TaxTMI 
TaxTMI 
2013 (9) TMI 531
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....nd in the circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of Rs.11,36,451/- out of interest expenses in respect of interest free advances to subsidy company without appreciating that the issue of business expediency is not proved by the assessee" 3. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored." 3. Ground no.1 is regarding disallowance made u/s 14A of the I T Act. 3.1 In the return of income, the assessee has claimed an amount of Rs.104,19,59,188/- as interest exempt u/s 10(23G) and Rs.16,09,63,502/- as dividend exempt u/s 10(34) of the I T Act. 3.2 During the course of assessment proceedings, the Assessing Officer asked the assessee to furnish the details and the expenditure incurred in view of the provisions of sec. 14A of the IT Act. The assessee furnished the details as well as the submissions as recorded by the Assessing Officer in para 4.2 of the assessment. It was mainly contended by the assessee before the Assessing Officer that the assessee has not incurred any interest expenditure for earning the tax free income. It was f....
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....essee has not brought on record to prove that the investment in the shares, mutual funds and NCD resulting tax free income has been made from assessee's own interest free funds. He has further submitted that just because the flow of funds cannot be traced from the borrowed funds to the investments, it is not correct to say that borrowed fund was not used for acquiring the investments when there is a common pool from all sources put together which was utilised for all activities of its business including acquiring shares, bonds and securities, then apportionment of common expenditure against different source of income is justified. He has relied upon the order of the Assessing Officer and submitted that the Assessing Officer has pointed out that the total investments of Rs. 572.64 crores have been made from a mix of borrowed funds as well as the assessee's own funds. The Assessing Officer has worked out the year wise percentage of borrowed funds and come to the average of 53.54%. Accordingly, the Assessing Officer has taken 53.54% of the total investment from the borrowed funds and applied the average rate of interest at 11.50%. Hence, the Assessing Officer has calculated the intere....
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.... April May 3.5.2004 Axsys Health Tech P Ltd 3.5.2004 - Axsys Health Tech P Ltd(Warrants) 2.40 0.56 June July 2.7.04 Shriram Investments Ltd 2.7.04Shriram Transport Fin Co 5.74 6.25 Aug 17.8,94 Reliance Utilities & Power Ltd 4.02 Sept Oct Nov Dec Jan Feb Mar: 4.3.05 Sale of Financial Technologies Ltd 7.56 25.3.05-Comat Lithographers Ltd 1.15 25.3.05-GMS Technologies Ltd 0.75 25.3.05 Him Techno Forge Ltd 1.60 25.3.05-Roots Indl Ltd 0.83 25.3.....
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.... tax free investment in assessment years 1998-99, 1999-2000 and 2000-2001 is much less than the income before depreciation and element of depreciation must be considered for correct working of the funds generation. In the assessment year 2001-2002 the funds were generated by issuing preference shares to the extent of Rs. 800 crore but increase in tax free investments in the same year i.e. assessment year 2001-2002 is marginally higher than the profit before tax and preference share capital raised during the year. He further submits that in assessment years 1997-98, 1998-99 the investment in shares and securities was much below the total share capital, reserves and surplus. He submits that the tax free securities were also held as stock in trade and only the dividend is exempt and profit on the sale of stock in trade of shares and securities is taxable as the business income and hence section 14A is not attracted at all. He further submits that the ad hoc disallowance cannot be made as in fact all the details were filed before the A.O. in respect of the generation of funds ITA 3303/Mum/2003 & other 7 group-appeals but the same were discarded. The learned Counsel relied on the follow....
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....ance on the dividend income had come for the consideration before the Tribunal in assessee's own case for the assessment year 1995-96 in context of deduction under sec. 80M of the Act (ITA No.3073/Mum/1996 & other appeals). In that year also the assessee had received the dividend of Rs. 11,57,98,227. The A.O worked out the interest expenditure attributable for earning dividend income at Rs. 1 crore. When the matter reached before the Tribunal, vide order dated 12.1.2007 the Tribunal held that ad-hoc disallowance of interest expenditure cannot be justified at any cost. 19. In the case of CIT Vs. Reliance Utility and Power Limited 313 ITR 340 (Bom.) the controversy was diversion of the interest bearing funds for making the investment. In the said case the A.O. recorded finding that the sum of Rs. 313 crore was invested out of their own funds and Rs. 147 crore were invested out of borrowed funds. The A.O. accordingly worked out the disallowance by taking interest rate at 12% per annum for three months. The assessee pleaded before the Hon'ble High Court that the assessee had sufficient interest free funds as under:- (i) Share capital &nb....
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....icient to meet the investments. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal." 20. The argument of the learned Departmental Representative that the Hon'ble jurisdictional High Court in the case of Godrej & Boyce ITA 3303/Mum/2003 & other 7 group-appeals Ltd. Mfg. Co. VS. DCIT (2010) 328 ITR 81 (Bom) held that the A.O. should work out the reasonable disallowance. With due respect, in our considered opinion, in the present appeals, there is no need to restore the matter to the file of the A.O. as the facts are distinguishable. Here we find that the assessee had sufficient own as well as interest free funds to make the investment in the shares, bonds and debentures. Moreover nothing has been controverted on said findings of the Ld. CIT(A) by the Revenue. So far as the finding of the learned CIT(A) is concerned, after giving anxious consideration the totality of the facts and figures placed before us, we find no reason to sustain any disallowance made by the Assessing Officer in respect of the dividend income claimed exempt u/s 10(33) as....
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.... the AO on some 'reasonable basis' and not rule 8D. Under such circumstances, we set aside the impugned order and restore the matter to the file of the AO for deciding the quantum of disallowance as per the afore noted judgment, after allowing a reasonable opportunity of being heard to the assessee." 5.4 As it is clear from the said order for the Assessment Year 2002-03 that the Tribunal has not gone into merits of the case and remitted the issue to the record of the Assessing Officer because Rule 8D is not applicable as held by the Hon'ble jurisdictional High Court in the case of Godrej & Boyce Ltd v ACIT reported in 328 ITR 81. 5.5 From the relevant facts of the present case for the year under consideration, it is clear that on principle the issue is covered by the order of this Tribunal in assessee's own case for the AYs 1998-99 to 2001-02 (supra); because the most of the investments were already made in the earlier years; however, for the Assessment Years 2002-03 to 2004-05, the issue of disallowance u/s 14A is pending before the Assessing Officer as it was remanded by the Tribunal. Therefore, to this extent, the issue for the year under consideration is remitted to the r....
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....Year 2004-05 in ITA No.3060/Mum/2008 vide order dated 27.10.2010 in paras 15 & 16 as under: "15. The only other ground in the Revenue's appeal is against the deletion of disallowance of Rs.13,78,800 out of interest expenditure in respect of interest free advance to subsidiary company. Briefly stated the facts of this ground are that the assessee advanced a sum of Rs.2.07 crores to M/s.Reliance Life Insurance Co. Ltd. which is a subsidiary company of the assessee. No interest was charged on this loan. On being called upon to explain as to why the interest be not disallowed, the assessee stated that the amount was advanced to subsidiary company not out of any specific borrowings but out of own funds. In the absence of any evidence to espouse the assessee's submission, the Assessing Officer held that the disallowance was called for. He, therefore, made an addition of Rs.13,67,800 towards interest as relatable to the interest free loan advanced to subsidiary company. The learned CIT(A) however ordered for the deletion of addition. 16. After considering the rival submissions and perusing the relevant material on record it is noted that the assessee made i....
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....e same amount, which has been disallowed u/s 14A. 11.2 On appeal, since the Commissioner of Income Tax(Appeals) deleted the disallowance made on account of interest expenditure; but the adjustment was confirmed and enhanced only to the extent of administrative expenses. 12. Before us, the ld AR of the assessee has submitted that the Rule of apportionment as provided u/s 14A cannot be applied for computation of the book profit u/s 115JB. In support of his contention, he has relied upon the following decisions: i) Quippo Telecom Infrastructure Ltd v ACIT ITA No.4931/Del/2010 ii) Essar Teleholdings Ltd v DCIT ITA NO.3850/Mum/2010 iii) DCIT vs Syncome Formulations I Ltd 106 ITD 193 iv) CIT vs Bhari Information Tech.Sys P Ltd Civil Appeall no.33750/2009 v) Al Kabeer Exports Ltd v CIT Civil Appeal No. 32274/2010 12.1 On the other hand, the ld DR has relied upon the orders of the authorities below. 13. We have considered the rival submissions as well as the relevant material on record. As regards the applicability of Rule of apportionment as embedded in the provisions of sec. 14A of the IT Act whil....
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....ation. Therefore, disallowance of expenditure by applying Rule 8D is not justified. Further, no actual expenditure was debited in the profit & loss account relating to the earning of exempt income. Therefore the provisions of Sec. 14A cannot be imported into while computing the book profit u/s. 115JB of the Act inasmuch as clause (f) of Explanation to Sec. 115JB refers to the amount debited to the profit & loss account which can be added back to the book profit while computing book profit u/s. 115JB of the Act. In this connection, reliance can be placed upon the decision of ITAT Delhi Bench in the case of Goetze (India) Ltd. Vs CIT (2009) 32 SOT 101 (Del), wherein it has been held that provisions of Sub-Sec. (2) & (3) of Sec. 14A cannot be imported into clause (f) of the Explanation to Sec. 115JA of the Act. In this view of the matter, we therefore, delete the disallowance of expenses confirmed by the CIT(A) while computing book profit u/s. 115JB of the Act. In other words, no addition to the book profit shall be made on account of alleged expenditure incurred to earn exempt income while computing income u/s. 115JB of the Act. Thus ground No. 2 is decided in favour of the assessee.....