Sandeep Singh Karhail ORDER
Sandeep Singh Karhail, Member (J)
1. The present appeal has been filed by the assessee challenging the impugned order dated 31/03/2023, passed under section 250 of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax (Appeals), Delhi, National Faceless Appeal Centre, ["learned CIT(A)"], for the assessment year 2014-15.
2. In its appeal, the assessee has raised the following grounds:-
"1. The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (hereinafter referred to as "the CIT(A)") erred in upholding the disallowance of interest of Rs 80,08,92,309/- and expenses of Rs. 8,21,54,351 under section 14A of the Income-tax, 1961 (hereinafter referred to as "the Act") r.w. Rule 8D of the Income Tax Rules, 1962 (hereinafter referred to as "the Rules") to normal provisions of the Act as well as for computation of book profit under section 115JB of the Act. The reasons given by him for doing so are wrong. contrary to the facts of the case and provision of law;
2. The CIT(A) failed to appreciate that disallowance of the said interest and expenses under section 14A of the Act read with Rule 8D without proving any nexus of expenses incurred with investments and/or exempt income and without recording proper satisfaction is bad in law;
3. The CIT(A) in upholding the action of the Assessing Officer failed to appreciate that the investments were out of own funds and therefore disallowance of interest of Rs. 80,08,92,309/- under section 14A read with Rule 8D(2)(ii) is uncalled for;
4. The above grounds/sub-grounds are without prejudice to each other,
5. The appellant craves the leave to add, amend or alter all or any of the grounds of appeal."
3. The only dispute raised by the assessee is against disallowance made under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 ("the Rules").
4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a private limited company and is engaged in the business of providing wireless services, electronics telecommunication, GSM/GPRS modems, buying, selling advertising space in print media and subscriber management services for media companies. For the year under consideration, the assessee filed its return of income on 29/11/2014 declaring a total income of Rs. Nil, after claiming carry forward losses of Rs.85,96,49,128. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) read with section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee has earned a dividend income of Rs.48,28,05,816, which was claimed as exempt under section 10(34) of the Act. From the profit and loss account, it was observed that the assessee has debited an amount of Rs.84,05,56,839 as interest on the loan paid. Further, in the balance sheet, the assessee has shown a total investment of Rs.1643,08,70,195. However, the assessee had suo moto disallowed only Rs.8,21,54,351, i.e. 0.5% of average investment under section 14A of the Act. Accordingly, the assessee was asked to explain as to why disallowance under section 14A read with Rule 8D be not made for the exempt income earned during the year. In response thereto, the assessee submitted that part of its investment was received pursuant to the scheme of amalgamation and thus there was no outflow of funds for acquisition of these investments. As regards the balance investment, the assessee submitted that it had sufficient interest- free funds and therefore no disallowance under section 14A read with Rule 8D can be made since the assessee has already made suo moto disallowance being 0.5% of the average investment. The Assessing Officer ("AO") vide order dated 30/12/2016 passed under section 143(3) of the Act did not agree with the submissions of the assessee and computed the disallowance of Rs.80,08,92,309 under section 14A read with Rule 8D after considering the suo moto disallowance already made by the assessee.
5. The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and upheld the disallowance made under section 14A read with Rule 8D. Being aggrieved, the assessee is in appeal before us.
6. We have considered the submissions of both sides and perused the material available on record. From the perusal of the financials of the assessee, forming part of the paper book, we find that the total investment during the year was Rs.164308.70 lacs in the shares of the Zee Entertainment Enterprises Ltd. and the assessee earned dividend income of Rs.4828.06 lacs. While filing its return of income, the assessee suo moto disallowed Rs.8,21,54,350.98 under section 14A read with Rule 8D. From the annual report of the assessee for the financial year 2011-12, we find that the scheme of amalgamation between Essel Business Process Ltd and the assessee was sanctioned by the Hon'ble Bombay High Court on 02/12/2011, w.e.f. 15/10/2011. We further find that as on 31/03/2011 the value of investment in the books of account of the assessee was nil. However, as on 31/03/2012, i.e. after the aforesaid amalgamation, the value of the investment was increased to Rs.164308.70 lakhs. From the balance sheet of Essel Business Process Ltd, we find that as on 15/10/2011, i.e. on the date of the amalgamation, the total value of the investment was Rs.27 only in the 130,888,822 shares of Zee Entertainment Enterprises Ltd. As per the assessee, Essel Business Process Ltd acquired the shares by way of gift at nil consideration, however, the same was recorded at Rs.27 for accounting purposes. We find from the annual report of the assessee for the financial year 2011-12 that after the amalgamation, the assessee valued the aforesaid investment in shares of Zee Entertainment Enterprises Ltd. at Rs.146660.93 lacs, i.e. the fair value of the investment as on 15/10/2011, and recorded the same in its books of accounts. Thus, it is clearly evident that the investment to the extent of Rs. 146660.93 lacs in the books of the assessee is nothing but the shares transferred to the assessee pursuant to the aforesaid scheme of amalgamation with Essel Business Process Ltd. The Revenue has not brought any material to controvert the aforesaid facts as emanating from the material placed on record. Therefore, we are of the considered view that the investment to the extent of Rs. 146660.93 lacs cannot be considered for computation of disallowance under section 14A read with Rule 8D(2)(ii), since no interest-bearing funds were utilised for the acquisition of the aforesaid investment.
7. As regards the balance investment of Rs.17647.77 lacs (i.e. investment of Rs.164308.70 lacs as on 31/03/2014 minus investment of Rs. 146660.93 acquired by way of aforesaid amalgamation), we find that the assessee had a share capital of Rs. 95.00 lacs and reserves & surplus of Rs.88,294.94 lacs as on 31/03/2014. We further find that there is no change in the value of investment since 31/03/2012. However, even on 31/03/2012, the assessee had a share capital of Rs. 95.00 lacs and reserves & surplus of Rs.98,054.37 lacs, i.e. more than the value of balance investment of Rs.17647.77 lacs. Therefore, it is sufficiently evident that the assessee's own funds are more than investments, including the investments for earning exempt income. We find that the Hon'ble Jurisdictional High Court in CIT vs. HDFC Bank Ltd., MANU/MH/1058/2014 : [2014] 366 ITR 505 (Bom.) held that where assessee's own funds and other non-interest bearing funds were more than the investment in tax-free securities, no disallowance under section 14A of the Act can be made. We further find that the Hon'ble Supreme Court in South Indian Bank Ltd. vs. CIT, MANU/SC/0624/2021 : [2021] 438 ITR 001 (SC) held that disallowance under section 14A of the Act would not be warranted where interest-free own funds exceed the investment in tax-free securities and in such a case the investment would be presumed to be made out of assessee's own funds. Therefore, respectfully following the law laid down by the Hon'ble Supreme Court and the Hon'ble jurisdictional High Court in cases cited supra, we find no merit in disallowance of Rs. 80,08,92,309 made by the AO and upheld by the learned CIT(A) under section 14A read with Rule 8D(2)(ii). As regards the disallowance computed under section 14A read with Rule 8D(2)(iii) is concerned, it is undisputed that the assessee had suo moto disallowed Rs. 8,21,54,351 under section 14A read with Rule 8D, while filing its return of income. Therefore, in view of the aforesaid findings, the disallowance of Rs. 80,08,92,309 made by the AO and upheld by the learned CIT(A) is deleted. Accordingly, the grounds raised by the assessee are allowed.
8. In the result, the appeal by the assessee is allowed.
Order pronounced in the open Court on 19/07/2023
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