TaxTMI 
TaxTMI 
2011 (7) TMI 1150
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....rcumstances of the case, the learned CIT(A) erred in confirming the learned AO's order disallowing a sum of Rs. 3,90,63,218, as expenditure attributable to exempt dividend income of Rs. 1,08,72,574 in terms of s.14A of the IT Act, 1961, read with r. 8D of the IT Rules,1962. 2.That on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of Rs. 3,90,63,218 under s.14A of the IT Act, 1961, by applying r. 8D of the IT Rules, 1962, disregarding the computation of disallowance made by the assessee at Rs. 1,49,995 duly supported by the certificate obtained from its statutory auditors. 7.That, on the facts and in the circumstances of the case, the learned CIT(A) erred in sustaining the addition of Rs. 3,90,63,218 being the disallowance under s. 14A of the Act/r. 8D of the Rules to the net profit of the assessee company for the purpose of computation of its book profit under the provisions of s. 115JB of the IT Act, 1961." 3. The brief facts leading to the above issue are that the assessee company is engaged in the business of manufacture and sale of sugar, industrial alcohol, bio-compost fertilizers and generation of power....
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....ance sheet have been certified by any auditor. Non-maintenance of separate accounts in respect of exempted income and the fact that appellant has made its own estimation of expenditure to earn exempt income is sufficient reason for satisfaction of AO having regards to the accounts of appellant to estimate expenditure under s. 14A(2) of the IT Act read with r. 8D of the IT Rules. Further a certified estimate of such expenditure by a statutory auditor cannot override the estimation of expenditure as prescribed in IT Rules. In view of these facts and position of law, I hold that AO has rightly disallowed the expenditure of Rs. 3,90,63,218 consisting of interest of Rs. 3,38,47,524 and indirect expenditure of Rs. 52,15,694 to earn exempt income under s. 14A of the IT Act." Aggrieved, assessee came in appeal before Tribunal. 4. We have heard rival contentions and gone through facts and circumstances of the case. The first argument made by the learned counsel before us was that the assessee admittedly earned dividend income at Rs. 1,08,72,574 and claimed exemption under s. 34/35 of the Act. Learned counsel for the assessee stated that it has incurred expenditure to the sum of Rs. 1,....
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....(Rs. 88,110.87 + Rs. 78,503.34 + Rs. 3,706.56 + Rs. 12,630.71) lacs = Rs. 1,82,951.48 lacs." Further, learned counsel also filed calculation sheet of opening application of funds and closing application of funds for the entire financial year 2007-08 relevant to this assessment year. This calculation sheet is being reproduced as it is : "Balarampur Chini Mills Ltd. Asst. yr. 2008-09 Calculation sheet Sl. No. Particulars Calculation particulars Calculation workings (Rs in lacs) Amount (Rs in lacs) 1. Average owned capital employed (Op. share capital and reserves and surplus plus clause share capital and reserves and surplus)/2 (1,02,71,844 + 9,43.66.07)/2 98,542.26 2. Average rupee term loans 1-ECBs employed for projects (Op. secured loans + clause secured loans -excise loans and CC facilities from banks + deposit against conv. warrants)/2 (1,42,900.22 + 1,09,934.96 - 11,643-510-37,616.52 -1,359.52 -45,619.47 + 920)/2 78,503.34 3. Cash credit facilities/bank borrowings for working capital (including excise loans from bank) (Op. CC facilities + clause CC facilities + Op. unsecured loans from banks + clause unsecured loa....
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....xed asset 1,91,908.44 (in lacs) 1,73,994.51 (in lacs) Investments 20,562.12 (in lacs) 300.65 (in lacs) Net current asset 80,302.35 (in lacs) 50,533.44 (in lacs) Miscellaneous expenditure 249.65 (in lacs) 392.74 (in lacs) In view of these facts, learned counsel for the assessee stated that there is no expenditure attributable to exempted income qua administrative expenses, interest expenses or any other directly related expenditure. Learned counsel for the assessee accordingly stated that in the present case r. 8D of the Rules invoked by the lower authorities is without any basis. He stated that in view of the above facts the picture is very clear that there is no investment from interest-free or interest-bearing loans and there is no directly related expenses relating to exempted income i.e. dividend income. Hence, he urged the Bench to delete the addition. 5. On the other hand, the learned Departmental Representative stated that the r. 8D of the Rules is now mandatory and Hon'ble Bombay High Court in the case of CIT v. Godrej & Boyce Mfg. Co. Ltd. [2008] 2 DTR (Bom.) 36 has upheld the validity of this rule and it is applicable for a....
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....ssessment order itself. We have taken note from the said statement that the assessee had utilized its entire borrowings in the form of term loans/ECBs for setting up greenfield projects/expansion of existing projects. Similarly, borrowings in the form of cash credit facilities were utilized for its day-to-day requirements of working capital to run the business. As per fund flow statement it is clear that entire amount of investments, yielding tax-free dividend income to the assessee, were acquired from its owned funds represented by the share capital and free reserves and neither long-term borrowings in the form of term loans, ECBs etc. nor short-term borrowings in the form of cash credit facilities etc. were used for the purpose of acquisition of investments at any time during the previous year as is evident from statement prepared on the basis of audited balance sheet as at 31st March, 2008. 7. In view of the above facts, now we have to go to r. 8D of the Rules, which is being reproduced as it is : "8D. (1) Where the AO, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a)the correctness of the claim of expenditur....
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....of r. 8D(2) of the Rules. Even the provisions of s. 14A(2) clearly state that the AO shall determine the amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method as prescribed (under r. 8D of the Rules), if the AO having regard to the account of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of total income under the provisions of this Act. The provisions of s. 14A were enacted by the Finance Act, 2001 by retrospective effect, w.e.f. 1st April, 1962, which postulated that for the purpose of computing the total income no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of total income under the Act by an assessee. The Memorandum Explaining the Provision in the Finance Bill, 2001 provides reasons for insertion of s. 14A in the Act and the same are reported in (2001) 166 CTR (St) 145 : (2001) 248 ITR (St) 192 and at pp. 195 and 196, which are as under : "Certain incomes are not includible while computing the total income ....
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....t there is no link with expenditure for earning of dividend income incurred by the assessee and once the facts are clear, no disallowance can be made by invoking r. 8D of the Rules. Neither the AO nor CIT(A) has recorded any finding that having regard to the account of the assessee, they are not satisfied with the correctness of the claim of expenditure made by assessee or the claim made by assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for the relevant assessment year. In the absence of any such finding, facts of the present case show that the investment in shares was made out of own capital employed and not from borrowed funds, no disallowance on account of interest expenditure can be made by invoking r. 8D of the Rules. Accordingly, in the given facts and circumstances, we delete the addition and allow this issue of assessee's appeal. 9. The next issue in this appeal of the assessee is against the order of CIT(A) in confirming the action of AO in reducing the claim of deduction under s. 80-IA of the Act, by deducting proportionate head office expenses on turnover basis. For this, the assessee has....
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....o not identified the head office expenditures which may be considered as direct expenditure towards s. 80-IA/80-IB units either on the basis of specific identification method or on the basis of any reasonable method of estimation. Appellant has taken the same argument as in asst. yr. 2007-08 that none of the head office expenditures is for any of the s. 80-IA/80-IB units and this presumption is not supported by any evidence or even probability. In fact appellant had itself worked out the pro rata allocation of entire head office expenditure of Rs. 16.89 crores on the basis of turnover of each eligible unit under s. 80-IA or 80-IB during the assessment proceedings. I therefore do not find any reason to disturb the allocation of head office expenses made towards eligible ss. 80-IA and 80-IB units during the assessment proceedings for running such units by the AO following my own appellate order for asst. yr. 2007-08 in appeal No 133/CC-XIX/CIT(A)-C-II/Kol/2009-10. I confirm the action of AO to allocate head office expenses of Rs. 2,46,51,244 being the proportionate head office expenses towards eligible s. 80-IA units and I also confirm the action of the AO in reducing the appellant's....
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....lations were given by the assessee under protest repeating that direct expenses of the undertakings had already been accounted for. The AO as per record chose not to negatively comment on it and merely insisted for providing calculations in a certain manner. Compliance made under protest has been held against the assessee since relying on same the deductions claimed were reduced to Rs. 98,80,78,140 under s. 80-IA of the Act and Rs. 64,81,301 under s. 80-IB of the Act as against the claim of Rs. 1,01,55,74,745 and Rs. 2,74,96,600 respectively. The assessee has all along been contesting that the direct expenses incurred in the specific undertakings had already been reduced by the assessee from the profits of the said undertakings which was duly supported by the auditors report and Form No. 10CCB. It is also a matter of record that identical claims made by the assessee in an identical manner have been allowed to the assessee. For these very undertakings over the years at times as old as since 2000-01 assessment year. It is also an undisputed fact that the authorities have nowhere pointed out that any expenditure which had been incurred by the head office pertained directly to the unde....
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....ditures relatable to the units were incurred by the head office; whether the connection is direct or remote can be looked into only and after that here no efforts whatsoever have been made to show that any specific expenditure incurred by the head office in fact pertained to the eligible unit. When the ratio laid down by the apex Court in the case of Liberty India v. CIT [2009] 225 CTR (SC) 233/[2009] 317 ITR 218 (SC) is considered then it is eminently clear that direct connection with the eligible profits is necessarily to be there for income as considered by the apex Court. In the facts of the present case all the relevant details are available before the AO before whom it is repeatedly agitated that expenses directly connected to the units have already been accounted for. Necessary evidences, auditors certificate, books of accounts separately maintained for the units and the head office are available the AO refuses to look into the same and insists on applying proportionate disallowance on a pro rata basis and when the assessee again agitates providing the details by way of a chart made available to the CIT(A) from the same evidence, the AO again refuses to look into it and insi....