TaxTMI 
TaxTMI 
2012 (6) TMI 83
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.... AO on account of fines & penalties. 3. Ld. Commissioner of Income Tax (Appeals) erred, in law and on the facts and circumstances of the case, in directing the AO as under :- i) To verify the claim of the assessee and exclude interest income from UTI from income after due verification. ii) To allow the balance 50% of additional depreciation after verifying the contention of the assessee that 50% of additional depreciation was claimed and allowed in immediately preceding year i.e. A.Y. 2005-06. iii) Verify the claim of the assessee and allow credit of the TDS. Since the CIT(A), as per the provisions of section 251 (1)(a) of the I.T. Act, may confirm, reduce, enhance or annul the assessment and the above directions of the CIT(A) amount to setting aside the grounds of appeal." 2. The assessee has raised the following cross objections:- 1. "That the CIT(A) erred on facts and in law in confirming the disallowance of expenditure amounting to Rs. 16,54,525/- under section 14A Income-tax Act, 1961 (the Act), alleged to have been incurred for earning tax free dividend income. That the CIT(A) erred on facts and in law in not holding th....
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....g the Special Bench decision of the Tribunal in "ITO, Mumbai v. Daga Capital Management Pvt. Ltd.", 2008 - TIOL - 509-Mumbai-(SB), Rule 8 D of the I.T. Rules read with Sections 14A(2) & (3) of the Act are applicable with retrospective effect. Holding so, the AO worked out the disallowance u/s 14 A of the Act as follows:- A) Direct cost (50% of Interest) 1,61,49,981/- B) Indirect cost Opening balance of Investment 88,85,47,596/- Closing balance of Investment 100,47,31,991/- 189,32,79,587/- 94,66,39,793/- 47,33,200/- Total disallowance u/s 14A (A+B) 2,08,83,181/- 4. Before the ld. CIT(A), the assessee contended that as per the Scheme of demerger, the entire interest bearing liabilities, namely, secured and unsecured loans, belonging to the assessee company as on 30.6.05, the date preceding the date of demerger, were relatable to the demerged Textile Division and were transferred to the resulting company, i.e., STIL, as part of the demerger. The assessee supported such contention with documentary evidence, i.e., Schedule of assets and liabilities in respect of the residual undertaking forming p....
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....iture actually related to the earning of taxable income from the Textile Division and not to the earning of any exempt income. It was held that therefore, no part of the interest expenditure was disallowable u/s 14A of the Act read with Rule 8D of the Rules. 8. Regarding the disallowance of Rs. 47,33,200/- out of administrative and operative expenses, the ld. CIT(A) observed that the entire expenditure during the pre-demerger period, excepting Rs. 12,99,537/- related to the demerged Textile Division; that for the post-demerger period, the total expenditure was of Rs. 21,06,266/-, out of which, the assessee had itself disallowed Rs. 11,79,478/- and had claimed only the balance of Rs. 9,26,788/-; and that thus, the total pre-demerger and post-demerger expenses, from which, disallowance could be made, aggregated to Rs. 22,26,325/-. The ld. CIT(A) observed that the disallowance of Rs. 47,33,000/-, as made by the AO u/s 14A of the Act read with Rule 8D of the Rules could not be sustained, since such disallowance had to be restricted to the actual expenditure incurred. The ld. CIT(A) further observed that, on the other hand, the contention of the assessee that no part of the expenditu....
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....r, the Profit and Loss Account of the residual company for the period from 1.7.05 to 31.3.06 (APB 78), the comparative Profit and Loss Account for the segregated period from 1.4.05 to 30.6.05, of the consolidated company and that for the year ending 31.3.06 (APB 79 to 80) have also been referred to. It has been contended that if no nexus is shown between the borrowed funds and the tax free investment, no disallowance of interest on the borrowed funds can be made. For this proposition, reliance has been placed on the following case laws:- 1. "CIT v. Hero Cycles", 323 ITR 518(P&H); 2. "CIT v. K. Raheja Corporation Pvt. Ltd.", decision dated 8.8.11 in ITA No. 1260/2009, rendered by the Hon'ble Bombay High Court (Copy at pages 31 to 33 of the Case Laws Paper Book filed by the assessee, "CLPB" for short); 3. "DCIT v. Jindal Photo Ltd.", authored by one of us, the J.M., on 22.12.10, in ITA No. 4539(Del)2010 (copy at CLPB 39 to 45); 4. "Maruti Udyog Ltd. v. DCIT", 92 ITD 119(Del); 5. "ACIT v. Eicher Ltd.", 101 TTJ 369(Del); and 6. "DCIT v. Maharashtra Seamless Ltd.", 138 TTJ 244(Del). 11. Apropos the administrative expenditure, it h....
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....of a restructuring/demerger expenditure of Rs. 14,74,347/- and balance other expenses, with regard to which, our attention has been drawn to APB 78 to 80; that in the revised return of income, out of the demerger expenses of Rs. 14,74,347/-, an amount of Rs. 2,94,869/- had been claimed u/s 35 DD of the Act, whereas the balance expenditure of Rs. 11,79,478/- was disallowed in the return (reference made to APB 283); that therefore, a total expenditure of only Rs. 16,54,531/- had been claimed and disallowance, if at all, could have been made only out of the said expenditure of Rs. 16,54,531/-; that so, the ld. CIT(A) went wrong in disallowing the entire expenditure, particularly when there is no evidence available to suggest that even any part of such expenditure was incurred to earn exempt income; and that further more, this expenditure includes expenditure towards remuneration of Director and Audit Fees, which expenditure had to be incurred, irrespective of exempt income being received or not and these expenses also could not be held to be related to the earning of exempt income. 14. The learned DR, on the other hand, has contended that the ld. CIT(A) has erred in restricting the....
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....expenditure had been paid actually stood transferred from the assessee company to STIL, the resulting company, pursuant to the scheme of demerger. This fact, as found by the ld. CIT(A), has remained established. Nothing to the contrary has been brought out . It remains undisputed that in the audited financial statement of STIL, as on 31.3.2006, this loan stood transferred pursuant to the scheme of demerger, from the assessee company to STIL. This was in accordance with the scheme of demerger as approved by the Hon'ble Rajasthan High Court. A copy of the said scheme of demerger is at APB 1 to 20. As per this scheme, the liabilities, duties and obligations of the assessee company relating to the demerged Textile Division were to be transferred to the resulting company, STIL. Then, as per the Schedule of assets and liabilities in respect of the residual undertaking forming part of the scheme of demerger, the relevant portion whereof is at APB 62 to 64, after the demerger, the books of the assessee do not show any outstanding loans, signifying that all the loans pertaining to the demerged Textile Division stood transferred. APB 64, states, inter alia, :- Secured loans - Nil ....
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....t case, as seen, the AO has not established any nexus whatsoever between the borrowed funds and the investment made. Therefore, "Hero Cycles" (supra), is applicable. 19. In "ACIT v. Eicher Ltd." (supra), it has been held that the burden is on the AO to establish the nexus of the expenditure incurred with the earning of exempt income, before making any disallowance u/s 14A of the Act. 20. In "Maruti Udyog"(supra), it has been held that before making any disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the Revenue. 21. In "Jindal Photo"(supra), following "Hero Cycles"(supra), "Eicher Ltd."(supra), "Maruti Udyog"(supra) and other decisions, we have held as follows:- "18. Now, as per section 14A(2) of the Act, if the AO, having regard the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee's total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e. under Rule 8D of the I.T. Rul....
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....incurred during the pre-demerger period related to the demerged Textile Division, but for Rs. 12,99,537/-. It was also noticed that the total expenditure for the post demerger period was of Rs. 21,06,266/-. Out of this amount, the assessee had itself disallowed Rs. 11,79,478/- and had claimed only the balance expenses of Rs. 9,26,788/-. The total expenses pre-demerger and post-demerger thus amounted to Rs. 22,26,325/-. The ld. CIT(A) observead that it was out of this amount that the disallowance could be made. The CIT(A) agreed in principle with the argument of the assessee that just since the AO had worked out the disallowance of Rs. 47,33,000/- u/s 14A of the Act, being 0.5% of the average investment under Rule 8D of the Rules, and this amount exceeded the total expenditure incurred in connection with the earning of the exempt income, the expenditure as worked out as per the Rules, could not be disallowed. The ld. CIT(A) was of the view that the disallowance was to be restricted to the total expenditure of Rs. 22,26,325/- (rounded off to the figure of Rs. 22,26,000/-), lest the disallowance exceeded even the actual expenditure incurred. However, the assessee's stand that no part ....
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....ability of the provisions of Sections 14A(2) and (3) of the Act and Rule 8D of the Rules being prospective with effect from assessment year 2008-09, such contention is supported by "Godrej & Boyce"(supra) and "Godrej Agrovet Ltd."(supra). It is, however, well established, as held in "Continental Carriers P.Ltd. v. ACIT", 138 TTJ 249(Del), that even prior to assessment year 2008-09, when Rule 8D of the Rules was not applicable, the AO was duty bound to determine the expenditure incurred in relation to income not forming part of the total income, by adopting a reasonable basis. Therefore, nothing stopped the AO from determining the expenditure incurred in relation to the exempt income earned by the assessee. But for doing so, a "reasonable basis" had to be adopted. And the most reasonable basis, rather, the first reasonable basis for such determination can be none else than the nexus between the expenditure incurred and the exempt income earned. Now, evidently, the AO did not establish any such nexus between the expenditure incurred and the exempt income earned by the assessee Company. 29. Even the ld. CIT(A), though he restricted the disallowance from Rs. 47,33,200/- to Rs. 16,54....
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....heet as on 31.3.06 (copy at APB 199), as fixed assets of the company. Both these Holiday Homes, undeniably, were demerged under the Demerger Scheme and so, the ld. CIT(A) rightly did not disallow the expenditure on these Holiday Homes. 32. So, what remained as balance under the head of misc.expenditure incurred during the three months period from 1.4.2005 to 30.6.2005, was the amount of Rs. 7,27,743/-. Even this part of the expenditure has not been corelated by the Authorities below to the exempt income earned by the assessee Company. 33. So far as regards the post-demerger expenditure incurred by the assessee from 1.7.05 to 31.3.06, as available from the details of expenses in the Profit and Loss Account in March, 2006 and June, 2005, i.e., for the year ended 31.3.06 and for the period ended 30.6.05 (copy at APB 81), that is, the difference of expenses in the Profit and Loss Account for the period from 1.4.05 to 30.6.05 and 1.7.05 to 31.3.06, i.e., to say, the pre-demerger and the post-demerger periods, during the post-demerger period, the assessee had only investment activity and there was no activity of manufacture of Textiles, the Textile Division having been demerged. Th....
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.... There is absolutely nothing on record to show that any part of the expenditure was incurred to earn the exempt income. And not only this, as rightly canvassed, this expenditure of Rs. 16,54,531/- even included expenditure towards remuneration to Director and Audit Fees. Now this kind of expenditure, irrespective of the fact whether or not income not forming part of the total income is earned, has to be incurred. Therefore also, these expenses cannot, in any manner, be said to be relatable to earning of exempt income by the assessee company. 34. Thus, looked at from any angle, the ld. CIT(A), in our considered opinion, was not at all justified in holding the entire balance expenditure of Rs. 16,54,531/- incurred by the assessee company as liable to disallowance u/s 14A of the Act. The grievance of the assessee in this regard is, therefore, found to be justified and is accepted as such. The grouse of the Department, on the other hand, is found to be baseless and ground No. 1 raised by the Department is, hence, rejected, whereas Cross Objection No. 1 taken by the assessee is accepted. 35. Turning to ground No.2 raised by the Department, it has been contended that the ld. CIT(A)....
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....he return of income for the year under consideration, the assessee had claimed the balance 50% of additional depreciation of 15% of the value of the plant and machinery installed in the immediately preceding assessment year; that this was done through Notes to Accounts appended to the return of income; that this claim was computed at Rs. 1,32,79,884/-, by apportioning 50% of the gross amount of additional depreciation of Rs. 5,32,65,467/- in the ratio of 91 days to the total period; and that however, the AO had not considered this claim made by the assessee. 39. The ld. CIT(A), in the impugned order, observed as follows:- "8.2 Since the appellant is stated to be admittedly eligible for deduction of additional depreciation as 50% of the same has already been duly allowed by the AO in the immediately preceding assessment year 2005-06, there is nothing on record to indicate that the appellant should not be allowed deduction of the balance 50% of deduction in the current assessment year 2006-07. Accordingly, the ld. AO is directed to verify the contention of the appellant that 50% of additional depreciation was claimed and allowed in the immediately preceding assessment yea....
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....ny; that these units had been part of the assessee company during the pre-demerger period from 1.4.05 to 30.5.05; that these units had been transferred under the Demerger Scheme with effect from 1.7.05; that the deduction claimed was only with respect to the profits earned by these undertakings for the said pre-demerger period only and such deduction had not been claimed in the computation of income but by way of Notes appended to the return of income filed, the said Notes forming an integral part of the return of income; and that prior to the introduction of section 80 IA(12), CBDT Circular No. 15/5/63 - IT(A-I) dated 13.12.63 clarified that deductions under sections 80 IA and 80 IB of the Act were related to the eligible undertaking and accordingly, they got transferred with the undertaking, notwithstanding the ownership thereof. The learned counsel for the assessee has placed reliance on the following case laws in this regard:- 1. "CIT v. P.K. Engg.& Forging Pvt. Ltd.", 87 Taxmann 101(Cal); 2. "A.G.S. Timber & Chemical Industries Pvt. Ltd. v. CIT", 233 ITR 207(Mad); 3. "ITO v. Hindustan Petroleum Corpn. Ltd.", 25 TTJ (Bom)28; 4. "Shah Granites....
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....ere also given in the tax audit reports, certifying such deduction; that the AO has also wrongly observed that since the deduction was not claimed in the computation of income, it could not be allowed, in view of "Goetze India v. CIT", 284 ITR 323(SC); that in fact, it remains undisputed that the deduction in question was claimed by way of a Note appended to the original return of income; that in "CIT v. Sain Processing and Weaving Mill Pvt. Ltd.", 325 ITR 565(Del), it has been held that the net profit cannot be determined, without taking into account the information disclosed in the Notes appended to the accounts, which Notes form part of the accounts of the assessee Company. 46. The ld. DR, on the other hand, has strongly supported the impugned order in this regard, submitting that it remains undisputed that under the provisions of section 80 IA(12) of the Act, in a case where the eligible undertaking stands transferred in a Scheme of Amalgamation and Demerger, deduction is allowable only to the resulting company and so, the assessee/demerged company is not at all eligible for deduction under sections 80 IA/80 IB of the Act, as has rightly been held by both the Authorities bel....