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.1076/2017 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 of [ncome-TaxRange-11, Present Address|DCIT, C-2(1)(2), 2[nd]FIoorBMTC Building, 80 Feet RoadRange-11, Present Address|DCIT, C-2(1)(2), 2[nd]FIoorBMTC 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&, Iyengar StreetseshadripuramBengaluru-9560 O20PAN: AAACD 64660C ... Respondent This I.T.A. is filed under Section 260-A of Income Tax|Act 1961, praying to 1. Formulate the substantial questions Date of Judgment 26-06-2018 I.T.A.No.1076/2017 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.669/Bang/2014 dated 05-05-2017 andconfirming the order of the Appellate Commissioner|confirming the order passed by the Deputy Commissioner ofIncome Tax, 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 appealraising purported substantial questions of law arising from the Order of thelearned Income Tax Appellate| Tribunal Bengaluru Bench “C” Bengaluru,Annexure Ccdated|05/05/2017inIT(TP)A.No.669/Bang/2014 forAY 2010-11 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.1076/2017 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 14¢A attracts even when there isno 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. 7,15,44,133/7without|considering 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 Cn The learned JTAT in its QOrder dated05/05/2017has given the following findings with Date of Judgment 26-06-2018 I.T.A.No.1076/2017 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. 7,15,44,133/7without|considering 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 Cn The learned JTAT in its QOrder dated05/05/2017has given the following findings with Date of Judgment 26-06-2018 I.T.A.No.1076/2017 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. “The next issue 1S whether the interestdisallowance made u/s.14A rwr 8D2(it) 1s|justified. In this regard, we have alreadynoted that the assessee made investments in|its subsidiary, during the year, at Rs. 14 croreand hence it must have incurred certain§indirect expenses as explained by the CIT (A)|in his order. It is an undisputed fact thatduring the year the assessee has taken a\decision to make an investment i1n_ thsubsidiaru.Therefore,the|expenditureincurred for taking such decision would fall)within the category of expenditure incurred|for earning the exempt income as per Section14A. Except the investment in subsidiary,|there is no other investment. Therefore, for|the purpose of computing the disallowance as per Rule 8D(2)(ut), the amount of averageinvestment would be PRs.7 crores qnd hencethe disallowance made at 0.5% of the average|amount of the current year investment of Rs. 7crores would be restricted to Rs.3,50,000/-. Date of Judgment 26-06-2018 I.T.A.No.1076/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 5/10 only. To this extent, the disallowance 1s|justified. Thus the corresponding assessee’s|ground fails.” 4. The said controversy is no longer)res integra and the Division Bench of this Court in two matters has. already 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.. So. The relevant portions of the following twojudgments are quoted below for ready reference:- (i) Commisstoner of Income Tax & Anr. Vs.Microlabs Ltd., [2016] 383 ITR 490 (Karn). €39_.Aggrieved by the order of CIT{(A),the assessee has raised ground No.2. 40. We|have.heardthe|rivalsubmissions. A copy of the availability ofjunds and investments made was filedbefore us which is at pages 38 to 42 of| Date of Judgment 26-06-2018 I.T.A.No.1076/2017 6/10 the assessee’s paperbook and the same is enclosed asANNEXURE0ITI to this 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 tax free income. 41.)The Hon’ble Bombay High Court|in Reliance Utilities & Power Ltd. 313 ITR|340 (Bom) has held that where _ thinterest free funds far exceed the value ofinvestments, it should be considered that|investments have been made out ofinterest free funds and no disallowanceu/s.[IAtowards|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 interestexpenditure u/s. 14A can be made. Date of Judgment 26-06-2018 I.T.A.No.1076/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 7/10 41.)The Hon’ble Bombay High Court|in Reliance Utilities & Power Ltd. 313 ITR|340 (Bom) has held that where _ thinterest free funds far exceed the value ofinvestments, it should be considered that|investments have been made out ofinterest free funds and no disallowanceu/s.[IAtowards|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 interestexpenditure u/s. 14A can be made. Date of Judgment 26-06-2018 I.T.A.No.1076/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 7/10 4? |In|the.lightofabove|Saiddecisions, we are of the view thatdisallowance of interest expenses in thepresent 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.Joint|Commissionerof|Income.Tax(ITA Nos.100001/2018 & 100002/2018decided by theDivision Bench of this Court at Dharwad Bench|(inwhich, one of us, Justice Vineet Kothari was a party) Date of Judgment 26-06-2018 I.T.A.No.1076/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 8/10 also, the Court held in favour of the assessee in thefollowing terms:- “13. Themannerin.whichthe|aforesaid disallowance has been made by the|assessing authority and has been upheld by|the appellate authorities leaves much to the.desired and the sqme cannot be sustained|and therefore the matter deserves to be|remanded back to the Assessing Authority. 14.We.makeit|clearthattheexpenditure for earning exempted income has|to have a reasonable proportion to the income,so earned, going by the common financialprudence. Therefore, even if the AssessingAuthority has to make an estimate of such an.expenditureincurredtoCary?exemptedincome, it has to have a rational nexus withtheamountof|incomeearneditself.DisallowanceunderSection.[4Aof|Rs.2,48,85,O000/-ahsEXPENSES|toeCar>exemptedDividendincome|of|Rs.1,80,30,965/- is per se absurd and|hypothetical. The disallowance under Section|&D cannot exceed the expenses claimed by| Date of Judgment 26-06-2018 I.T.A.No.1076/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 9/10 assessee under the Proviso to Rule SD.Therefore, where the assessee claimed that|assessee did not incur any such expenditure|during the year in question to earn Dividends|of Rs.1,80,30,965/-, the burden was upon the|assessing authority to compute the interest on|such borrowed funds which were dedicatedly|used for investment in securities to earn such|exempted Dividend income. The disallowance|underSection[GAcannotbe(Owildguesswork bereft of ground realities. It has tohave q reasonable and close nexus with the|factually incurred expenses. It is not deemeddisallowance under Section 14A of the Act|but an enabling provision for assessing|authority to compute the same on the given|facts and figures in the regularly maintainedBooks of Accounts. The assessing authority|also could not have called upon the Assessee.himselfto.undertakethe|exercise|of|computing the disallowance under Section 8D|of the Rules. Such abdication of duty in not|permissible in law. Since no such exercisehas been undertaken by the assessing|authority, the case calls for a remand. Date of Judgment 26-06-2018 I.T.A.No.1076/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 10/10 Date of Judgment 26-06-2018 I.T.A.No.1076/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Deepak Cable (India) Ltd., 10/10 15.In this view of the matter, the|findings of all the three authorities below forsection 14A of the Act are set aside and the|matter is remanded back to the Assessing|Authority 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. TheOrder passed by the learned Tribunal in this regard is |therefore confirmed. 7. 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