TaxTMI 
TaxTMI 
2016 (3) TMI 724
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....apart from the disallowance made 40A(2) in respect of the interest free advances made to the related parties and further disallowance of interest on loans taken for expansion of the business of the assessee. On appeal, the CIT (Appeals) deleted the disallowance made by the Assessing Officer under Section 14A on the ground of sufficient interest free funds utilized for investment purpose. However, the CIT (Appeals) confirmed the disallowance made by the Assessing Officer under Section 14A on account of indirect administrative expenses. As regards, the disallowance made by the Assessing Officer 40A(2) in respect of interest free advances given to the related parties. The CIT (Appeals) deleted the said disallowance made by the Assessing Officer on the ground that the said advances made by the assessee from its own funds and not from the interest bearing fund. As regards the disallowance made by the Assessing Officer under Section 36(1)(iii) in respect of the interest on loan taken for expansion of business for the Assessment Year 2010-11, the CIT (Appeals) confirmed the disallowance made by the Assessing Officer. Thus both the assessee as well as the revenue are aggrieved by the impug....
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.... During the year under consideration the assessee has earned an dividend income of Rs. 63,477, the Assessing Officer apart from the disallowance under Section 14A on account of interest expenditure also made a disallowance of interest expenditure under Section 14A. On appeal, the CIT (Appeals) has confirmed the disallowance made by the Assessing Officer on account of indirect expenditure by applying Rule 8D(2)(iii) of I.T. Rules. 6. Before us, the learned Authorised Representative of the assessee has submitted that the assessee has not incurred any expenditure for earning the dividend income. He has further submitted that there is no change in the investment portfolio of the assessee during the year under consideration, therefore, there cannot be any expenditure attributable to the income not forming part of the total income of the assessee being dividend income. Even otherwise, before making an addition under Section 14A of the Act, the Assessing Officer needs to arrive at proper satisfaction that the assessee has incurred certain expenditure for earning the exempt income. In the case of the assessee, the Assessing Officer has not arrived at a proper satisfaction and directly a....
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..../2012 and submitted that the Tribunal has given a finding that at the best if any disallowance could be made that can be restricted and cannot exceed the exempt income. Thus the learned Authorised Representative has pleaded that the disallowance made by the Assessing Officer and confirmed by the CIT (Appeals) on account of indirect expenditure is not called for and the same may be deleted. 7. On the other hand, learned Departmental Representative has submitted that during the course of assessment proceedings, the Assessing Officer has asked the assessee to file the details regarding the expenditure to be disallowed under Section 14A. The assessee has not furnished any details and even the assessee has not made suo moto disallowance under Section 14A. Therefore the Assessing Officer was justified in making the disallowance under Section 14A. She has relied upon the orders of the authorities below. The learned Departmental Representative further contended that when the assessee has earned dividend income during the year under consideration, then, the provisions of section 14A are applicable and the disallowance has to be computed as per the Rule 8D(2)(iii). 8. We have considere....
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....d attributable to earning the exempt income, the provisions of section 14A can be invoked. Only after ascertaining and identifying such expenditure, the Assessing Officer can proceed further for quantifying the apportionment by applying the formula under Rule 8D. Thus the Rule 8D cannot be applied automatically but it is only a method of apportionment of an expenditure which has been incurred for an indivisible activity resulting in taxable and non-taxable income. As it is manifest from the assessment order that there is no such ascertainment of expenditure which can be apportioned and attributable to the tax exempt income. The co-ordinate bench of this Tribunal in the case of Subramanya Constructions & Development Co. Ltd. (supra) while dealing with an identical issue has held in para 9 as under :- " 9. Vis-à-vis the disallowance made under Rule 8D(2)(iii), a look at the assessment order clearly show that assessee, though it did not take specific plea it had stated that there was nothing which called for a disallowance under section 14A investment portfolio. Reply of the assessee on the proposed disallowance under section 14A of the Act given before the AO read as ....
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.... the assessment order or even has not ascertained and identified the expenditure which is attributable to the tax free income the disallowance made by the Assessing Officer by applying Rule 8D(2)(iii) is not sustainable. We concur with the view of the co-ordinate bench of this Tribunal in the case of Subramanya Constructions & Development Co. Ltd. (supra) and accordingly delete this disallowance made by the Assessing Officer on account of indirect expenditure by applying Rule 8D(2)(iii). Further we note that there is no change in the investment portfolio of the assessee as it is evident from the record that except an investment of Rs. 20,000 in NSC, there is no other change in the existing investment of the prior years. Therefore, there is no movement in the investment portfolio except Rs. 20,000 which too in NSC. Accordingly when there is no movement in the investment portfolio, then, we are in agreement with the claim of the assessee that there is no expenditure incurred by the assessee on account of indirect expenditure for earning the dividend income. Even otherwise while applying the provisions of section 14A and computing the quantum of disallowance under Rule 8D(2)(iii), it ....
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.... very much attracted. In rebuttal the learned A. R. has submitted that even otherwise when there is no dividend income from the said investment no disallowance can be made without identifying the expenditure attributable for earning the dividend income and further the Assessing Officer has not recorded any satisfaction for rejecting the claim of the assessee that no expenditure has been incurred. 11. We have considered the rival submissions and relevant material on record. As regards the non-expression or recording of satisfaction by the Assessing Officer, we find that the Assessing Officer has made no efforts to ascertain and identify the expenditure which is attributable to the activity which has resulted taxable and non taxable income and therefore can be apportioned under Section 14A r.w. Rule 8D. Therefore, so far as the requirement of recording the satisfaction the assessment order is lacking this requirement and consequently for want of the pre-requisite condition for making the disallowance under section 14A on account of indirect expenditure the action of the Assessing Officer is not sustainable. In view of our findings for the Assessment Year 2008-09 which are applicab....
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....on, does not hold good especially in absence of non-furnishing of details for the purposes of calculation of disallowance at Rs. 16.50 lakhs by the assessee on its own. In this view of the matter and in absence of any distinguishable feature brought to our notice by the learned Counsel for the assessee against the order of the CIT(A), we do not find any infirmity in the same. Accordingly the same is upheld and the ground raised by the assessee is dismissed." 8. As it is clear from the finding of Tribunal that the assessee failed to furnish the details of disallowance under section 14A and, therefore, the disallowance made by the AO was found by the Tribunal without any infirmity. For the year under consideration the assessee has specifically raised a point before the AO that 97.82% of the investment is in the subsidiary companies and joint venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are st....
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....s held in para 32 and 33 as under:- "32. Sub-ssection (2) and (3) to section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Sub Sections (2) and (3) Provide as follows. "14A.(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 expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of....
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....g Officer not being so satisfied that recourse to the prescribed method is mandated by law. Subsection (3) of section 14A provides for the application of sub-section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an assessment year beginning on or before April 1,2001, either to reassess under section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154." 10. It has been made clear by the Hon'ble High Court that sub-section (2) does not ifso facto empower the AO to apply the method prescribed by Rules straightaway without considering whether the claim made by the assessee is correct. 11. The assessee has relied upon various decisions of this Tribunal wherein an identical issue has been considered. In the case of Garware Wall Ropes Limited Vs. Addl. CIT (supra), the Tribunal while deciding an identical issue has held in para 2.4 as....
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....n 14A- "there should be proximate cause for disallowance which has relationship with the tax exempt income as held by the Hon'ble Supreme Court in case of CIT Vs. Walfort Share and Stock Brokers P. Ltd. ( 326 ITR 1). Therefore, there should be a proximate relationship between the expenditure and the income which does not form part of the total income. In the case in hand the assessee has claimed that no expenditure has been incurred for earning the exempt income, therefore, it was incumbent on the AO to find out as to whether the assessee has incurred any expenditure in relation to income which does not form part of the total income and if so to quantify the expenditure of disallowance. The AO has not brought on record any fact or material to show that any expenditure has been incurred on the activity which has resulted into both taxable and non taxable income. Therefore, in our view when the assessee has prima facie brought out a case that no expenditure has been incurred for earning the income which does not form part of the total income then in the absence of any finding that expenditure has been incurred for earning the exempt income the provisions of section 14A cannot be appl....
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....sing Officer has not expressed or recorded any satisfaction by identifying the expenditure which has been incurred by the assessee for earning the dividend income the disallowance for the Assessment Year 2009-10 under Section 14A on account of indirect expenditure is not sustainable and the same is disallowed. 12. For the Assessment Year 2010-11, the facts are identical to the Assessment Year 2008-09 as there is no fresh investment during the said assessment year and therefore in view of our finding for the assessment year 2008- 09 the disallowance made by the Assessing Officer under section 14A on account of indirect expenditure is deleted. 13. The assessee has also raised another ground for the Assessment Year 2010-11 being Ground No.6 as under : " 6. The learned CIT (Appeals) is not justified in law in conforming the disallowance made by the ld. Assessing Officer under section 36(1)(iii) of the Act of Rs. 21,03,510 being interest calculated at the rate of 10% on the increase in work-in-progress amounting to Rs. 2,10,35,105 (i.e. Rs. 9,21,96,773 minus Rs. 7,11,61,668) instead of deleting the entire disallowance under the facts and circumstances of the case." Dur....
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.... part of the work in progress. Accordingly, we do not find any error or illegality in the orders of authorities below on this issue. This ground of the assessee's appeal is dismissed. 15. Now we will take up the revenue's appeal. 16. The revenue has raised common grounds in these appeals. The grounds for the Assessment Year 2008-09 are reproduced as under :- "1. The order of the learned CIT (Appeals) in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The CIT (Appeals) erred in deleting the disallowance of Rs. 34,23,969 calculated under rule 8D(2)(ii) holding that none of the interest payments claimed by the assessee can be taken for the purpose of rule 8D(2)(ii) without appreciating the fact that the finance charges included Rs. 11,77,98,115 and Rs. 81,36,431 respectively towards interest on working capital and KSBCL advance respectively. 3. The CIT (Appeals) erred in not appreciating the facts and circumstances that investments are made form a common pool of funds i.e. working capital and / or cash credit or overdraft accounts. 4. The CIT (Appeals) erred in not appre....
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....nt has been made during the year under consideration then the disallowance made by the Assessing Officer is deleted. 18. Before us, the learned Departmental Representative submitted that there is no dispute that the assessee has taken working capital loan and therefore the said loan is general in nature and is not for specific purpose and can be used for the purpose of investment. She has relied upon the order of the Assessing Officer. 19. On the other hand, the learned Authorised Representative of the assessee has submitted that the investments were made in the earlier years out of the assessee's own fund. He has further submitted that there was no disallowance on account of interest expenditure under Section 14A for the earlier assessment years when the investment was made. Since there is no investment made during the year under consideration, therefore, no disallowance on account of interest expenditure can be made under Section 14A. He has further submitted that whatever expenditure on account of interest has been incurred by the assessee during the year under consideration is in respect of specific loans taken by the assessee which has been used for specific purposes....
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....earning of dividend income which is exempt income. Accordingly, in view of the fact that there is no disallowance on account of interest expenditure under Section 40A in the earlier year and there is no fresh investment during the year under consideration as well as the interest expenditure during the year is on account of specific loans for specific purposes, we do not find any error or illegality in the order of the CIT (Appeals) in deleting the said disallowance made by the Assessing Officer under Section 14A on account of indirect interest expenditure. 21. The next issue raised by the revenue in the Ground Nos.6 to 8, regarding the disallowance made by the Assessing Officer of interest on account of interest free advances given to related parties/sister concerns. The Assessing Officer noted that the assessee had advanced interest free loans to various sister concerns amounting to Rs. 179 Crores though the said amount was found to be incorrect figure and the correct amount of interest free advance was recorded by the CIT (Appeals) only Rs. 155.51 Crores. The Assessing Officer found that the assessee was paying Rs. 17.84 Crores towards interest on borrowals. Accordingly the As....
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....ng fund was used for the purpose of advancing interest free loan to the sister concern, no disallowance of interest is called for. He has supported the order of the CIT (Appeals). 25. We have considered the rival submissions as well as the relevant material on record. The Assessing Officer noted that the assessee has given the interest free advances to its sister concerns amounting to Rs. 179 Crores, correct amount is Rs. 155.51 Crores. The Assessing Officer thus invoked the provisions of section 40A(2) and made a proportionate disallowance of interest expenditure. The CIT (Appeals) has deleted the disallowance made by the Assessing Officer. In para 4.4 to 4.7 of the impugned order as under : " 4.4 I have carefully considered the appellant's submissions and the reasons given by the AO in the assessment order. The AO noted that the appellant had advanced interest-free loans to various sister concerns amounting to Rs. 179 crores. The AO also found that the appellant was paying Rs. 17.84 crores as interest towards borrowals. In view of this, the AO presumed that interest- bearing funds were diverted to the sister concerns free of interest and accordingly made a disallowanc....
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....ree funds were sufficient to meet their investments. In the present case, the interst-free funds available with the appellant are Rs. 158.47 crores and whereas the interest-free advances were only Rs. 155.51Crores. Thus there cannot be any disallowance of interest on account of account of interest-free advances made to the sister concerns in the instant case. It is also not the argument of the appellant that the interest-free advances were for any commercial expediency. Therefore, the decision of the Hon'ble Supreme Court in the case of SA Builders [288 ITR 1] is not applicable to the instant case. The AO relied on the following decisions i) Abhishek Industries [20S CTR 304 (P&H)] ii) Varinder Agro Chemicals Ltd. [20S CTR 304] iii) Doctor & Co. [180-ITR-627] 4.7 The Hon' ble Punjab & Haryana High' Court followed the decision in the case of Abhishek Industries Ltd. while giving decision in the Varinder Agro Chemicals Ltd. case cited above. It should be mentioned that the decision in the case of Abhishek Industries rendered by the Punjab & Haryana High Court was overruled by the Hon'ble Supreme Court in the case of Manjula sales Cor....
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....e sum of Rs. 213 crores was invested out of its own funds and Rs. 147 crores was invested out of borrowed funds. Accordingly, he disallowed interest of Rs. 4.4 crores calculated at 12% per annum. The CIT (A) found that the assessee had enough interest free funds at its disposal for investment and, accordingly, deleted the addition which was subsequently upheld by the Tribunal. On appeal, the Hon'ble Court had held that "if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case, this presumption was established considering the finding the fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible." (b) We have, with due regards, perused the judgment of the Hon'ble Court (supra) and of the view that the ratio laid down by the Court is directly applicable to the present assessee as the issue under consideration is identical to that of the matter dealt by the Hon'ble Court. (ii) The Hon'ble High Court of Gujarat had an ....
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....assessee's own fund during the year is more than the advance given to the sister concern, therefore, we do not find any reason to interfere with the finding of the CIT (Appeals) that the assessee is having its own interest free funds which is sufficient to advance interest free loan to the sister concern. Accordingly, this issue is decided against the revenue and in favour of the assessee. 26. For the Assessment Year 2009-10, the grounds are identical. As regards the disallowance under Section 14A on account of interest expenditure which has been deleted by the CIT (Appeals), the facts are almost identical except the fact that for the said assessment year the assessee has made an investment of Rs. 2 Crores in the sister concern namely Green Food Park Ltd. 27. We have heard the learned Departmental Representative and learned Authorised Representative as well as considered the relevant material on record. The learned Authorised Representative of the assessee has pointed out that the investment is a strategic investment in the sister concern therefore provisions of section 14A are not applicable. Even otherwise the assessee was having its own fund for making the said investm....