TaxTMI 
TaxTMI 
2016 (6) TMI 205
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....e the assessment as the same was found to be erroneous in sofaras it was prejudicial to the interest of the revenue with the following directions : "(1) The Assessing Officer should cause necessary enquiries as per provisions of Section 14A r/w Rule 8D. (2) The Assessing Officer should verify the contentions of the assessee having regard to the accounts of the assessee. (3) The Assessing Officer should verify both direct as well as indirect expenditure for earning exempt income. (4) Where the expenditure incurred cannot be related to either taxable income or exempted income, the provisions of section 14A would be attracted and therefore, Assessing Officer would be justified in making disallowance in accordance with provisions of sub-sections (2) & (3) r/w Rule 8D if the assessment year is 2008-09 or any subsequent year. (5) If the Assessing Officer is not satisfied with the correctness of the claim(s) of the assessee having regard to the accounts of the assessee, he must record his satisfaction. (6) After recording satisfaction, the Assessing Officer should determine the expenditure incurred in relation to such income which does not form part of the total income, in accordanc....
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.... of treating the investment in partnership firm liable for disallowance u/s.14A. It was accordingly submitted that the investments in the partnership firm are not to be considered as exempt investments for the purpose of determining the disallowance u/s.14A. Finally it was submitted that there is no clear nexus that the assessee company has utilized the borrowed interest bearing funds for making in tax free investments. The total borrowed interest bearing funds as on 31-03-2008 is Rs. 84.05 crores which is far less than the investments made by the assessee company. It was reiterated that the assessee has its own surplus free funds far more than the tax free investments made and therefore in absence of any nexus to prove that the borrowed funds are utilized for earning tax free income, there is no question of making any disallowance u/s.14A. It was accordingly argued that under no circumstances any disallowance u/s.14A r.w. Rule 8D is called for. Various decisions including the decision of Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 were relied upon. 6. However, the AO was not satisfied with the arguments advanced by the assess....
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.... and 8D(3) made a disallowance of Rs. 2,70,46,829/-. 10. In appeal, the Ld.CIT(A) upheld the action of the AO for which the assessee is in appeal before us with the following grounds : "The following grounds are taken without prejudice to each other - On facts and in law, 1] The learned CIT(A) erred in confirming the disallowance u/s 14A r.w.r. 8D of Rs. 2,70,46,829/- on the ground that the assessee had incurred the above expenditure for earning exempt income and hence, the same was not allowable as a deduction while computing the business income for this year. 2] The learned CIT(A) erred in holding that the learned A.O. had made the disallowance u/s 14A r.w.r. 8D after recording his satisfaction that the claim of the assessee was not correct and therefore, the disallowance was justified. 2.1] The learned CIT(A) failed to appreciate that the satisfaction recorded by the learned A.O. was based on wrong presumptions and since the A.O. had not given any cogent reasons as to how the claim of the assessee was incorrect, the disallowance made u/s 14A was not justified at all. 3] Without prejudice to the above grounds, the assessee submits that the investments in shares of various g....
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....e u/s 14A r.w.r. 8D(2)(ii). 5] The learned CIT(A) erred in confirming the disallowance of Rs. 95,31,646/- made by the learned A.O. u/s 14A r.w.r. 8D(2)(iii) on the ground that the assessee had incurred indirect expenditure in relation to earning exempt income without appreciating that the learned A.O. has not recorded any objective satisfaction as to how the claim of the assessee is not correct and hence, the disallowance made u/s 14A r.w.r. 8D(2)(iii) is not justified at all. 5.1] The learned CIT(A) failed to appreciate that the assessee had not claimed indirect expenditure incurred in relation to earning the exempt income in the form of dividend from mutual funds and share of profit in partnership firms and hence, the disallowance of Rs. 95,31,646/- was not justified on the facts of the case. 5.2] Without prejudice to the above grounds, the assessee submits that the whole of the investments in mutual funds were sourced out of funds raised through IPO of shares of the assessee company and no expenses in respect of the IPO issue have been claimed by the assessee and therefore, the investments in mutual funds should have been excluded from the amount of tax free investments while....
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....which was kept in separate bank account maintained with HSBC and the said funds were temporarily utilised for investment in mutual funds which was redeemed as and when funds were required. However, the lower authorities have rejected the contention of the assessee without giving any justifiable reasons. He submitted that it was conclusively proved before the lower authorities that the mutual funds are not at all out of borrowed funds. Referring to the computation statement for A.Y. 2008-09, a copy of which is placed at page 12 of the paper book he submitted that entire IPO expenses of Rs. 1,55,31,359/- has been suo moto disallowed by the assessee in its computation statement. Referring to page 24 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to the balance sheet of the assessee company and submitted that the share capital has been shown at Rs. 75,31,00,480/- and reserves and surplus at Rs. 493,26,64,916/-. However, the AO in the body of the assessment order has reduced the net current assets shown at Rs. 134.6 crores and net fixed assets at Rs. 9.86 crores and has determined the own capital and free reserves of the assessee company at Rs. 424.05....
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....the investment in tax free investments. 16. So far as the indirect expenses are concerned the Ld. Counsel for the assessee referring to the computation statement submitted that the assessee has already disallowed the public issue expenditure on account of the IPO in the computation statement. Therefore, no disallowance is called for. Further, no satisfaction has been recorded by the AO on account of incurring of indirect expenses for earning tax free dividend income. Referring to the decision of the Pune Bench of the Tribunal in the case of ACIT Vs. Magarpatta Township Development and Construction Ltd. reported in 152 ITD 469 he submitted that the Tribunal in the said decision has held that where AO has not recorded any satisfaction as required by section 14A(2) and where the assessee claims that no expenditure was incurred for earning earned exempt income, the AO was not justified in invoking Rule 8D in computing disallowance u/s.14A of the I.T. Act. He accordingly submitted that the grounds raised by the assessee should be allowed. 17. The Ld. Departmental Representative on the other hand heavily relied on the order of the AO and the CIT(A). He submitted that the assessee has e....
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....isallowance. However, no specific satisfaction has been recorded for disallowance of indirect expenses. Referring to the decision of the Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. vs. JCIT vide ITA No.2012/PN/2013 order dated 21-07-2014 he submitted that the Tribunal in the said decision has held that in absence of any specific objective satisfaction recorded by the AO which is one of the mandates of section14A(2) no disallowance is called for. It has been held in the said decision that the AO must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the AO is not satisfied with the correctness of the claim made by the assessee he must record reasons for his conclusion. There has to be specific objective satisfaction recorded by the AO which is one of the mandates of section 14(2). In absence of the same recourse to Rule 8D of the Rules is not permissible. Therefore, where the AO in the instant case has not recorded any objective satisfaction to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act, then his action of invoking Rule ....
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....estment in debentures and NSC the income of which is not tax free. Therefore, the AO is not justified in including the same in the category of investment, the income of which is tax free. From page 46 of the paper book we find the total investment in subsidiary/associate companies, investment in mutual funds and the investment in partnership firms, the income of which is tax free is Rs. 334,79,88,547/-. The balance sheet of the assessee, a copy of which is placed at page 24 of the paper book shows the share capital at Rs. 75,31,00,480/- and free reserves and surplus at Rs. 433,26,64,916/-. Thus, the total amount of share capital and free reserves of Rs. 568.57 crores is much more than the amount of Rs. 334.80 crores invested in shares/mutual funds/partnership firms, the income of which is tax free. Under these circumstances we have to see the applicability of provisions of section 14A r.w.r.8D. 25. We find merit in the submission of the Ld. Counsel for the assessee that when no dividend is received on investment in shares worth Rs. 117,85,71,206/- in subsidiary/associate companies no disallowance u/s.14A is called for. We find the Pune Bench of the Tribunal in the case of Goyal Is....
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....ed for investment in mutual funds, therefore without contradicting the above submission of the assessee, the revenue authorities are not justified in invoking the provisions of section 14A on account of investment of Rs. 116.28 crores in mutual funds. 28. As regards the submission of the Ld. Departmental Representative that if the assessee had sufficient interest free funds, then there was no need to borrow is concerned we do not find any merit in the same. It is for the assessee to arrange its affairs and the revenue cannot direct the assessee to do its business in a particular manner. The Revenue has to see whether money borrowed has been utilized for the purpose of business or not. We find a somewhat similar issue had come up before the Hon'ble Bombay High Court in the case of Bombay Samachar Ltd. (Supra). In that case, the assessee had borrowed money prior to the relevant previous year on which interest had been paid and claimed the same interest expenditure in the profit and loss account. During the course of assessment proceedings the AO noted that assessee had given interest free funds to sister concerns. He, therefore, asked the assessee to explain as to why assessee shoul....
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....e assessee had sufficient amount of its own, the deduction could not be allowed. Similarly, the Madras High Court in Amna Bai Hajee Issa v. Commissioner of Income tax has held that in deciding whether a claim for interest on borrowing can be allowed the fact that the assessee had ample resources at its disposal and need not have borrowed, is not a relevant matter for consideration. The matter to be decided is whether the amount of interest was paid in fact in respect of the capital borrowed for business." We therefore do not find any merit in the arguments of the Ld. Departmental Representative that if the assessee had sufficient interest free funds, there was no need to borrow from financial institutions. 29. As regards the argument of the Ld. Departmental Representative that assessee was not able to demonstrate that no borrowed funds have been utilized by the assessee towards the investment in shares/mutual funds/partnership firms, the income of which is tax free is concerned, we find the assessee before the AO had demonstrated that no borrowed funds have been utilized for investment in tax free investments. Once the assessee submits that there is no diversion of interest beari....
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.... Ltd. (Supra). Thus, there is no conflict as sought to be made out by the impugned order. Thus, impugned order has proceeded on a fundamentally erroneous basis as the ratio decindi of the order in Godrej and Boyce manufacturing Co. Ltd. (Supra) had nothing to do with the rest of presumption canvassed by the petitioner before the Tribunal on the basis of the ratio of the decision of this Court in HDFC Bank Ltd. (Supra). 16. At the hearing Mr. Suresh Kumar, Learned Counsel for the Revenue urged that on the facts of this case no fault can be found with the order of the Tribunal. It is submitted that, the petitioner was not able to establish before the Assessing Officer and the CIT(A) that the amounts invested in the interest free securities came out of interest free funds available with the petitioner. In that view of the matter, it is submitted by him that the order of this Court in HDFC Bank Ltd.(Supra) would not apply to the facts of the present case. We are unable to understand the above submission. The Assessing Officer passed the Assessment order on 22nd December, 2010 under section 143(3) of the Act. The CIT(A) passed an order on 21st November, 2011 dismissing the petitioner's....
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....ld and direct accordingly. The grounds raised by the assessee are accordingly partly allowed. ITA No.1657/PN/2014 (A.Y.2009-10) : 33. Grounds raised by the assessee are as under : "The following grounds are taken without prejudice to each other - On facts and in law, 1] The learned CIT(A) erred in confirming the disallowance u/s 14A r.w.r. 8D of Rs. 2,62,33,383/- on the ground that the assessee had incurred the above expenditure for earning exempt income and hence, the same was not allowable as a deduction while computing the business income for this year. 2] The learned CIT(A) erred in holding that the learned A.O. had made the disallowance u/s 14A r.w.r. 8D after recording his satisfaction that the claim of the assessee was not correct and therefore, the disallowance was justified. 2.1] The learned CIT(A) failed to appreciate that the satisfaction recorded by the learned A.O. was based on wrong presumptions and since the A.O. had not given any cogent reasons as to how the claim of the assessee was incorrect, the disallowance made u/s 14A was not justified at all. 3] Without prejudice to the above grounds, the assessee submits that the investments in shares of various grou....
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..../s 14A r.w.r. 8D(2)(ii). 5] The learned CIT(A) erred in confirming the disallowance of Rs. 1,01,21,875/- made by the learned A.O. u/s 14A r.w.r. 8D(2)(iii) on the ground that the assessee had incurred indirect expenditure in relation to earning exempt income without appreciating that the learned A.O. has not recorded any objective satisfaction as to how the claim of the assessee is not correct and hence, the disallowance made u/s 14A r.w.r. 8D(2)(iii) is not justified at all. 5.1] The learned CIT(A) failed to appreciate that the assessee had not claimed indirect expenditure incurred in relation to earning the exempt income in the form of dividend from mutual funds and share of profit in partnership firms and hence, the disallowance of Rs. 1,01,21,875/- was not justified on the facts of the case. 5.2] Without prejudice to the above grounds, the assessee submits that the whole of the investments in mutual funds were sourced out of funds raised through IPO of shares of the assessee company and no expenses in respect of the IPO issue have been claimed by the assessee and therefore, the investments in mutual funds should have been excluded from the amount of tax free investments whil....