Date Of Judgment 26-06-2018 I.t.a v. M/S. Deepak Cable (India) Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 26[th]DAY OF JUNE 2ZO1L8 PRESENT THE HON'BLE Dr.JUSTICE VINEET KOTHARI AND THE HON’BLE Mrs.JUSTICE S.SUJATHAI.T.A.No.1075/2017 Between:| 1.The Pr. Commissioner of Income-tax, CIT(A)5[th]floor, BMTC Building80 Feet Road, Kormangala5[th]floor, BMTC Building80 Feet Road, Kormangala Bengaluru-560 O95. 2.The Addl. Commissioner otf Income- TaRange-11, Present AddressDCIT, C-2(1)(2), 2[nd]FILoOorBMTC Building, 80 Feet RoadRange-11, Present AddressDCIT, C-2(1)(2), 2[nd]FILoOorBMTC Building, 80 Feet Road Kormangala, Bengaluru-560 O95. .. Appellant (By Mr. Aravind K.V. Advocate) And: M/s. Deepak Cable (India) Ltd., No.7, N8, lyengar StreetseshadripuramBengaluru-560 O20PAN: AAACD 6466C. ... Respondent This I.T.A. is filed under Section 26O0-A ot Income TaxAct 1961, praying to 1. Formulate the substantial questions Date of Judgment 26-06-2018 I.T.A.No.1075/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 2/10 of law stated above. 2. Allow the appeal and set aside theorders passed by the Income-Tax Appellate Tribunal,Bengaluru in ITA No.493/Bang/2014 dated 05-05-2017 andconfirm the order of the Appellate Commissioner confirmingthe order passed by the Deputy Commissioner of IncomeTax, Circle-2(1)(2), Bengaluru & etc. This I.T.A. coming on for Admission, this day | Dr. Vineet KothariJ. delivered the following:- JUDGMENT Mr. Aravind K.V.Adv. for Appellants - Revenue 1. The Appellants - Revenue have filed this appeal raising purported substantial questions of law arisingfrom the Order oft thelearned Income Tax Appellate| Tribunal Bengaluru Bench “C” Bengaluru,Annexure Ccdated05/05/2017inIT(TP)A.No.493/Bang/2014 forAY 2ZO1Q-1 2. The appellants - Revenue have suggested twosubstantial questions of law which are quoted below forready reference: - “1. Whether on the facts and in thecircumstances of the case, the Tribunal 1isright in law in setting aside the disallowance| Date of Judgment 26-06-2018 I.T.A.No.1075/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 3/10 made under section 14A read with Rule 8D of|the Act even when CIT(A) had rightlyconfirmed the disallowance and _ withouappreciating the Board’s Circular No.5/2014|dated 11/2/2014, whereby it is stipulated|that section 14A attracts even when there 1s|no exempt income earned by assessee during|the currentfinancial year?| D2 Whether on the facts and in the|circumstances of the case, the Tribunal 1isright in law in setting aside the disallowance|of interest towards interest free advances to|sister concerns at Rs.2,27,14,151 and also.capitalized interest towards capital work in|progressof|Rs. 7,15,44,133/7withoutconsidering the cash flow statement whereby|it is clear that the transactions in question|were not commercially expedient to make|interest free advances out of interest bearing|??, funds 3. The learned [TAT in its Order dated05/05/2017has given the following’ findings with Date of Judgment 26-06-2018 I.T.A.No.1075/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 4/10 regard to the issues raised in the present appeal by the Department. D2 Whether on the facts and in the|circumstances of the case, the Tribunal 1isright in law in setting aside the disallowance|of interest towards interest free advances to|sister concerns at Rs.2,27,14,151 and also.capitalized interest towards capital work in|progressof|Rs. 7,15,44,133/7withoutconsidering the cash flow statement whereby|it is clear that the transactions in question|were not commercially expedient to make|interest free advances out of interest bearing|??, funds 3. The learned [TAT in its Order dated05/05/2017has given the following’ findings with Date of Judgment 26-06-2018 I.T.A.No.1075/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 4/10 regard to the issues raised in the present appeal by the Department. “ThenextISSUE1Swhethertheinterestdisallowance made u/s.14A rwr S8D2(ii) isjustified. In this regard, we have already notedthat the assessee made investments in itssubsidiary, during the year, at Rs.1¢4 crore andhence it must have incurred certain indirectexpenses as explained by the CIT (A) in his order.It is an undisputed fact that during the year theassessee has taken a decision to make aniinvestment in the subsidiary. Therefore, theexpenditure incurred for taking such decisionwould fall within the category of expenditureincurred for earning the exempt income as perSectionLGA.|Excepttheinvestment.in|subsidiary,there1STLOotherinvestment.Therefore, for the purpose of computing thedisallowance as per Rule 8D(2)(ut), the amount ofaverage investment would be Rs.7 crores andhence the disallowance made at 0.5% of theaverage amount of the current year investment ofRs.7 crores would be restricted to Rs.3,50,000/-only. To this extent, the disallowance ts justified.Thus the corresponding assessee’s ground fails.” Date of Judgment 26-06-2018 I.T.A.No.1075/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 5/10 4. The said controversy is no longer|res integraand the Division Bench oft this Court in two matters hasalready held in favour of the assessee that thedisallowance under Rule-8D of the Rules r/w Section14A of the Act cannot exceed the expenditure directlyrelatable to earn the exempted income in the form of‘Dividend’ as computed in accordance with Rule-8D ofthe Rules.| Oo. The relevant portions of the following twojudgments are quoted below for ready reference:- (1) Commisstoner of Income Tax & Anr. Vs.Microlabs Ltd., [2016] 383 ITR 490 (Karn). “39Aggrieved by the order of CIT(A),|the assessee has raised ground No.2. 40. We|have.heardthe|rivalsubmissions. A copy of the availability offunds and investments made was filed|before us which is at pages 38 to 42 ofthe assessee’s paperbook and the sameis enclosed asANNEXURE0ITI to this Date of Judgment 26-06-2018 I.T.A.No.1075/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 6/10 order. It ts clearfrom the said statementthat the availability ofprofit, share capitaland reserves & surplus was much more|than investments made by the assesseewhich could yield taxfree income. 41.|The Hon’ble Bombay High Courtin Reliance Utilities & Power Ltd. 313 ITR|340 (Bom) has held that where theinterest free funds far exceed the value of|investments, it should be considered that|investments have been made out of|interest free funds and no disallowance|u/s.IGAtowards.interestexpenditure can be made. This view was|again confirmed by the Hon’ble Bombay|High Court in CIT v. HDFC Bank Ltd., ITANo.330 of 2012, judgment dated 23.7. 14,whereinIt|WasSheldthatwheninvestments are made out of common poolof funds and non-interest bearing fundswere more than the investments in tax|free securities, no disallowance of interest|expenditure u/s. 14A can be made. 4? |In|the.lightofabove|Saiddecisions, we are of the view thatdisallowance of interest expenses in the Date of Judgment 26-06-2018 I.T.A.No.1075/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 4? |In|the.lightofabove|Saiddecisions, we are of the view thatdisallowance of interest expenses in the Date of Judgment 26-06-2018 I.T.A.No.1075/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 7/10 present case of Rs.49,42,473 made underRule 8D(2)(u) of the I.T. Rules should be|deleted. We order accordingly.” The aforesaid shows that the Tribunal hasfollowed a decision of the Bombay High Court inthe case ofCIT v. HDFC Bank Ltd., (ITA No.330/2012 disposed of on 23/7/2014)When the issue is already covered by a decisionof the High Court of Bombay with which weconcur, we do notfind any substantial question oflaw would arise for consideration as canvassed. 6.|In view of the above observations,the appeal is dismissed.” (11)M/s.Pragatht Krishna Gramin Bank os.JointCommissionerof.IncomeTax(ITA Nos.100001/2018 & 100002/2018decided by theDivision Bench of this Court at Dharwad Bench|(in which, one of us, Justice Vineet Kothari was a party) also, the Court held in favour of the assessee in thefollowing terms:- “13. The manner in which the aforesaiddisallowance has been made by the assessing Date of Judgment 26-06-2018 I.T.A.No.1075/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 8/10 authority and has been upheld by the appellate|authorities leques much to the desired aqnd thesame cannot be sustained and therefore thematter deserves to be remanded back to theAssessing Authority. 14.We make it clear that the expenditurefor earning exempted income has to have areasonable proportion to the income, so earned,goingbythe|COMmmonfinancialprudence.Therefore, even if the Assessing Authority has tomake an estimate of such an expenditureincurred to earn exempted income, it has to havea rational nexus with the amount of incomeearned itself. Disallowance under Section 14A ofRs.2,48,85,000/- as expenses to earn exempted|Dwidend income of Rs.1,80,30,965/- is per seabsurd and hypothetical. The disallowanceunder Section 8D cannot exceed the expensesclaimed by assessee under the Proviso to Rule8D. Therefore, where the assessee claimed thatassessee did not incur any such expenditure|during the year in question to earn Dividends ofRs. 1,80,30,965/-, the burden was upon theassessing authority to compute the interest onsuch borrowed funds which were dedicatedlyused for investment in securities to earn suchexempted Dividend income. The disallowance Date of Judgment 26-06-2018 I.T.A.No.1075/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 9/10 under Section 14A cannot be a wild guessworkbereft of ground realities. It has to have areasonable and close nexus with the factuallyincurred expenses. It is not deemed disallowance |under Section 14A of the Act but an enablingprovision for assessing authority to compute thesame on the given facts and figures in theregularly maintained Books of Accounts. Theassessing authority also could not have calledupon the Assessee himself to undertake theexercise of computing the disallowance underSection 8D of the Rules. Such abdication of dutyin not permissible in law. Since no such exercisehas been undertaken by the assessing authority,the case calls for a remand. 15.In this view of the matter, thefindings of all the three authorities below forsection 14A of the Act are set aside and thematter is remanded back to the AssessingAuthority for re-computing the disallowance ofexpenditure, if any, under Section 14A of the Act,in accordance with law.” 6.|In view of the aforesaid two decisions, we donot find any substantial questions of law arising in thepresent appeal requiring our further consideration. The Date of Judgment 26-06-2018 I.T.A.No.1075/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 10/10 Order passed by the learned Tribunal in this regard is —therefore confirmed. /. The appeal filed by the Revenue is liable to bedismissed and accordingly, it is dismissed. No costs. 15.In this view of the matter, thefindings of all the three authorities below forsection 14A of the Act are set aside and thematter is remanded back to the AssessingAuthority for re-computing the disallowance ofexpenditure, if any, under Section 14A of the Act,in accordance with law.” 6.|In view of the aforesaid two decisions, we donot find any substantial questions of law arising in thepresent appeal requiring our further consideration. The Date of Judgment 26-06-2018 I.T.A.No.1075/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 10/10 Order passed by the learned Tribunal in this regard is —therefore confirmed. /. The appeal filed by the Revenue is liable to bedismissed and accordingly, it is dismissed. No costs. The copy of this Judgment be sent to theRespondent — Assessee forthwith. BM V~ Sd/-.JUDGE Sd/-|JUDGE