TaxTMI 
TaxTMI 
2013 (9) TMI 407
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....ed for business purposes from the disallowance of interest expenditure u/s read with Rule 8D. " 2. Facts in brief as emerged from the corresponding assessment order passed under Section 143(3), dated 16.12.2009 were that the assessee company is in the business of manufacturing of glassware items. It was noted by the AO that w.e.f. 1.4.2006 a merger took place with Alembic Glass Industries. In respect of the provisions of Section 14-A, it was noted that the assessee had received dividend income of Rs.1.84 crores, which was claimed as exempt under Section 10(34) of the IT Act. The assessee had furnished a computation and made a disallowance u/s. 14A of Rs.6.29 lacs. The AO has thereupon proposed the invocation of the provisions of Section 14A of the IT Act and finally worked out at disallowance in the following manner: "Average value of investment as per working of the assessee comes to Rs.29.50 crore and average value of assets at Rs. 107.75 crore. Therefore, allowing the interest expense of Rs.220.63 lacs on borrowed funds for repayment of ONGC liability from the gross interest payment of Rs.427.61 lacs, the net interest payments comes to Rs.206.98 lacs. Apportionment of the inte....
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....made on the basis of a calculation of the proportionate interest alleged to be attributable to the investment earning exempted dividend income. It is also to be noted that while doing so for the years under consideration the A.O. has not followed the past method of calculation of the disallowance. As per AO it was seen that the working of disallowance was wrong because while calculating the proportionate interest attributable to dividend income the ratio of dividend income and total sales have been taken though there was no direct relation between the two. The Assessing Officer had thus made the calculation after taking into account the proportion of the interest on the ratio between the investment in shares and total assets including investment in shares. Apart from this, there is nothing in the assessment order which can establish the nexus of utilization of borrowed interest-bearing funds diverted towards investment in debentures. But there are other discussions in this very assessment order wherein the provisions of section 36(1)(iii) of the Act have also been touched upon. The Assessing Officer was expected to correlate the said discussion with the exempted dividend income u/s....
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....produced below:- "a) The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallowability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the present case, no such exercise has been carried out and, therefore, the Tribunal was justified in remanding the matter. b) Section 14A was introduced by the Finance Act 2001 with retrospective effect from 1 April 1962. However, in view of the proviso to that Section, the disallowance thereunder could be effectively made from assessment year 2001-2002 onwards. The fact that the Tribunal failed to consider the applicability of Section 14A in its proper perspective, for assessment year 2001-2002 would not bar the Tribunal from considering disallowa....
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....y way of dividend does not form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis; iii) The provisions of sub sections (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid; iv) The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution; v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 March 2008 shall apply with effect from Assessment Year 2008-09; vi) Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For tht purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity ....
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....he other taxable income of the assessee. While upholding the decision of Hon'ble High Court, the Hon'ble Supreme Court{ CIT vs Walfort Share & Stock Brokers 326 ITR pg.1(SC) } has also said that for attracting section 14A of the Act there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income, relevant para from the held portion is as follows :- "Section 14A of the Income-tax Act, 1961, clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the a may be relatable partly to exempt income and partly to taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear: it desires to curb the practice of claiming deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are....
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....ical purposes." 7. Therefore after a long discussion, it was decided by the respected co-ordinate bench to refer the issue back to assessment stage to decide as per the guidelines of the Hon'ble Courts therefore on the same lines we hereby restore the matter back to the file of Assessing Officer. Resultantly,this ground of the assessee is allowed only for statistical purposes." 5. In the light of the above order, it is apparent that certain guidelines have been issued to correctly apply these provisions. We, therefore, hereby direct the AO to examine the facts of this case in the light of the precedents cited hereinabove and thereupon compute the disallowance, if any, to be made. With these directions, we hereby allow this ground of the assessee for statistical purpose only. 6. Ground No.2 is reproduced below: "Disallowance of foreign travel expenditure Rs.7,81,757/: On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance made by the Assessing Officer of expenditure on foreign travel incurred by the Appellant presuming it to be for non business purposes. The appellant craves leave to add to, alter, amend or delete a....