TaxTMI 
TaxTMI 
2016 (6) TMI 202
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....ce made by the ld. Assessing Officer under section 14A of the Act read with Rule 8D of the Income Tax Rules to Rs. 4,64,525 instead of deleting the entire disallowance made by the ld. Assessing Officer under the provisions of section 14A read with rule 8D of the Income Tax Rules, 1962 under the facts and circumstances of the case. 3.1. The learned CIT (Appeals) failed to appreciate the fact that the ld. Assessing Officer did not arrive at a proper satisfaction for invoking the provisions of section 14A read with Rule 8D of the Income Tax Rules under the facts and circumstances of the case. 3.2. The learned CIT (Appeals) failed to appreciate the fact that the appellant had not incurred any expenditure in earning exempt income under the facts and circumstances of the case. 3.3. The learned CIT (Appeals) further failed to appreciate that what canbe disallowed by invoking the provisions of section 14A read with Rule 8D of the Income Tax Rules, 1962 are only such income which do not form part of the total income under the facts and circumstances of the case. 3.4. Without prejudice to the above the appellant contends that the disallowance made by the ld. Authorities below is high....
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....ibutable for earning the exempt income one is direct expenditure and another is indirect expenditure. So far as the direct expenditure is concerned, there is no dispute on this issue, the dispute is confined only to the disallowance of the indirect expenditure. Section 14A mandates apportionment of an expenditure incurred for indivisible activities resulting taxable income as well as tax free income. Therefore, the expenditure which has been incurred for such a composite activity resulting both taxable and non-taxable income is required to be apportioned among the taxable and non-taxable income. Thus, the primary requirement for invoking the provisions of section 14A in respect of indirect expenditure which can be apportioned for earning the tax free income is that the said expenditure has been incurred for indivisible activity resulting taxable as well as well as tax free income. The Assessing Officer has to examine and ascertain that certain expenditure has been incurred by the assessee on account of a composite indivisible activity which has resulted in taxable and non-taxable income and therefore the said expenditure is required to be apportioned. Only when the Assessing Office....
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....was the same all though, brought forward from earlier year. Under section 14A of the Act, once assessee has taken a stand that it had not incurred any expenditure under section 14A, then in our opinion, the AO is not justified in invoking Rule 8D(2)(iii) for a disallowance of indirect expenditure unless he recorded his dis-satisfaction of claim. It is essential such non-satisfaction has to be given with cogent reasons before invoking Section 14A. Doctrine of satisfaction no doubt, does not mean that an AO should presume what was in the mind of the assessee and express his approval or disapproval thereon. However, once assessee say that it had incurred no expense covered by section 14A of the Act for its investment portfolio, AO has to make a verification. Especially so, when incremental investments is negligible. In these circumstances, we are of the opinion that CIT(A) while he was justified in deleting the disallowances made under Rule 8D(2)(ii) and ought not have sustained the disallowance made under Rule 8D(2)(iii). Order of the learned CIT(A) is set aside to the extent. Disallowance under rule 8D(iii) is also deleted." Therefore, in view of the facts and circumstances of the ....
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....t of his contention, he has relied upon the decision of the Mumbai Benches of the Tribunal dt.26.3.2014 in the case of J.M. Financials Ltd. Vs. CIT in ITA 4521/M/2012 and submitted that the Tribunal in the said case has held that the investment in the subsidiary is for the purpose of holding the controlling state in the group concern and not for earning the income out of investment. Therefore the learned Authorised Representative has submitted that this investment in the subsidiary does not attract the provisions of section 14A when the purpose and motive of the investment is not to earn the dividend income and it has also not yielded any dividend income during the year under consideration. 10. On the other hand, the learned Departmental Representative has submitted that the decisions relied upon by the learned Authorised Representative is not applicable in the case of the assessee as in the said case the investment in the group company was made upto 98% and therefore it was an investment for holding the controlling stake which is not in the case of assessee where the investment is only of Rs. 2 Crores. The learned D.R. has thus contended that when there is a investment during the....
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....rrel on this point that for the A.Y. under consideration Rule 8D is applicable. Further for the A.Y. 2008-09, the Tribunal held in para 15 as under:- "We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. In the instant case, the only dispute is regarding determination of disallowance of expenditure for earning tax free dividend income of Rs. 18,17,68,458/- the assessee disallowed on its own Rs. 16.50 lakhs u/s 14A. Despite being asked by the AO to furnish the disallowance under rule 8D, the assessee did not furnish the details. The provisions of rule 8D inserted by the IT (Fifth Amendment) Rules 2008 with effect from 24.3.2008 are applicable for A.Y. 2008-09 and onwards. Therefore, the revenue authorities are bound to follow the mandatory provisions for calculation of disallowance u/s 14A. Therefore, we do not find any infirmity in the order of the CIT(A) upholding the action of the AO for disallowing the deduction u/s 14A read with rule 8D. The contention of the assessee that the AO without satisfaction being reached ....
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....aims for deduction of expenditure in relation to income which does not form part of the total income. (b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) The principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and nontaxable income of an indivisible business; (d) The basic principle of taxation is to tax net income. This principle applies even for the purpose of section 14A and expenses towards non-taxable income must be excluded; (e) Once a proximate cause for disallowance is established - which is the relationship of the expenditure with income which does not form part of the total income - a disallowance has to be effected. All expenditure under the provisions of the Act has to be disallowed under section 14A Income which does not form part of the total income is broadly adverted to as exempt income as an abbreviated appellation." 9. After considering these principles as emerged from the decision of Hon'ble Supreme Court in the case of Walfort Share and Stock Brokers P. Ltd. (supra), Hon'ble Jurisdictional High Court has held in....
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....facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must-be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the Legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to ....
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....ny administrative expenses in holding these investments. The AO has not brought on record any material to show that the assessee has incurred any expenditure in relation to the income which does not form part of the total income. Section 14A has within it implicit the notion of apportionment in the cases where the expenditure is incurred for composite/indivisible activities in which taxable and non taxable income is received but when no expenditure has been incurred in relation to the exempt income then principle of apportionment embedded in section 14A has no application. The object of section 14A is not allowing to reduce tax payable on the non exempt income by deducting the expenditure incurred to earn the exempt income. In the case in hand it is not the case of the revenue that the assessee has incurred any direct expenditure or any interest expenditure for earning the exempt income or keeping the investment in question. If there is expenditure directly or indirectly incurred in relation to exempt income the same cannot be claimed against the income which is taxable. For attracting the provisions of section 14A- "there should be proximate cause for disallowance which has relati....
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....the investments made by the appellant in the PSVs can be disallowed u/s 14A LW. Rule 8D because it cannot be termed as expense/ interest incurred for earning exempted income. Under the circumstances, Ld. Commissioner of Income Tax (Appeals) is correct in holding that disallowance of a further sum Rs. 40,556/- calculated@2%ofthedividend earned is sufficient. Under the circumstances, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals), hence we uphold the same." 13. In view of the above discussion and facts and circumstances of the case we agree with the view taken by this Tribunal in the above stated cases and accordingly hold that the assessee has brought out a case to show that no expenditure has been incurred for maintaining the 98% of the investment made in the subsidiary companies, therefore, in the absence of any finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the AO is not justified, accordingly the same is deleted." In view of the facts and circumstances of the case and when the Assessing Officer has not expressed or recorded any satisfaction by identifying the expenditure which ha....
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....below on this issue. This ground of the assessee's appeal is dismissed." In principle, we concur with the view of the co-ordinate bench of this Tribunal in assessee's own case and therefore if the interest bearing borrowed fund has been used by the assessee for the purpose of expansion of business forming part of work-in-progress then the proportionate interest has to be disallowed being capital in nature. However, the learned Authorised Representative of the assessee has submitted that the assessee was having its own fund which were sufficient for the expenditure incurred being part of the work-in-progress for the year under consideration. Therefore, to the extent of availability of own fund, the disallowance of interest is not justified. Thus the learned Authorised Representative has pleaded that the disallowance may be deleted. 6.2 On the other hand, the learned Departmental Representative has submitted that since the availability of the fund has not been verified by the authorities below and therefore this issue requires proper verification at the level of the Assessing Officer. 6.3 In view of the contention of the learned Authorised Representative that the assessee is h....
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....umbering to 70 persons free of interest either before the Assessing Officer or before the CIT (Appeals). 5. The CIT (Appeals) erred in restricting the disallowance of interest of Rs. 2,24,76,468 to Rs. 68,59,054 at 11% on account of capitalization of work-inprogress without appre4ciating that the assessee neither before the Assessing Officer nor before the CIT (Appeals) was able to furnish any evidence with regard to the utilization of loans other than work-in-progress and the disallowance of 15% was reasonable. 6. The CIT (Appeals) erred in computing the disallowance at Rs. 68,59,054 by holding that the Assessing Officer has not justified in computing the disallowance of Rs. 2,24,76,468 without finding as to where from the work in progress of Rs. 14,51,61,100 and carry forward balance of Rs. 6,23,55,045 were adopted and as to why the disallowance is computed at 11% as against 15% made by the A.O. 7. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed and that of the Assessing Officer be restored. 8. The appellant craves leave to add, to alter, amend or delete any of the grounds that ....
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....han which the loan was taken and the specific purpose was financed by the banks. Thus for the year under consideration none of the items of interest can be attributable to the 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." Following the earlier order of this Tribunal, we do not find any reason to interfere with the impugned order of the CIT (Appeals). 10. Ground No.4 is regarding disallowance of interest on account of interest free advances given to related parties. 10.1 We have heard the learned Authorised Representative as well as learned Departmental Representative and the relevant material on record. At the outset, we note that an identical issue has been considered b....
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....e appellant advanced interest-free loans to sister concerns amounting to Rs. 155.51 crores. Thus it can be concluded that the interest-free advances were out of the interest-free funds available with the appellant. The details of interest payment have already been extracted at para 3.6 above. A perusal of the said interest payment indicates that they were incurred for the purpose of business and they are allowable u/s 36(1) (iii) of the Act. There is no material available on record to show that interest -free funds are diverted towards interest-free advances to the sister concerns. Even otherwiseJ where the appellant had interest- free funds by way of capital and reserves or by way of interest-free deposits from customersJ there is an inference that borrowed funds are not diverted for non-business purpose. In such circumstancesJ there can be no disallowance. This is the ratio laid down by the Hon 'ble High Court of Allahabad in the case of Prem Engineering Pvt. Ltd. [285 ITR 554]. A similar view has been expressed interest-free funds generated or available with the company if the interestfree funds were sufficient to meet their investments. In the present case, the interst-free....
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....ee company could have involved its own money in its business instead of taking bank loans on interest.' [Courtesy: page 2 of Asst. order]. It is, however, the prerogative of the assessee as how to conduct its business. Further, it is very evident from the details furnished by the learned AR and also perusal of the Schedules to Profit & Loss account as at March, 31, 2007, it is obvious that the interest bearing loans obtained from the banks were availed for specific purposes, namely, working capital, KSBCL Advance, vehicle loans [motor cars, trucks] etc., [Copies of Balance Sheet/Schedules to P & L a/c as at March 31, 2007 are placed on record]. ITA Nos.1362 & 1363 if 2011 JBD Sugars & Distilleries Ltd., Bangalore. 9.5.2 We shall now analyse the case laws as to whether the AO was within her realm to disallow the interest amount of Rs. 10.97 crores. (i) CIT v. Reliance Utilities and Power Ltd (2009) 313 ITR 340 (BOM): (a) In that case, the assessee claimed deduction of interest on borrowed capital. The AO recorded a finding that the 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 ....
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....e Court held that "when there was no evidence brought on record by the Department for the Tribunal to hold otherwise than what had been concluded by way of any material; the assessee was eligible for allowance of interest." 9.5.3. Taking all the above facts into consideration and also in conformity with the judicial views on a similar issue (supra), we are of the considered view that the authorities below were not justified in resorting to disallow the interest claim of Rs. 10,97,85,319/-. It is ordered accordingly." Thus, for the earlier assessment year, the Tribunal found that the assessee was having sufficient funds for advancing interest free loan to the sister concern to the tune of Rs. 117.39 Crores. For the year under consideration, there is an increase in the interest free advances of about Rs. 37 Crores. Therefore to the extent of Rs. 117.39 Crores advanced in the earlier year the issue has been settled by the Tribunal that the assessee was having sufficient funds. The CIT (Appeals) has recorded that the 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 C....