TaxTMI 
TaxTMI 
2012 (8) TMI 957
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....t on the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of Rs. 1,08,65,937/- u/s. 14A read with Rule 8D under the I. T. Act, 1961. 2. For that on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to correctly appreciate the details and explanations furnished by the assessee in support of the claim that no expenditure had been incurred in relation to earning exempt income in terms of Section 14A of the Act and without assigning cogent reasons upheld the disallowance made by the AO. 3. For that on the facts and in the circumstances of the case and in law, the disallowance u/s. 14A of the I. T. Act be deleted and/orreduced." 3. Brief facts leading to the above issue are that the assessee is engaged in the business of manufacturing of paper. The assessee filed its return of income on 30.09.2008. Subsequently, assesee's case was selected for scrutiny u/s. 143(2) of the Act. During the course of assessment proceedings, AO noticed from the audited accounts of the assessee that it has invested huge amount of capital in unquoted shares specially shares of subsidiary companies and earne....
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....vidend income of Rs. 12.38 cr. from shares held of its subsidiary Hindusthan Newsprint Ltd. and the same was exempted u/s. 10(33) of the Act and accordingly, the same was claimed as exempt. Ld. Cousnel stated that the assessee has made investments in two subsidiaries i.e. Nagaland Pulp & Paper Co. Ltd. (NPPCL) and Hindusthan Newsprint Ltd. (HNL). He explained the background of investment made and stated that the Govt. of India nationalised loss making NPPCL brought under the administrative control of the assessee by way of subsidiary. According to him, the newsprint division was converted into its wholly owned subsidary at the instance of Govt. of India and it functioned under the administrative control of Ministry of Industries, who required the control operations of these two subsidiary companies. According to Ld. Counsel, the Govt. exercises control over its subsidiaries through the agies of the assessee. He narrated that even financial assistance and funding provided by the Central Govt is routed through the assessee to these two companies. Even the entire investment in these two subsidiaries was made out of capital contribution received from Govt. of India. He drew our attenti....
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....at the cost of investment Rs. 21,392.30 lacs whereas assessee's own funds available are at Rs. 87981.12 lacs. In such facts, Ld. Counsel stated that there is no need for AO to make disallowance under Rule 8D(2) of the Rules as there was no nexus between borrowed funds and acquisition of investment which gives exempted income to the assessee. According to Ld. Counsel the interest exenditure of Rs,6,06,287/- disallowed and confirmed by lower authorities should be deleted in full. He also stated that administrative expenses disallowed by AO at Rs. 1,02,59,650/- as alleged by AO that this expenditure is in relation to earning exempt income is preposterous and illogical. Ld. Counsel for the assessee stated that there cannot be any expenditure to earn such dividend income because the dividend is from a subsidiary company HNL and the investment was made in earlier years not in this year. He stated that for collecting dividend warrant the assessee has not to incur any expenditure reason being the dividend warrrant is directly being credited to the bank of the assessee company. Even in collecting there is no expenditure incurred by assessee. In view of these facts, the Ld. Counsel for the a....
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....elied on the provision of section 14A (1) and (2) of the Act wherein the provision talks of nexus of borrowed fund utilised for tax free income and in case there is no nexus the disallowance cannot be made or the provisions of section 14A read with Rule 8D of the Rules cannot be invoked. He drew our attention to Rule 8D(1) of the Rules wherein the AO's satisfaction in respect to correctness of the claim of the assessee in relation to income which does not form part of the total income is must. Ld. Counsel stated that in the present case before us neither the AO nor the CIT(A) has tried to establish any nexus of borrowed funds with the investment bearing exempted income. In such case, no disallowance can be made. Ld. Counsel for the assessee relied on the case law of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT [2010] 328 ITR 81 (Bom.). 7. We have heard rival submissions and gone through facts and circumstances of the case. We find from the P&L Account of the assessee company for the year ended 31.03.2008 that it has earned dividend from subsidiary company at Rs. 12.38 cr. The assessee's investments which are declared in assessee's Balance Sheet ....
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....sent through ECS directly in the assessee's bank account by HNL. We find that the facts are clear that the dividend warrant was only one and HNL sent the dividend through banking channel i.e. through ECS and it seems that there is no expenditure involved in it. Even otherwise to substantiate that there requires same disallowance on acount of pro rata interest and also administrative expenses. AO has to find out the nexus which is the very essence for invocation of the provisions of section 14A of the Act. The relevant provision of section 14A reads as under: "14A. 38[(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.] 38[(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditur....