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2015 (8) TMI 605
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.... of the Act under the facts and in the circumstances of the appellant's case. 3. The learned CIT(A) is not justified in upholding the disallowance of Rs. 1,64,97,300/- claimed u/s.57 of the Act in respect of the interest paid on borrowed funds under the facts and in the circumstances of the appellant's case." 03. As against this, Revenue has taken four grounds of which, grounds 1, 3 and 4 are general, needing no specific adjudication. Effective ground of the Revenue, numbered as ground 2 is reproduced hereunder : "2. On the facts and in the circumstances of the case the learned CIT (A) has erred in law in directing the AO to allow set off of losses suffered in the eligible 80IB unit against the income from non eligible unit without appreciating the statutory position as envisaged under sub section 5 of Section 80IA which is applicable to Section 80IB also, that the income from eligible unit shall be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the Ays for which the provisions of Section 80IB are applicable." 04. Facts apropos are that assessee engaged in developing and const....
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....ere was a survey u/s.133A of the Act in the premises of the assessee, when the Department had taken a stand that proportionate interest on the loans utilised for investments in shares and debentures could not be allowed as business expenditure. Accordingly as per the assessee, interest pertaining to shares and debentures were separated out of the business income and placed under the head 'income from other sources' and the related interest out go was claimed u/s.57 of the Act. As per the assessee, what could be disallowed u/s.14A of the Act, could at best be Rs. 36,80,500/-, being the investment made in M/s. Padmavathi Associates, a partnership firm, wherein the assessee was a partner. 06. However, AO was not impressed with the above reply. According to him, investments in shares of SUDPL made by the assessee were to earn income from dividends which was not includible in the total income. According to the AO, there was no business income directly relatable to the interest expenditure during the relevant previous year. According to him, a part of the interest out go of Rs. 12,13,19,585/- had to be disallowed applying the formula prescribed in Rule 8D of the IT Rules. He w....
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....see, entire interest expenditure could not have been considered for application of Rule 8D(2)(ii) since part of the loans were utilised for its business. Assessee also pointed out that average investments considered by the AO at Rs. 55,83,03,916/- was incorrect and the actual figure should have been Rs. 37,42,52,916/-. CIT (A) partly agreed with the contentions of the assessee and held that average value of the investments was wrongly considered by the AO while working out the disallowance under Rule 8D. He also held that a sum of Rs. 44,16,600/- had to be excluded from the total interest expenditure of Rs. 12,13,19,585/- while working out the interest disallowance. Effectively, he scaled down the disallowance u/s.14A of the Act, from Rs. 5,20,69,680/- to Rs. 3,8118,472/-. 11. Vis-à-vis the third issue viz., claim of loss under the head 'income from other sources' argument of the assessee before the CIT (A) was that the income from the debentures having been declared u/s.56 of the Act, legitimate expenditure claimed u/s.57 could not be disallowed. As per the assessee, the reasoning given by the AO that what could be disallowed u/s.37 could not be claimed u/s.57 wa....
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....thstanding anything contained in any other provisions of Section 80 I(6) of the Act, as it existed at that relevant point of time and the same is extracted hereunder for clarity : " Section 80 I (6) - Notwithstanding anything contained in any other provisions of this Act, the profits and gains of an industrial undertaking on a ship or the business of a hotel (or the business of repairs to ocean going vessels or other powered craft) to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under sub-section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or business of the hotel (or the business of repairs to ocean going vessels or other powered craft) were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year upto and including the assessment year for which the determination is to be made." Let us also peruse and consider the provisions of section 80 IA(5) of the Act which is relied on by the Assessi....
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....back to section 80-I(1) which categorically states that where the gross total income includes any profits and gains derived from an industrial undertaking to which section 80-I applies then there shall be a deduction from such profits and gains of an amount equal to 20 per cent. The words "includes any profits" used by the legislature in section 80-I(1) are very important which indicate that the gross total income of an assessee shall include profits from a priority undertaking. While computing the quantum of deduction under section 80-I(6) the Assessing Officer, no doubt, has to treat the profits derived from an industrial undertaking as the only source of income in order to arrive at the deduction under Chapter VI-A. However, this court finds that the non obstante clause appearing in section 80-I(6) of the Act, is applicable only to the quantum of deduction, whereas, the gross total income under section 80B(5) which is also referred to in section 80-I(1) is required to be computed in the manner provided under the Act which presupposes that the gross total income shall be arrived at after adjusting the losses of the other division against the profits derived from an industrial und....
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....ome. That restriction, however, cannot be applied to render the concept of gross total income in terms of section 80 B(5) to be determined before the set off of the losses under section 70(1) of the Act. We are, therefore, of the view that the learned CIT(Appeals) has rightly applied the decision of the Hon'ble Apex Court in the case of Synco Industries Ltd (supra) and that there is no merit in the plea of revenue that the said judgment is not applicable to the facts of the present case of the assessee. 5.3.4 That apart, the learned counsel for the assessee has rightly contended that the provisions of section 80 IA (5) of the Act applies in computing the profits of an eligible business for the purposes of working out the quantum of deduction for the initial assessment year and for every subsequent year thereafter. The incentive deductions both under section 80 IA and 80 IB of the Act have the concept of initial assessment year in respect of almost all eligible business. However, with respect to the eligible business to which the provisions of section 80 IB(10) of the Act apply, there is no concept of "initial assessment year." The deduction is granted to undertakings e....
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....14. The only issue that arise for consideration in this appeal by the assessee is with regard to the disallowance made by the Assessing Officer by invoking the provisions of section 14A of the Act. The Assessing Officer has observed in the order of the assessment that from the financials of the assessee, it had earned exempt income during the year. The opening investment as on 01.4.2007 was Rs. 3,80,00,000/- and the closing investment stood at Rs. 13,82,00,000/-. The average investment was Rs. 8,81,00,000/-. The Assessing Officer called upon the assessee to explain as to why the expenditure incurred in earning exempted income should not be disallowed by applying the provisions of section 1 4A r/w Rule 8D In response, the assessee submitted that the investments were made in its subsidiary company out of the profit earned by the assessee. The Assessing Officer did not accept the explanation given by the assessee and was of the view that whether the investment was made with a subsidiary company or with an outside company, the intention of making investment was to earn dividend income which is exempted under the I. T. Act. By applying the provisions of section 14A r/w Rule 8D, the Asse....
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....on of total income would clearly evidence the fact that the assessee had no exempt income during the previous year. 17. The learned Counsel for the assessee relied on the following judicial pronouncements of the Hon'ble High Courts to the proposition that if there is no exempt income during the previous year, then the provisions of section 1 4A of the Act, cannot be invoked: * CIT v. Winsome Textile Industries Ltd (2009) 319 ITR 204 (P&H) * Cit v. Corrtech Energy P. Ltd (Tax Appeal No.23 9 of 2014, dt 24.03.2014)(Guj.) * JCIT v. Shivam Motors (F) Ltd (ITA 17/Lkw/2012, dated 12.11.2013) (ITAT Lucknow); and * CIT v. M/s Shivam Motors (F) Ltd (ITA 88 of 2014, dated 5.5.14) Allahabad High Court 18. The learned DR relied on the order of the Assessing Officer and drew our attention to the circular No.5 of 2014 dt. 11.02.2014 wherein the CBDT has opined that even in the absence of exempt income earned by the assessee during the previous year, provisions of section 14A have to be invoked. 19. We have given a careful consideration to the rival submissions. On the basis of the documents to which our attention was drawn it is ....
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....ove proposition, facts are required to be examined with the angle, whether the assessee has received any dividend income or any other income which is exempt. The assessee has been raising this plea right from the assessment proceedings stage, but conclusively neither the Assessing Officer nor the CIT (A) has examined this aspect. Therefore, we set aside this issue to the file of the learned Assessing Officer for examination. If on examination it comes out that the assessee has not claimed any exempt income, then section 14A would not be applicable. In case exempt income would found to be claimed, then disallowance would be there. The learned Assessing Officer shall re-examine this issue with the above angle and adjudicate it in accordance with the law. Our observation would not impair the case of the Assessing Officer and would not cause to the defense/explanation of the assessee. 13. In assessment year 2003-04, the dividend income was not exempt from taxation. Prior and subsequent to this assessment year, dividend income was exempt. Therefore, in this year section 14A would not be applicable. Respectfully following the judgment of the Hon'ble Allahabad High Court, ....
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....d. AR further submitted that for A. Y. 2008-09, interest income from debentures shown by the assessee under the head 'income from other sources' were accepted by the AO in an assessment done u/s.143(3) and interest expenditure on the funds utilised for placing such debentures, claimed u/s.57(iii) of the Act, were allowed. As per the Ld. AR, Revenue's claim that reduction in interest rate on debentures effected by SUDPL was a colourable device was not substantiated. Ld. AR submitted that M/s. SUDPL was also engaged in the very same line of business and subscription to its debentures by the assessee were done as a part of assessee's business. The income therefrom had to be classified under the head 'income from other sources' since it was in the nature of interest. Reliance was placed by Ld. AR on the decision of Hon'ble Apex Court in the case of Union of India v. Azadi Bachao Andolan [(2003) 263 ITR 706]. 21. Per contra, Ld. DR submitted that interest rate on debentures had come down from 10% to 1% and assessee was not able to show why its associate concern SUDPL reduced the interest rate by 9%. As per the Ld. DR, this was nothing but a colourable devi....
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....ding to an exaggerated claim of loss which was a colourable device. To establish a colourable device, it is necessary to show that there was a series of legal steps taken by the assessee for bringing down its taxable income and the intermediate steps should show that the real motive of the assessee was to evade tax. CIT (A) relied on the decision of Hon'ble Apex Court in the case of McDowells & Co Ltd (supra), for considering the reduction of interest by SUDPL to be a colourable device. However, as explained by Hon'ble Apex Court in the case of Azadi Bachao Andolan (supra), it is not part of the judicial function to treat as nugatory any step whatever which a tax payer might take with a view to avoidance or mitigation of tax. Their Lordships also observed that a tax payer where he is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax, and the other of which will not, be at liberty to do the latter, and to do so effectively in the absence of any specific tax avoidance provision. Nothing has been placed by the Revenue to show that the reduction in debenture interest rate by SUDPL was not in accordance with law an....