TaxTMI 
TaxTMI 
2014 (9) TMI 358
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....ndia. The assessee was earlier known as 'Sufala Finance Ltd., which was incorporated on 25/11/1991 as a private limited company engaged in the business of providing financial services as hire purchase and leasing of incomes. After change of management, it also changed its business model by making investments in equity, mutual fund and also advanced loans to micro finance institutions. Assessee entered into a fund management agreement with Caspian Advisors Pvt. Ltd. (in short CAPL) on 27/05/2005 a per which the said company would render consultation services to the assessee in the matter of investment etc. as fund manager. For the assessment year under dispute assessee filed its return of income on 15/09/2009 declaring 'Nil' income. Initially the return was processed u/s 143(1) and refund on account of TDS amounting to Rs. 62,21,130/- was also issued to the assessee. Subsequently, assessee's case was selected for scrutiny. During the scrutiny assessment proceeding, after examining the books of account and other details submitted by the assessee, it was noted by the AO that the fund manager i.e. CAPL was holding 18.7% shareholding in the assessee company. One of the D....
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.... 3.3 AO also quantified the expenditure pertaining to exempt/taxable income for the purpose of disallowance u/s 14A and called for an explanation from assessee for proposed disallowance. Assessee objecting to the disallowance proposed by the AO u/s 14A of the Act, submitted that dividend income and income from mutual fund cannot be regarded as exempt income since tax has been imposed and paid by the payer u/s 115-O and 115J. It was submitted that tax on dividend distributed cannot be any thing other than tax on dividend income of the recipient/shareholder, which for the sake of administrative convenience and cost effectiveness is collected from the paying company. It was further submitted that the situation is analogous to FBT paid on ESOP issued to non-resident. Vide CBDT Circular No. 9 of 2007 the non resident employee is allowed to take credit, in a foreign country, for the FBT paid by the employer on ESOPs. It was submitted that in terms with Ruled 8D assessee has computed disallowance u/s 14A by arriving at the direct expenditure by considering fees attributable to those investments which have yielded income. AO rejecting each of the arguments of the assessee held that the a....
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....f rule 14A even if no expenditure is incurred to earn exempt income. The AO was fair enough in computing the disallowance u/s 14A separately for exempt income and for taxable income. He disallowed only that part of expenditure which pertains to exempt income. It is also pertinent to mention that the Rule 8D(2)(iii) applies even in cases where there is no exempt income as the formula relates to investment and not to income earned. Meaning thereby certain disallowance has to be made even in cases where there is no income at all and also in cases where no expenditure was actually incurred. 7.1 It is also pertinent to mention here that the Hon'ble Mumbai High court in the case of Godrej & Boyce Co. Ltd., Vs. DCIT 328 ITR 81 held that the provisions of Rule 8D are prospective and are applicable with effect from AY 2008-09. It is also pertinent to mention that the CIT(A)-V, Hyderabad for the AY 2007-08 had dismissed the appeal on the same issue vide order in ITA No. 175/DCIT-1(3)/CIT(A)-V/2012-13 dated 14/02/2013. 7.2 In view of the above discussion the disallowance made by the AO of Rs. 1,97,36,624/- is sustained, therefore, the grounds of the appeal of the assessee on this is....
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....her during the assessment proceeding nor before the CIT(A), assessee has substantiated by furnishing details what amount relates to earning of exempt income and what amount was towards earning of taxable income. Therefore, in absence of any details by the assessee, it cannot be said that the computation made by the AO is incorrect. 7. We have heard parties and perused materials on record as well as the orders of the authorities on this issue. So far as the contention of the learned AR that provisions of section 14A is not attracted and it has not incurred any expenditure towards earning of exempt income and further contention that dividend income cannot be considered as exempt income as it is subjected to dividend distribution Tax u/s 115J and 115-O of the Act, in our view, it is not acceptable simply because of the fact that the assessee itself recognizing the fact that it has incurred expenditure towards earning of exempt income has disallowed expenditure to the tune of Rs. 35,65,860/- u/s 14A read with Rule 8D(2) of the Act. Therefore, assessee's challenge with regard to applicability of section 14A read with Rule 8D (2) cannot be sustained. However, so far as assessee....
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....asis of formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The third part as provided under Sub-Rule 8D(2)(iii) is an artificial figure i.e. one-half per cent of the average investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. Aggregate of these three components would constitute expenditure in relation to exempt income and would be disallowed u/s 14A of the Act. Therefore, if we examine the facts of the present case in the context of the aforesaid statutory provision, it is quite clear that AO while working out disallowance under rule 8D(2)(i) has taken the total investment irrespective of the fact whether they have yielded income or not during the assessment year under consideration. The reasoning of the AO in this regard is actual earning or receipt of income will not be a condition for disallowance of such expenditure under the provisions of section 14A as it speaks about expenditure in relation to income which does not form part of the ....
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....sages 'scope of total income'. On a reading of section 5 of the IT Act, it would be evident that as per this section 'total income' is of any previous year and which includes income from whatever source derived which is received or deemed to be received in India in such year by or on behalf of such person or accrues or arises or is deemed to accrue or arises to him in India during such year or accrues or arise to him outside India during such year. Considered in aforesaid context, expression 'total income' referred to in rule 8D(2)(i) cannot be in abstract. It must relate to a previous year income of which is sought to be assessed. Therefore, as a natural corollary it follows that only expenditure directly relating to income which is earned either on receipt basis or on accrual basis and which does not form part of total income of a particular assessment year can be disallowed under clause (i) of Rule 8D(2). Rule 8D(2)(i) does not refer to the investment made by the assessee. On a conjoint reading of clause (i) and clause (iii) of Rule 8D(2), the difference between them is clearly discernible. While clause (i) speaks of disallowance of expenditure directly r....