties. On the first contention raised by the assessee vis-à-vis the applicability of section 14A r.w.r. 8D, we find that this aspect has already been dealt with by the Tribunal in the case of the assessee in assessment year 2012-13 vide their order in ITA No.48/Chd/2016 dated 30.10.2017 wherein the contention of the Ld. counsel for assessee that the provisions of section 14A r.w.r. 8D could not be applied for the purpose of computing the expenses relatable to earning of interest and dividend income was dismissed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch business computed in accordance with the provisions of the IT Act, which is includible in such person's total income liable to charge of incometax, it must flow therefrom, as a necessary corollary thereof, that the "profits and gains" for which exemption from income-tax is envisaged under s. 81(i)(d) of the IT Act, ought to be net profits and gains, i.e. income of business computed in accordance with the provisions of the IT Act which is includible in such person's total income for charging income-tax thereon." 13. It may be noticed that s. 80P was inserted in place of s. 81 which was simultaneously deleted by Finance (No. 2) Act, 1967, w.e.f. 1st April, 1968. 14. Further, s. 14A was inserted in the Act by Finance Act, 2001 w.e.f. 1st April, 1962. The said section provides that any expenses incurred by the assessee for earning income which does not form part of total income under the Act, shall not be an allowable expenditure. The apex Court in Walfort Share & Stock Brokers's case (supra), defining the scope of s. 14A of the Act, incorporated retrospectively from 1st April, 1962, had laid down as under : "The insertion of s. 14A with retrospective effect is the serious ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for computing income for the purpose of chargeability to tax under those heads. Secs. 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in ss. 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in ss. 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under s. 14A. Reading s. 14 in juxtaposition with ss. 15 to 59, it is clear that the words "expenditure incurred" in s. 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see ss. 30 to 37)." 15. Adverting to the judgments relied upon by the learned counsel for the assessee, the same do not advance its case. Suffice it to notice that the Doaba Co-operative Sugar Mills case (supra) was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt had not been controverted by the Ld. DR and the same stands reflected in the Balance Sheet of the assessee right from financial year ending 31-03-91 to the impugned financial year ending on 31-03-12, which have been filed before us in the form of Paper Book .Moreover, the Hon'ble jurisdictional High Court has held in the case of CIT VS. Max India Ltd.ITA No.210/Chd/2013 dt.08-03-2017 that if an assessee establishes that its interest free funds were equal to or more than the interest bearing funds it would be open to it to contend that presumption arises that the expenditure for earning interest income was incurred from out of its interest free funds warranting no disallowance of interest expenditure u/s 14A r.w.r. 8D.. The relevant findings of the Hon'ble High Court are as under: "9. This presumption is unfounded. Merely because the interest free funds with the assessee have decreased during any period, it does not follow that the funds borrowed on interest were utilized for the purpose of investing in assets yielding exempt income. If even after the decrease the assessee has interest free funds sufficient to make the investment in assets yielding the exempt income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance computed as per section 14A by taking the average value of only those investments which have earned income during the year, we find that even this issue had been dealt by the ITAT in its order in ITA No.48/Chd/2016 dated 30.10.2017 and pertaining to A.Y. 2012-13, in which the said direction was held to be correct in view of the decision of the special bench of the ITAT in the case of ACIT vs Vireet Investments Pvt. Ltd. in ITA No.502/Del/2012 dt.16.06.17 and the decision of the Delhi High Court in the case of ACB India Ltd.(supra). The relevant findings of the ITAT at para 13 of its order is as under: "13. As far as the contention of Ld. counsel for assessee that the calculation of administrative expenses to be disallowed as per rule 8D(2)(ii) be restricted to investments which have earned income during the year, we find merit in this contention of Ld. counsel for assessee. The Special Bench of the I.T.A.T. in the case of ACIT vs. Vireet Investments Pvt. Ltd. ITA No.502/Del/2012 dt.16/06/17 has laid down the said proposition and even the Hon'ble Delhi High Court in the case of ACB India Ltd. vs ACIT in ITA No.615/2014 dt-24.03.2015 has hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the Hon'ble High Court in the case of the assessee which was followed by the I.T.A.T. in subsequent years in the case of the assessee, the storage charges could not be treated as rental income, but godown owned by the assessee and hired to outside parties and not used by the assessee, earned rental income which was eligible for deduction u/s 80P(2)(e) of the Act. He further found on perusal of the details of rental income filed by the assessee that the assessee had rightly claimed deduction of Rs. 6,98,01,113/- u/s 80P(2)(e) of the Act and, therefore, allowed the same. 21. Before us, the Ld. DR relied upon the order of the Assessing Officer while the Ld.Counsel for the assessee relied upon the order and findings of the Ld.CIT(Appeals) and pointed out that since it had been accepted by the I.T.A.T. in assessee's own case for preceding years that the rental income earned by letting out godown to outsiders was entitled to deduction u/s 80P(2)(e) of the Act and the assessee having demonstrated this fact to the Ld.CIT(Appeals) on account of rental income earned amounting to Rs. 6,98,01,113/- which was verified and accepted by the Ld.CIT(Appeals) also, there was no inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gress on other hand the assessee has incurred huge interest on various loans of Rs. 7,17,94,28,40//- during the year. 25. Briefly stated, the Assessing Officer found that the assessee had shown machinery work in progress at the end of the year amounting to Rs. 75,88,81,585/- and had incurred interest expenses of Rs. 717,94,28,407/-. The Assessing Officer, following the decision of the Hon'ble jurisdictional High Court in the case of CIT Vs. Abhishek Industries Ltd., 286 ITR 1, treated all the moneys of the assessee as common kitty and thereafter proceeded to capitalize the interest expenses @ 12% on the machinery work in progress shown by the assessee treating the same as pertaining to them. 26. During appellate proceedings before the Ld.CIT(Appeals) the assessee filed details of interest expenses reflecting that they were paid both for short term and long term loans. The assessee further demonstrated that the short term loans were used for the working capital needs of the assessee's business while the long term loans had been taken from National Cooperative Development Corporation (hereinafter referred to as 'NCDC') and used by the assessee for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before it through sanction letter of the said loan. The aforesaid facts have not been controverted by the Revenue . In view of the same, it is clear that the assessee had demonstrated and bifurcated the user of loans and, therefore, the Ld.CIT(Appeals), we hold, was right in holding that the interest pertaining to only those loans which were taken for the purpose of construction of godowns needed to be capitalized as per the provisions of section 36(1)(iii) of the Act. Even otherwise, the Ld. DR has not controverted this finding of the Ld.CIT(Appeals) that the loans taken by the assessee were duly bifurcated. In view of the same, we see no reason to interfere with the order of the Ld.CIT(Appeals) and uphold the same in restricting the disallowance of interest expenses by capitalized the same to the extent of Rs. 3,15,81,084/-. The ground of appeal No.3 raised by the Revenue is, therefore, dismissed in above terms.
29. In effect, the appeal of the Revenue is dismissed.
30. In the result, the appeal of the assessee is allowed for statistical purposes and the appeal of the Revenue is dismissed.
Order pronounced in the open court. X X X X Extracts X X X X X X X X Extracts X X X X
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