TaxTMI 
TaxTMI 
2014 (10) TMI 289
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....restricting the addition of Rs. 5,11,00,925/- to the extent of Rs. 1,89,70,367/- made u/s 14A read with Rule 8D of the Income Tax Rules, 1962. 3. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the addition of Rs. 10,79,68,722/- made on account of valuation of closing stock. 4. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing." The grounds of appeal of assessee read as under :- "l(a) That the learned CIT(A) erred, both on facts and in law in sustaining a disallowance of Rs. 1,89,70,367/- (Rs.64,60,071/- towards interest and Rs. 1,25,10,296/- towards administrative expenditure) u/s 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules. 1(b) The Id CIT(A) failed to appreciate that the assessee had made investments during the year from the redemption proceeds of earlier investments / Realisation from Debtors and interest free funds available with the assessee and as such disallowance u/s 14A with respect to interest of Rs. 64,60,071/- deserves to be deleted . 1(c) That the ld CIT(A) in the facts and circumstances of the case has erred in sustaining disall....
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....) and Rs. 55,23,351/- (Refer PB 273, 275) as dividend income on mutual funds investment which was claimed as exempt u/s 10(35) of the Income Tax Act, 1961. It is respectfully submitted: As regards Interest income of Rs. 64,60,071/- * That during the year assessee company has made investments to the tune of Rs. 2,18,16,75,912.68 and received a sum of Rs. 2,16,09,61,251.25 from redemption of investments. * That purchase of investments is from proceeds of redemption of existing investments and other cash surplus generated during the year. * That it is also not out of place to mention here that the balance of General Fund as on 01-04- 2007 was much more than the investments as on 01-04-2007. * That interest expenditure which was debited to Income and Expenditure account was with respect to import/ export of sugar alone and not for investment activity, detailed evidences of which were filed during the course of assessment proceedings and also before Ld. CIT(A). * That assessee company is paying bank interest only in relation to packing credit/ packing credit in foreign currency utilised for export of sugar from India which is as such a short term borrowing for purpo....
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....details of investment made in mutual funds and tax free bonds for the year ending 31-03-2008 and copy of ICICI Bank statement showing purchase and redemption of investments during the year. PB 913-918 is Investment Summary showing opening balance, investments made during the year, investments redeemed during the year and closing balance together with detailed ledger account of Investments. PB 925-926 is Detailed Statement of Investments made during F.Y. 2007-08 together with source of investments. PB 927 to 963 Copies of bank statement identifying entries of purchase and redemption of Investments made during F.Y. 2007-08. PB 1032 to 1041 is detailed submissions dated 12-10-2011 filed to Ld. CIT(A) regarding 14A. PB 1207 to 1208 is detailed statement of Investments made in mutual fund and tax free bonds during F.Y. 2006-07 together with source of investments. As regards administration and other expenses i.e. 0.5% of average value of investments Our first and foremost submission is that Ld. CIT(A) has erred in calculating the disallowance as per clause (iii) of sub-section (2) of Rule 8D of Income Tax Rules, 1962. While calculating 0.5% of average value of investment, ....
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....penditure arises. Reliance is placed on following judicial pronouncements (a) The principle of apportionment embedded in section 14A, has application only when it is not possible to determine the actual expenditure in relation to the exempt income. When it is possible to determine the actual expenditure in relation to exempt income or, when no expenditure has been incurred in relation to exempt income the principle of apportionment has no application. * -Expenses towards dividend income exempt under s. 10(33)-Expenditure which the AO seeks to disallow under s. 14A should be actually incurred-There being no material with the AO to show that any expenditure was incurred in earning dividend income, nothing could be disallowed under s. 14A on estimate basis, ACIT vs. Eicher Ltd. - 101 TTJ 369 (Del) * Whether it is for Assessing Officer to identify expenditure which can be reasonably said to have been incurred to earn a tax exempt income before invoking disallowance under section 14A - Held yes - Dresdner Bank AG v. Addl. CIT - 11 SOT 158 (Mum.) * Whether when no expenditure is incurred by an assessee in earning dividend income ,no notional expenditure can be deducted fro....
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....l Bank Vs. DCIT 103 TTJ 908 (Del); 2. Vidyut Investment Ltd., 10 SOT 284 (Del); and 3. D.J. Mehta Vs. ITO 290 ITR 238 (Mum.)(AT)" * CCI Ltd. vs. JCIT 206 Taxman 563 (Kar.) High Court Disallowance on notional basis is invalid. When no expenditure is incurred by the assessee in earning dividend income, notional expenditure cannot be disallowed u/s 14A. * CIT vs. Metalman Auto P. Ltd., 336 ITR 434 (P&H) It has been held that disallowance under section 14A of presumptive expenditure in absence of actual expenditure could not be taken into account. Ld.AO has mentioned in para 10 on page 3 of the assessment order that if the assessee had surplus funds then it should not make borrowing for working capital purposes In reply it is respectfully submitted that Ld. A.O. cannot step into the shoes of the assessee company and decide as to how it should run its business. It is assessee company's prerogative to decide and take decisions accordingly as to how it runs its business. Therefore, the action of Ld. A.O. in making the disallowance of expenditure on account of interest u/s 14A read with rule 8D in the absence of any contrary evidence is not sustainable under any circumstance....
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....oke the provision of Rule 8D. AO has to record his satisfaction about correctness or otherwise of computation made by the AO, which mutatis mutandis means that if the contention is that no expenditure has been incurred, it has to be rebutted. * JK Investors (Bombay) Ltd vs. ACIT in ITA No.7858/Mum/2011 ITA No.7851/Mum/2011 dated 13-03-2013 of ITAT, Mumbai Bench The condition precedent for the AO to invoke Rule 8D is that he first must examine the accounts of assessee and then record by giving cogent reasons why he is not satisfied with the correctness of the assessee's claim. In the absence of an examination of accounts and the recording of satisfaction, Rule 8D cannot be invoked. (b) No expense disallowance if investment is out of own funds or own funds are more than investments * Reliance is also placed on the judgement of Hon'ble Mumbai Tribunal in case of Godrej Industries Ltd. (ITA No. 1090/Mum/2009) wherein it was held that assessee had sufficient own funds in the form of own capital and reserves to make the investments. The Tribunal also considered the Fund Flow Statement presented to observe that assessee had generated sufficient funds from its own operations....
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....ut, if there are substantial reserves in addition to other reserves in the books of the assessee company and it can be proved that the investments were out of own funds, no disallowance on account of interest u/s 14A could be made. Reliance is placed in the case of Harrisons Malayalam Ltd vs. ACIT (2008) 19 SOT 363 Cochin. Also, a date wise chart of proceeds from redemption received in the bank accounts of the assessee company and the dates on which the investments were made was filed before Ld. CIT(A), showing the source of investments made. The same has been also accepted by Ld. CIT(A) in his order in Para 10 at Page 15. The same is again being reproduced hereunder:- (a) As regards Birla Mutual Fund investment amounting to Rs. 14 Crores, dated 21-6-2007 PB 925 is Detailed Statement of Investments made in mutual fund and tax free bonds during F.Y. 2007-08 together with source of investments wherein serial no. 10 shows that investment in Birla Sun Mutual Fund has been made from Standard Chartered Bank Current Account. PB 934 to 937 is Standard Chartered Bank Current Account Statement wherein PB 936 shows that on 19-06-2007 two deposits of Rs. 2.69 Crores and Rs. 11.48 Crores ....
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....ores was from interest free funds (sugar sale proceeds) Pls see excel sheet (b) As regards JM Mutual Fund amounting to Rs. 14 Crores , Investment dated 12 -07-2007 PB 925 is Detailed Statement of Investments made in mutual fund and tax free bonds during F.Y. 2007-08 together with source of investments wherein serial no. 11 shows that investment in JM Mutual Fund has been made from Standard Chartered Bank Current A/c. PB 1022 -1023 (second half portion) is the copy of email dated 12-07-2007 from Shri JP Silswal (Accountant of appellant Company) asking for rates on 19.6.2007 and 9.7.2007 on which USD transfer from EEFC account to Current account of USD 28 lacs and USD 6.50 lacs has been made. And PB 1022 (first half portion) is email giving the exchange rates in response to the above email. PB 1024 is the copy of email from Standard Chartered Bank to Shri JP Silswal (Accountant of appellant Company) showing relevant extract of EEFC Bank Statement wherein entries amounting to USD 28 lacs and USD 6.50 lacs dated 19-06-2007 and USD 35 lacs dated 09-07-2007 are appearing as transfer to Standard Chartered Bank current account. PB 1025 is assessee's letter dated 09-07-2007 to S....
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....een from the order of Ld. CIT(A), he itself has mentioned in his order at page 15 Rs. 3Crores (which is rather Rs. 30 lacs, misinterpreted as Rs. 3crores by Ld. CIT(A)) invested out of Rs. 6.25 crores. This investment has been made out of refund from Birla Mutual Fund (Rs.14 - Rs. 7.75 = Rs. 6.25). Remaining is from the left over proceeds from Tata Mutual Fund and Income Tax Refund. Even otherwise, on 30.7.2007 and 31.7.2007, total withdrawals of Rs. 30,17,160 were made (this can be fully covered from Opening balance of Rs. 1.26 crores before credit of Rs. 6.25crores) (e) As regards SBI Mutual Fund amounting to Rs. 2 Crores , Investment dated 30 -10-2007 PB 925 is Detailed Statement of Investments made in mutual fund and tax free bonds during F.Y. 2007-08 together with source of investments wherein serial no. 22 shows that investment amounting to Rs. 2 crores in SBI Mutual Fund has been made from Standard Chartered Bank Current Account out of sale proceeds received from DEPB licences. PB 946 is ICICI Bank current account statement showing credit of Rs. 64,59,888/- as on 29-10-2007, being amount received as Income Tax Refund. PB 996 is credit voucher no. 55 dated 2....
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....investments upto 19-12-2007 amounted to Rs. 135 Crores (Rs. 107 crores from redemption of investments + introduction of Rs. 28 Crores from EEFC for purchase of investments) and total investments made upto 19-12-2007 amounted to Rs. 118 Crores. Therefore, it can be seen that the net proceeds were put into mixed funds. Also, in the subsequent year i.e. A.Y. 2009-10, Ld. CIT (A) has given a finding at PB 21 of his order "that out of Rs. 35 crores, the assessee has brought forward investments of Rs. 10.75 crores as at 1.4.2008 and the balance Rs. 24.25 crores had already been redeemed in the last year. Further, these investments of Rs. 10.75 crores remained throughout the year and were also held by the assessee as at 31/3/2009. In view of the same, for working out disallowance under Rule 8D (2)(ii), average investments of Rs. 10.75 crores alone are being taken, since use of mixed funds could be held only to that extent. The remaining investments made during the year, taxable or exempt, were made out of redemption proceeds of investments made in earlier years and thus held to be not from interest bearing funds." All the investment amounting to Rs. 35 crores are into growth fund ea....
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....)] For attracting s. 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. * Godrej & Boyce Mfg. Co. Ltd. vs. DCIT & ANR. [(2010) 328 ITR 81] S. 14A supersedes the principle of law that in the case of a composite business expenditure incurred towards taxfree income could not be disallowed and incorporates an implicit theory of apportionment of expenditure between taxable and non-taxable income. Once a proximate cause for disallowance is established - which is the relationship of the expenditure with income which does not form part of the total income - a disallowance u/s 14A has to be effected. * Minda Investments vs. DCIT [(2011) 138 TTJ 240 (Delhi)] S. 14A disallowance has to be on basis of nexus between income & expenditure & not on adhoc estimate basis. * ACIT vs. Yatish Trading Co. P. Ltd. (2011) 50 DTR 158 (Mum) (Trib.) The expression "in relation to" in s. 14A means dominant and immediate connection or nexus with the exempt income. In order to disallow expenditure u/s 14A, there must be a live nexus between the expenditure incurred and the tax-free income. Disallowance cannot be made on presumption....
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....rofit & loss account was with respect to export and import of sugar alone and it was not at all related to any investment activity and it was claimed that no interest was incurred towards the investment activity. The assessee has also relied on the decision of Hon'ble Delhi High Court in the case of assessee's own case for Assessment Year 2001-02 wherein the ITAT's view that no interest has been incurred towards investment activity has been accrued. On this, we hold that the Rule 8D is applicable for Assessment Year 2008-09 and earlier decision on the disallowance u/s 14A shall not have impact for applicability of Rule 8D for the year under consideration. We would also like to state that Rule 8D of the Income-tax Rules, 1962 is mandatory by using the word "shall" in section 14A(2), the legislature made it mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to exempt income according to the prescribed method. Prior to insertion of Rule 8D of the Rules, the Assessing Officers were having discretion to determine expenditure on a reasonable and acceptable method of apportionment of expenditure between the exempt taxable income and exempt ....
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....= 31.3.2007 : 249,17,01,962 31.3.2008 : 251,24,16,625 B = Average Investments = 250,20,59,294 C = Average Total Assets = 31.3.2007 total assets 322,43,39,582 31.3.2008 total assets 674,03,88,872 Average Total Assets = 498,23,64,227 A X B C = Rs. 7,68,45,729 x 250,20,59,294 498,23,64,227 = 385,90,629 III. 0.5% percent of the average value of 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 1/4/2007 and 31/3/2008 Average Investments as calculated above : 250,20,59,294 0.5% X 250,20,59,294 = 1,25,10,296 Total 5,11,00,925 The total disallowance on this account comes to Rs. 5,11,00,925/-. The same is therefore, being disallowed and added to the total income." From the submissions of assessee and from the orders of the revenue authorities, we find that the Assessing Officer has not considered all relevant facts on record and has also not verified the claim of the assessee with regard to the source of investment. To reach at the conclusion that he was not satisfied with the claim of assessee with regard to expenses incurred to earn exempted income, then only he can inv....
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.... The contention of the Revenue is that these amendments are w.e.f. 1st April, 2010 and are not retrospective and, therefore, not applicable to the assessment year in question i.e. 2008-09." The decision of Hon'ble Delhi High Court in paras 26 & 27 read as under:- 26. Principle of matching which is disturbed by Section 40(a)(ia) of the Act, may not materially be of consequence to the Revenue when the tax rates are stable and uniform or in cases of big assessees having substantial turnover and equally huge expenses as they have necessary cushion to absorb the effect. However, marginal and medium taxpayers, who work at low G.P. rate and when expenditure which becomes subject matter of an order under Section 40(a)(ia) is substantial, can suffer severe adverse consequences as is apparent from the case of Naresh Kumar. Transferring or shifting expenses to a subsequent year, in such cases, will not wipe off the adverse effect and the financial stress. Nevertheless the Section 40(a)(ia) has to be given full play keeping in mind the object and purpose behind the section. At the same time, the provision can be and should be interpreted liberally and equitable so that an assessee sh....
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....en excluded in computation of business income and the same has been considered under the head 'capital gains'. In such a situation, we find no infirmity in the order of the CIT (A) and the same is sustained on this ground. Accordingly, this ground of revenue's appeal is dismissed. 13. In the ground no.3, the revenue has raised the deletion of addition of Rs. 10,79,68,722/- made on account of valuation of closing stock. 14. This issue has been decided by the CIT (A) in para 11 which read as under :- "11. Ground no 9 relates to addition of Rs. 10,79,68,722 to the value of closing stock of the appellant. During the course of appellant proceedings, the appellant stated that the Hon'ble ITAT in AY 1993-94 has decided this issue in favour of the appellant. The issue is that the appellant valued the closing stock on cost or net realizable value whichever is lower. This method of valuation of closing stock was followed by the appellant in Assessment Year 1993-94 and had been accepted by the Tribunal. Since the facts of the case are identical to the facts of earlier years and since the appellant is following the method of valuation consistently on cost or net realizable valu....