TaxTMI 
TaxTMI 
2017 (1) TMI 561
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....ircumstances of the case and in law, the learned CIT(A) erred in confirming the action of the Assessing Officer by disallowing Rs. 79.30 lacs u/s 14A read with rule 8D without appreciating that the Appellant had sufficient own funds for making the investments and most of the borrowings were taken for the purpose of business and not for making investments." 3. Briefly stated, the relevant material facts are like this. The assessee before us is engaged in the business of manufacturing glassware items, machinery required for glass and other industries. During the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has earned dividend income of Rs. 1,84,59,071/- which has been claimed as exempt under section 10(34) of the Act and that the aessee, on his own, offered expenses of Rs. 1,00,000/- as disallowance under section 14A towards administrative expenses. When the Assessing Officer probed the matter further, it was explained by the assessee that the interest bearing funds have not been used in making the investments from which the dividend income is earned. It was also explained that the borrowings from the bank are used for the purpose of which borro....
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....terest free advance the presumption has to be taken that interest free advances are from assessee's own funds, and, accordingly, when the assessee has sufficient interest free fund of his own much in excess of the investments in tax exempt yielding assets, presumption is to be taken that investment are out of interest free funds. It was also emphasised that it cannot be open to the Assessing officer to apply rule 8D without pointing as how the disallowance offered by the assessee on its own is inadequate. None of these submissions impressed the learned CIT(A). He was of the considered view that the Assessing Officer has properly recorded his dissatisfactions before invoking rule 8D and that where tax exempt investment are made out by common pool of funds, which has interest free as also interest bearing funds, it is reasonable to apportion such interest to tax exempt income yielding investment on a proportionate basis. The contentions of the assessee were thus rejected. While so rejecting the contentions of the assessee, the learned CIT(A) observed as under:- "5.3 I have considered the contentions of the AO and the submissions of the appellant. So far as the appellant's first co....
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....med that funds deployed for earning tax free income were entirely out of interest free funds and the entire interest cost is to be loaded on to activities resulting in taxable income. Merely because appellant had positive net worth or during the year, borrowings increased by a figure lower than investments made does not mean that entire tax free income yielding activities were carried out by deploying own or surplus funds. Where tax free income earning activities and taxable income earning activities are both carried out suing the common kitty of funds, it would be reasonable to apportion the interest burden between the two activities." 5. The learned CIT(A) further noted that the assessee has made disallowance of Rs. 1,00,000/- without there being any basis. A reference was made to the judgement of Hon'ble Kerala High Court in the case of CIT vs. Dhanalakshmi Bank Limited [(2011) 10 taxmann.com 213 (Ker)] and the judgement of Hon'ble Calcutta High Court in the case of Dhanuka & Sons Vs CIT [(2011) 12 taxmann.com 227 (Cal)] . The proposition supported by these judicial precedents were stated to be (a) that when no separate books of accounts are maintained, the disallowance by re....
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.... question. We will come to the correctness and legal sustainability of this proposition a little later, but, while on this issue, it is also important to bear in mind the fact that in the present case, the Assessing Officer has invoked rule 8D by observing that "assessee could not justify hat no interest bearing funds have been diverted for making investment from where it has earned exempt income". This observation of the Assessing Officer, in the light of the decisions of the Hon'ble jurisdictional High Court, is unsustainable in law, and, as there is direct guidance of Hon'ble jurisdictional High Court on this issue, we see no need to be guided by other Hon'ble High Courts, such as Hon'ble Kerala High Court and Hon'ble Calcutta High Court, relied upon by the CIT (A). The incorrectness of the Assessing Officer is evident from the fact that undisputedly the interest free funds of the assessee are far in excess of the investments yielding tax exempt income, and in such a situation, as held by Hon'ble jurisdictional High Court, in the case of CIT vs. UTI Bank Limited [(2013) 32 taxmann.com 370 (Guj)], has approved the stand of this Tribunal in following the principle, laid down by Ho....
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....on of disallowance of interest expenses under Section 14A of the Act by the learned Tribunal/CIT(A) is concerned, it is required to be noted that the AO made the disallowance under Section 14A of the Act on the ground that the assessee was not able to justify that the investments made in the shares and mutual funds amounting to Rs. 21,14,07,850/- was made out of the interest-free funds. However, it is required to be noted that both, the learned CIT(A) as well as the learned Tribunal have categorically found on the basis of the material on record that as such the assessee was having interest-free funds out of which the investment was made. Therefore, by observing in paras 6 to 9 extracted hereinbelow, the learned Tribunal has deleted the entire disallowance of Rs. 12,06,934/- made by the AO under section 14A of the Act. "6. We have heard the rival submissions and perused the orders of lower authorities and material available on record. The undisputed facts of the case are that the Assessing Officer observed that the assessee has made investment of Rs. 21,14,07,850/- and the assessee has paid interest on borrowed funds of Rs. 40,10,861/-. He also observed that the assessee h....
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....ved that the said expenses must have been incurred by the assessee in making the investments and therefore confirmed the disallowance of Rs. 6,22,228/- made by the Assessing Officer. The Authorized Representative of the assessee submitted that the assessee has earned divided income of Rs. 12,200/- as will be evidenced from the statement of accounts of the assessee at page 26 of the paper book for which disallowance of Rs. 6,22,228/- cannot be made. 9. We find that the Assessing Officer as well as the Commissioner of Income Tax (Appeals) could not pinpoint any error in the computation of disallowance made by the assessee of Rs. 2,00,000/- in earning tax free divided income. In the circumstances, in our considered opinion, disallowance of Rs. 6,22,228/- could not have been made by the Assessing Officer and confirmed by the Commissioner of Income Tax (Appeals). Our above view finds support from the decision of the Hon'ble Delhi High Court in the case of CIT v. Consolidated Photo & Finvest Ltd. (2012) 211 Taxman 184 (Del.). Therefore, we set aside the orders of lower authorities and delete the disallowance of Rs. 6,22,228/-. Thus, ground no.1 of appeal of the assessee is allowed....
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....ch a situation a reasonable presumption, even de hors the principle laid down by Reliance Utilities decision (supra), is required to be taken. In our considered view and given the fact that the lenders take all their precautions to ensure the end use, which is on record, it is reasonable to assume that these borrowings have been used for the stated purposes. The assessee has given reasonable evidence, as would be normally possible in such a situation, and, in the light of such evidence, there is no reason to resort to the presumption, leave aside reaching the conclusion, that these borrowings for specific purposes have been used in making investments in question. As regards inadequacy of disallowance, even during the course of proceedings before us, learned Departmental Representative could not demonstrate that the disallowance offered by the assessee suo motu is inadequate. In view of these discussions as also bearing in mind entirety of the case, we are of the considered view that authorities below were indeed in error in sustaining the impugned disallowance of Rs. 79.30 lakhs. We therefore delete the same. 11. In the result, ground no.1 is allowed. 12. In ground no.2, the ....
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....), shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956); or (b) being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956) is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company: Provided that while preparing the annual accounts including profit and loss account, - (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956) : Provided further that where the company has adopted or adopts the financial year und....
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....tions of the section are not relevant for the present case]. 30. A reading of the provisions of Sec.115JB(1) shows that when an Assessee is a company and the income-tax, payable on the total income as computed under this Act (under the normal provisions of the Act) in respect of any previous year relevant to the assessment year is less than prescribed percentage (this percentage keeps changing for various AYs) of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent. Book profit for the purpose of Sec.115JB of the Act has been defined by Expln.-1 below Sec.115JB(2) as net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956). Expln.1 below Sec.115JB(2) also provides for certain additions and deductions from the said profit where such sums have either been added or reduced while arriving at the profit as per profit and loss account for the relevant previous year prepared in accorda....
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....of the total income under the Act. If the Assessee satisfies the AO regarding the quantum of expenditure incurred in earning income which does not form part of the total income under the Act than that can be adopted for the purpose of addition under clause (f) of Expln.1 below Sec.115JB(2) of the Act. Rule 8D of the rules come into play only when there is no other basis for arriving at the quantum of expenditure incurred in earning income which does not form part of the total income under the Act. 34. In our opinion, the question formulated by the CIT(A) whether Sec. 14A of the Act read with Rule 8D of the rules can be imported into the provisions of clause (f) to Explanation (1) to section 115JB of the Act, is itself erroneous. The question to be asked is as to how to give effect to the provisions of clause (f) to Explanation (1) to section 115JB of the Act. We do not think that there is any prohibition to adopt the disallowance made by the AO u/s.14A of the Act read with Rule 8D of the rules, while computing total income under the normal provisions of the Act. The argument of the learned counsel for the Assessee that section 14A of the Act is very specific and is applicable on....
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....und no. 2 is thus also allowed. 16. In ground no.3, the assessee has raised the following grievance :- "3. Disallowance of foreign travel expenditure Rs. 9,74,612/- : 3.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming 75% of the disallowance made by the Assessing officer of expenditure on foreign travel incurred by the Appellant presuming it to be for non business purposes." 17. So far as this disallowance is concerned, the relevant material facts are like this. During the course of the assessment proceedings, the Assessing Officer noted that the assessee has incurred expenditure of Rs. 12,99,483 on UK and USA visit undertaken by Ms Y R Amin. It was stated by the assessee that this visit was undertaken to understand opportunities available in expanding and diversifying in the markets. It was also stated that Ms Amin had visited various manufacturing plants and interacted with key personnel, technology professionals and consultants et. The Assessing Officer was, however, not convinced with these explanations. He was of the view that "no tangible ad reliable evidence was filed to prove that the foreign visit of Ms Y R ....