Ita/423/2014 Of The Commissioner Of Income-Tax v. M/S Karnataka State

( IN THE HIGH COURT OF KARNATAKA AT BBNGALURUDATED THIS THE 20 DAY OF NOVEMBER, 20109) PRESENT THR HON'BLE MR. JUSTICEK VINBBT SARAN AND THR HON’BLEB MR. JUSTICK MOHAN M. SHANTANAGOUDAR ITA NO.423/2014 BETWEEN: 1.|THE COMMISSIONBR OF INCOME TAX C R BUILDING, QUEENS ROAD BANGALORE.» «|THER DEPUTY COMMISSIONEROF INCOME TAX, CIRCLE-11(95)OF INCOME TAX, CIRCLE-11(95) RASHTROTHANA BHAVAN NRUPATHUNGA ROAD, BANGALORE. ... APPELLANTS| (BY SRI. K.V.ARAVIND, ADV.) AND: M/S. KARNATAKA STATEINDUSTRIAL & INFRASTRUCTUREDEVELOPMENT CORPN. LTD.,.KHANIJA BHAVAN,NO.49, 5[‘L]FLOOR, EAST WING,RACE COURSE ROAD, BANGALORE-560 O17. ~.. RESPONDENT BY SRI A.SHANKAR, ADV.,) THIS TTA IS FILED UNDER SEC.2600-A OF INCOME TAXACT, 1961, ARISING OUT OF ORDER DATED 2.9.14 PASSED IN-ITA NO.19515/BANG/2012, FOR THE ASSESSMENT YEAR 200910 PRAYING TO I. FORMULATE THE SUBSTANTIAL QUESTIONS|OF LAW II. ALLOW THR APPEAL AND SEHBT ASIDE THR ORDERPASSED|BY|THE;ITAT, BANGALORE,LN|ITA|NO.1915/BANG/2012 CONFIRMING THE ORDER OF THE.APPELLATE COMMISSIONER AND CONFIRM THRE ORDER PASSED BY THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-11(5), BANGLORE. THIS ITA COMING ON FOR ADMISSION THIS DAY, |MOHANM.SHANTANAGOUDARJ.,DRLIVBRE)DTHEKOLLOWING:| JUDGMENT This appeal is directed against the orders passed bythe Income Tax Appellate Tribunal (hereinaiter referred to as|TTAT), Bangalore Bench “°C” in ITA No.1915/Bang/2012,|02.05.2014|confirmingtheOrderOT|theAppellateCommissioner and the order passed by the Deputy|Commissioner of Income Tax, Circle-11(5), Bangalore.2.The respondent-assessee is an undertaking ofGovernment of Karnataka engaged in financing industrial|units. During the assessment year 2009-10, the assessee|had made investments to the tune of Rs.1,24,04,17,118/- in|securitiesOT]which1t|earneddividendincomeOT Rs.2,91,95,563/-. The assessee company filed its return of income for theassessment year 2009-10 declaring “NIL” income. The case|was taken up for scrutiny and the assessment was|completed under Section 143(3) of the Income Tax Act, 1961(hereinaiter referred to as the ‘Act) by the order dated|21.11.2011determiningthelossoT aSSe€eSSCAT|Rs.1,73,60,/60/-. As per the provisions of Section 115 JB} oT theAct,“the.bookprofit”Was determinedatRs.30,01,07,991/-by|makingcertainadditionsanddisallowance. By the assessment order dated 21.11.2011, theAssessing Officer observed that while 75% of the investmentswere made through funds given by the Government otfKarnataka, the remaining 25% were made out of the mixedpool of funds and therefore 25% of the interest expenditure|was taken as indirect expenditure liable for disallowanceunder Section 14A of the Act read with Rule 8D of the'Income Tax Rules, 1962 (hereinafter referred to as the|‘Rules’. As the amount of disallowance exceeded theamount of exempt income itself, the Assessing Officer|adopted a sum of 95% of the indirect expenditure togetherwith 0.5% of the average investments under Rule 8D(2)(i11)|totaling to Rs.1,52,83,785/- as disallowance under Section|14A read with Rule SD ot the Rules. On appeal, by the assessee, before the Appellate|Commissioner, the Appellate Authority deleted the addition|of 5% of the indirect expenditure on the ground that theAssessing Officer failed to establish direct nexus between theborrowed funds and tax free investment. Further, regardingdisallowance of 0.5% of the average investments as| aforementioned (supra), the Appellate Commissioner directedthe Assessing Officer to verify as to whether double additionwas made on this account, since the assessee had contendedthat it had already disallowed an identical amount in its|computation of income filed in the return of income. On appeal, by the assessee, before the Appellate|Commissioner, the Appellate Authority deleted the addition|of 5% of the indirect expenditure on the ground that theAssessing Officer failed to establish direct nexus between theborrowed funds and tax free investment. Further, regardingdisallowance of 0.5% of the average investments as| aforementioned (supra), the Appellate Commissioner directedthe Assessing Officer to verify as to whether double additionwas made on this account, since the assessee had contendedthat it had already disallowed an identical amount in its|computation of income filed in the return of income. The ITAT, by its order dated 02.05.2014 affirmed the|order passed by the Appellate Commissioner concluding thatthe disallowance made by the Assessing Officer was not in accordance with the provisions of Rule 8D(2)(ii) of the Rules.It further observed that the Assessing Officer has failed to specify as to why 9% was adopted and as to what is thebasis to arrive at that figure and consequently has failed to justify that it was an appropriate estimation.The Tribunal,having concluded that as the disallowance was made by the|Assessing Officer on an adhoc percentage without any basisand without assigning any reason whatsoever, upheld the|order passed by the Appellate Commissioner. 3.Before proceeding further, it is relevant to note|the provisions of Section 14A of the Act and Rule 8D of the|Rules, which read thus: Section 14A of the Act: “14A. Expenditure incurred in relation toincome not includible in total income — (1)|For the purposes of computing the totalincome under this Chapter, no deduction shall beallowed in respect of expenditure incurred by theassessee in relation to income which does notform part of the total income under this Act. (2) The Assessing Officer shall determine|the amount of expenditure incurred in relation tosuch income which does not form part of the totalincome under this Act in accordance with suchmethod as may be prescribed, if the AssessingOfficer, having regard to the accounts of theassessee, iS not satisfied with the correctness ofthe claim of the assessee in respect of suchexpenditure in relation to income which does notform part of the total income under this Act. (3) The provisions of sub-section (2) shallalso apply in relation to a case where anassessee claims that no expenditure has beenincurred by him in relation to income which doesnotform part of the total income under this Act: Providedthat nothing contained in this section|Shall empower the Assessing Officer either toreassess under section 147 or pass an orderenhancing the assessment or reducing a refundalready made or otherwise increasing the liabilityof the assessee under section 154, for anyassessment year beginning on or before the I[St]day of April, 2001.’ Rule 8D of the Rules: "Method for determining amount of expenditure in|relation to income not includible in total income. 8D|%(1) Where the Assessing Officer,having regard to the accounts of the assessee of aprevious year, is not satisfied with — (a) the correctness of the claim of expendituremade by the assessee; or — (b)the claim made by the assessee that noexpenditure has been incurred,expenditure has been incurred, in relation to income which does not form part ofthe total income under the Act for such previousYedr,|he|Shalldetermine.theamountofexpenditureinrelationtosuch|income|in|accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which doesnot form part of the total income shall be the aggregate|offollowing amounts, namely:-| (i) the amount of expenditure directly relating to|income which does notform part of total income; (wu) in a case where the assessee has incurred|expenditure by way of interest during the previousyear which is not directly attributable to any|particular income or receipt, an amount computed|in accordance with the followingformula, namely:-| AxX BI C (b)the claim made by the assessee that noexpenditure has been incurred,expenditure has been incurred, in relation to income which does not form part ofthe total income under the Act for such previousYedr,|he|Shalldetermine.theamountofexpenditureinrelationtosuch|income|in|accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which doesnot form part of the total income shall be the aggregate|offollowing amounts, namely:-| (i) the amount of expenditure directly relating to|income which does notform part of total income; (wu) in a case where the assessee has incurred|expenditure by way of interest during the previousyear which is not directly attributable to any|particular income or receipt, an amount computed|in accordance with the followingformula, namely:-| AxX BI C Where A = amount of expenditure by way ofInterest |other than the amount of interest includedin clause(t) incurred during the previous ©Yedr.,other than the amount of interest includedin clause(t) incurred during the previous ©Yedr., B= the average of value of investment, incomefrom which does not or shall notform partof the total income, as appearing in thebalance sheet of the assessee, on the firstday and the last day of the previous year;from which does not or shall notform partof the total income, as appearing in thebalance sheet of the assessee, on the firstday and the last day of the previous year; C= _ the average of total assets as appearing inthe balance sheet of the assessee, on the |the balance sheet of the assessee, on the | first day and the last day of the previousYea, | (ui) an amount equal to one-half per cent of theaverage of the value of investment, income from|which does not or shall not form part of the totalincome, as appearing in the balance sheet of theassessee, on the first day and the last day of the|previous year. (3) For the purposes of this rule, the “total assets”shall mean, total assets as appearing in the balancesheet excluding the increase on account of revaluationof assets but including the decrease on account ofrevaluation of assets.” 4ori K.V.Aravind, learned counsel appearing on|behalf of the Revenue taking us through the material onrecord contends that the orders passed by the AppellateCommissioner as well as the ITAT are hable to be set aside. We are unable to accept the said contention of thelearned counsel for the Revenue. On going through the|orders passed by the authorities below, we find that the|Appellate Commissioner and the Tribunal are justified in setting aside the orders passed by the Assessing Authority|relating to disallowance. We also find that the Appellate|Commissioner as well as the Tribunal are justified in|concluding that the disallowance of Rs.1,03,08,426/- being a_sum of 9% of indirect expenditure is not in accordance with|the provisions of Rule 8D(2)(11). Though the Assessing Officer|computed the disallowance purportedly under Rule 8(2)(11), We are unable to accept the said contention of thelearned counsel for the Revenue. On going through the|orders passed by the authorities below, we find that the|Appellate Commissioner and the Tribunal are justified in setting aside the orders passed by the Assessing Authority|relating to disallowance. We also find that the Appellate|Commissioner as well as the Tribunal are justified in|concluding that the disallowance of Rs.1,03,08,426/- being a_sum of 9% of indirect expenditure is not in accordance with|the provisions of Rule 8D(2)(11). Though the Assessing Officer|computed the disallowance purportedly under Rule 8(2)(11), the amount so worked out was admittedly more than theexempt income. Therefore, the Assessing Officer has|proceeded to make disallowance at 5% of the total indirect|interest expenditure. It is not specified by the AssessingOfficer as to why 5% was adopted and has failed to justify|that the same is appropriate estimation. As the disallowancewas made on an adhoc percentage without any basis or assigning any reason whatsoever, the disallowance was|rightly set aside by the Appellate Authorities. As per the|provisions of Section 14A of the Act, the Assessing Officer|shall determine the amount of expenditure incurred in|relation to exempt income which does not form part of the|total income, if he was not satisfied with the correctness of)the claim of the assessee in respect of such expenditure. It|is settled principle of law that the Assessing Officer is required to record the non-satisfaction of the correctness oftheclaim.IntheabsenceOT|suchrecordingnon-satisfaction, the disallowance is untenable. In the case.on hand, we do not find any such finding given by theAssessing Officer in the order of assessment for the|assessment year 2009-10. © ot 5.As regards the issue of computation of the|expenditure, Rule 8D of the Rules contains three limbs,|namely:- i)|Expenditure directly related to the earning of exempt income;exempt income; 11)Interest expenditure not directly attributable to|any particular income; andany particular income; and 111)Amount equal to one-half percent of the average|value of investments, income from which does|not form part of total income.value of investments, income from which does|not form part of total income. As regards the 1[08]and 3[65]limbs of Rule 8D mentioned|Supra, there is no dispute in this matter. As regards the|interest referred to in the second limb of Rule SD of theRules, the assessee contends that the amounts of investmentin such securities in the period under consideration 1s muchless than the amount of capital and surplus funds available|with the Company and no portion of the borrowed funds|were utilized to make such investments. It is now well|settled principle that the disallowance towards interest is nottenable if the investments are made out of own funds or non-interest bearing funds and it is necessary to establish anexus between the interest bearing funds in investments|made. Therefore, the Appellate Authorities have rightly set|aside the order passed by the Assessing Officer, which doesnot establish nexus between the investments and interest|bearing funds. 6.Insofar as disallowance made by the Assessing|Officer towards provision of gratuity is concerned, theauthorities, on the basis of the settled principles of law, as|declared by the Courts’ of law have held that, the estimationof out flow is based on actuarial valuation. Since the|estimation of outilow is based on actuarial valuation, the|authorities are justified in setting aside the order passed bythe Assessing Officer, who has held contrary to the|aforementioned settled principle of law. T[.We find that the Appellate Authority as well as|the Tribunal have considered all the relevant records and onfacts have arrived at a correct conclusion. Hence, no.interference is called for, more particularly, when the orderspassed by the Appellate Commissioner as well as the ITATare just and proper. No substantial question of law arises|for consideration. | T[.We find that the Appellate Authority as well as|the Tribunal have considered all the relevant records and onfacts have arrived at a correct conclusion. Hence, no.interference is called for, more particularly, when the orderspassed by the Appellate Commissioner as well as the ITATare just and proper. No substantial question of law arises|for consideration. | Accordingly, the appeal fails and the same standsdismissed. sd/- JUDGE| sd/-. JUDGE| TL