TaxTMI 
TaxTMI 
2016 (1) TMI 1100
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....e group companies", engaged in the business of supporting service in the areas of management, information technology, business development and infrastructure, filed its return of income on 01.10.2010 for the assessment year 2010-11. Subsequently, the case was selected for scrutiny and the assessment u/s.143(3) was completed on 28.03.2013 wherein the ld. Assessing Officer made certain disallowances amongst which one of the disallowances was made by invoking Section.14A r.w. Rule 8D for Rs. 2,46,85,257/- being the expenditure incurred for earning exempt dividend income of Rs. 21,51,35,562/-. The assessee had explained before the Ld. Assessing Officer as to how Section.14A of the Act would not be applicable in the relevant case as follows:- "During the previous year relevant to the A. Y. 2010-11, the company earned a dividend income of Rs. 2, 151 lakhs. It is submitted that, to eliminate cross holding amongst the Group Companies and to consolidate the Promoter shareholdings, restructuring of the shareholding was undertaken in the preceeding years. The investments pursuant to restructuring of the shareholding in the previous year 2007-08, have yielded the dividend income to th....
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....ng Officer by observing as under:- "3.3 The reply of the assessee has been considered. A plain reading of section 14A read with Rule 8D clarifies the legislative intent that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. No expenditure, whether direct or indirect, which is not attributable or relatable to earning to taxable income can be allowed. In a particular year there may not be an income which does not form part of total income but still disallowance under the provisions of section 14A read with rule 8D as the source for generating income is already created which requires to be developed and nurtured. Therefore though said source may not yield income in a particular year but the source remains, maintained and nurtured. It is pertinent here to mention the decision of Hon'b(e ITAT Delhi (Special Bench) in the case of Cheminvest Ltd Vs. Income Tax Officer 124 TTJ 577 (DeL) (SB) in the context that even if there is no exempt income earned during a particular year still disallowance can be made u/s 14A read with Rule 8D. The controversy before the special bench, in this case, was whether disallowance u/s 14A could ....
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....r year still disallowance u/s 14A read with Rule 8D can be made. If the expenditure is incurred in relation to income which does not form part of the total income, it has to suffer disallowance irrespective of the fact whether any income is earned by the assessee or not. However, the reliance placed by the Assessing Officer on the ratio held in Walfort Share & Stock Brokers P Ltd., the Hon'ble Supreme Court has held that the basic reason for insertion of Sec.14A is that certain incomes are not includible while computing total income as these are exempted under certain provisions of the Act. 5.1 The Assessing Officer made a valid observation that the copies of invoices pertaining to the year under consideration filed by the assessee do not indicate any allocation or passing on of the interest suffered by it to its Group Companies. The assessee continue to earn substantial dividend income on its huge investments as in the past and expenditure incurred in relation to earning of such income which is liable for disallowance under section 14A. The working given by the assessee in which it has stated that interest has been allocated to its group companies is only self serving and....
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....a of the assessee averring no expenditure to have been incurred is not correct. The relevant observation of the Co-ordinate Bench read as under:- "6. We have considered the rival submissions. A perusal of the provisions of section 14A, more specifically sub-section (2), shows that if the AO is not satisfied with the correctness of the claim of the assessee, then the AO shall determine the amount of expenditure incurred in relation to such income, which does not form part of total income under the Act. For this the method is prescribed in rule 8D. The provision of section 14A, sub-section (3) specifies the provision of 14A(2) would also apply where the assessee makes a claim that there is no expenditure incurred. This is because if the assessee does not make a disallowance under section 14A in its computation of total income, when filing the return, then if subsection (3) was not available, the AO might not be able to make a disallowance under section 14A. Thus, where the assessee makes a claim that only a particular amount is to be disallowed under section 14A or where the assessee does not make a disallowance under section 14A, if the AO proposes to invoke the section 14A....
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....ive with the words "not directly attributable". Thus for bringing any interest expenditure, claimed by the assessee, under the ambit of rule 8D(2)(ii) it will have to be shown by the AO that the said interest is not directly attributable to any particular income or receipt. Why we say here that it is to be shown by the AO is on account of the words in Rule 8D(1) being "where the Assessing Officer, ...... is not satisfied with. (a) ........ (b) ........ in relation to income......., he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). In the assessee's case, admittedly, the assessee has substantial capital. The increase in the capital itself is to an extent of Rs. 4 crores and in respect of reserves and surplus, the increase is Rs. 112 crores. The loans taken during the year admittedly are for the letters of credit and the assessee is bound to provide the bank stock ITA No.1331 & 1423/Kol/2011 Assessment Year: 2008-09 statement and other details to show the utilization of the loans. No bank would permit the loan given for one purpose to be used for making any investment in shares. The ld....
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.... percentage of the numerator B in rule 8D(2)(ii). Again this is to be calculated in the same line as mentioned earlier in respect of Numerator B in rule 8D(2)(ii) of the Act. 8.1 Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under section 14A read with rule 8D(2)(iii), which is issue in the assessee's appeal, is restored to the file of the AO for recomputation in line with the direction given above. No disallowance under section 14A read with rule 8D(2)(i) and (ii) can be made in this case." Accordingly, after finding that in the instant case as well, the Assessing Officer and the CIT(A) have nowhere applied mind arriving at 'satisfaction' qua assessee's plea that it had not incurred any expenditure in earning the impugned dividend income....
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....is not justified, accordingly the same is deleted." (iv) CIT Vs. Bharti Televenture Ltd. reported in (2011) 331 ITR 0502. "Where the assessee was found to be having adequate noninterest bearing fund by way of share capital and reserves and there was no nexus between the borrowals of assessee and the advances given, no disallowance for interest was called for." (v) CIT Vs. Reliance Utilities & Power Ltd., reported in (2009) 313 ITR 0340(Bom.) has held as follows:- "Tribunal having recorded a clear finding that the assessee possessed sufficient interest-free funds of its own which were generated in the course of the relevant financial year, apart from substantial shareholders fund, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and therefore no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds." (vi) EIH Associated Hotels Ltd Vs. DCIT reported in 2013-TIOL- 796-ITAT-MAD ".... The investments made by the assessee in the subsidiary company are not on account of investment for earning c....