TaxTMI 
TaxTMI 
2016 (9) TMI 1270
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....enditure incurred in earning income which does not form part of the total income under the Act, should be excluded in arriving at the total income, the Assessee was bound to compute the disallowance of expenditure u/s.14A of the Act. The Assessee contended before the AO that it earned dividend from UTI Mutual Fund of Rs. 5,60,301/- and no expenses were incurred for earning this dividend income. 3. The AO however held that the reply of the Assessee was not satisfactory and he computed the disallowance u/s.14A of the Act, as follows: "The reply of the assessee is not acceptable in as much as that no expenditure for the earning of exempted income has been incurred as because no income can be earned without any expenditure especially where monetary fund is involved. In the instant case about Rs. Seven crore have been invested to earn this exempted income. Hence there is every possibility that interest pertaining to investment can be considered as expenditure for earhing the exempted income. For the calculation of disallowance u/s 14A, Rule 8D has been brought on the statute. In the circumstances as per calculation under Rule 8D the amount Rs. 6,48,411/- has been calculated as und....
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....e laid down in Sec.14A of the Act. Reference was made to the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce 328 ITR 81 (Bom.). It was next contended that the Assessee had sufficient own funds out of which the investments that yielded the tax free income was made. The Assessee gave the following particulars before the CIT(A) in this regard: "The total investment lying in Mutual Funds investment as at 31/03/2008 being Rs. 1,05,99,750/- ( as per audited accounts) , stands more than covered by the share capital and reserve funds balance available with the assessee as at 31/03/2008 , which totals to (Rs. 84.91 lacs plus Rs. 1.16 crores) ie. Rs. 2,0l crores , which is more than adequate to cover the said investment in Mutual Fund. Secondly, the fresh investment of Rs. 49.661acs has been made in Mutual Funds during the year is also covered by the appellants own funds generated from following sources: Increase in Subscribed and Paid up Share Capital ( Sch-1) 6.36 Addition to Reserve Funds less Utilisation ( Sch-2 ) 21.83 Out of Bank Withdrawal from C/A (Sch-6) 40.00 Available Own Funds ( not related to borrowings) 68.19 So....
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....dministrative and other expenses incurred by the assessee Cooperative society, which has facilitated in earning the dividend income cannot be rules out. In this connection. Reliance is placed on the decision of Hon'ble ITAT, Mumbai in the case of M/s Gherzi Eastern Limited (ITA No. 6562/Bom/94 dated 23/09/2002). Reliance is also placed on the decision of the Hon;ble Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. (155 ITR 120) and Bombay High Court in the case of Magganlal Chagganlal Pvt. Ltd. (236 ITR 456), which has expressed a similar view, that expenditure may be attributable to earning of dividend income." 6. The CIT(A) however confirmed the order of the AO by observing that disallowance u/s.14A of the Act can be made even if there is no exempt income and that if investments are made which can give raise to exempt income in future then expenditure incurred to make those investments can also be disallowed. From a reading of the CIT(A)'s order it is very clear that he has not addressed the issue raised by the Assessee before him and on which the AO has also given a remand report. 7. Aggrieved by the order of the CIT(A), the Assessee is in appeal before the....
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.... as were made before the CIT(A) and submitted that the AO has not arrived at a satisfaction regarding the correctness or otherwise of the claim of the Assessee that there was no expenditure incurred in earning the exempt income and therefore the disallowance u/s.14A of the Act has to be held as bad in law. In this regard he drew our attention to the decision of the ITAT Kolkata in the case of DCIT Vs. REI Agro Ltd. ITA No.1811/Kol/2012 order dated 14.5.2013(which was confirmed by the Hon'ble Calcutta High Court in GA No.3022 of 2013 order dated 23.12.2013), wherein it has been held that the AO has to examine the accounts of the Assessee and thereafter indicate cogent reasons as to why the claim of the Assessee that no expenses were incurred is being rejected. In the absence of such recording of satisfaction, the disallowance u/s.14A of the Act was held to be not sustainable. The learned counsel also drew our attention to the profit and loss account of Assessee at page-12 of the Paper Book and highlighted that interest received by the Assessee was a sum of Rs. 1,41,33,573.58 whereas the interest paid only Rs. 71,15,579. He drew our attention to decision of ITAT Kolkata Bench in the ....
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....ntion of the Legislature since the inception of the Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. The proposed amendment will take effect retrospectively from April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent assessment years." 14. Sub-sections (2) and (3) of 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 as....
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....id down that the assessee has to make a claim (including a claim that no expenditure was incurred) with regard to expenditure incurred for earning income which is not chargeable to tax. Such a claim has to be examined by the AO and only if on an objective satisfaction arrived at by the AO that the claim made by the assessee is not correct, can the AO proceed to apply the computation mode as specified in Rule 8D(2) of the Rules. 18. In the present case, the assessee has taken a stand that no expenditure was incurred to earn exempt income and therefore no expenditure can be disallowed as expenditure incurred in earning exempt dividend income. As per the provisions of Sec.14A(3) of the Act, even in such a situation, the AO has to follow the mandate laid down in Sec.14A(2) of the Act, i.e., he has to examine the claim of the Assessee in the light of the books of accounts of the Assessee. If the AO does not agree with the claim of the Assessee having regard to the books of accounts of the Assessee, then is it mandatory for him to resort to Rule 8D of the Income Tax Rules, 1962 to quantify the disallowance u/s.14A of the Act? A plain reading of Sec.14A(2) of the Act shows that the leg....
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....nce u/s 14A as made by the assessee is under estimation. The satisfaction contemplated u/.s 14A (2) of the Act is not merely restricted to rejecting the claim made by the assessee and the disallowance to be made u/s 14A of the Act but also includes substituting the claim made by the assessee on any other reasonable basis as the AO deems it fit. In such circumstances the correctness of the AO's judgment can be reviewed but it cannot be said that the AO had no jurisdiction to do so and AO ought to resort only to the provision of Rule 8D of the Rules. In other words Rule 8D is not automatic and can be resorted to by the AO only as a measure of last resort. 19. In the present case the only investment that yielded tax exempt income was investiment in UTI mutual fund. As on 31.3.2007 the investment in UTI mutual fund was Rs. 56,33,712.76 Ps. which increased to Rs. 1,05,99,750/- as on 31.3.2008. Therefore during the previous year there was an increase in investment in UTI mutual fund of Rs. 49.66 Lacs. From the submissions made by the Assessee before CIT(A), it has been claimed by the Assessee that the availability of own funds of the Assessee was Rs. 68.19 lacs. This has not been rebu....
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....rked out above of Rs. 40,583.66 Ps., in my view would be just and appropriate, in the facts and circumstances of the present case. I accordingly, restrict the disallowance u/s.14A of the Act to a sum of Rs. 40,583.66 Ps. 22. ITA No. 1983/Ko/2014 is accordingly partly allowed. ITA No.1984/Kol/2014: (A.Y. 2009-10) 23. As far as AY 2009-10 is concerned, there was no exempt dividend income. Nevertheless, the AO invoked provisions of Sec.14A of the Act and made a disallowance of Rs. 5,77,220 by applying the formula prescribed in Rule 8D(2)(ii) and (iii) of the rules. The revenue authorities held that even in the absence of exempt income disallowance u/s.14A of the Act can be made and in coming to the above conclusion, the revenue authorities relied on the decision of the Special Bench of the ITAT in the case of Cheminvest Vs. ITO 121 ITD 318 (Del)(SB). 24. The learned counsel for the Assessee filed before us a copy of the decision of the Hon'ble ITAT Chennai Bench in the case of ACIT Vs. Mr.M.Baskaran ITA No.1717/Mds.2013 order dated 31.7.2014 wherein the Chennai Bench held that there can be no disallowance of expenses u/s.14A of the Act when there is no exempt income earned....
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....752/- made by the Assessing Officer was in order. " 8. The Gujarat High Court in the case of CIT Vs. Corrtech Energy Pvt.Ltd.(supra) : held as under:- "We have given our thoughtful consideration to the facts and the decision relied upon by the Id AA. The Hon'ble Punjab & Haryana High Court in the case of CIT vs. Winsome Textile Industries Ltd. reported at (2009) 319 ITR 204(P&H) has held that in the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no epplicetion. In this case also, the assessee has not claimed any exempt income in this year. Therefore, respectfully following the judgement of Hon 'ble High Court of Punjab & Haryana in the case of CIT vs. Winsome Textile Industries Ltd. (supra), we hereby allow this ground and direct the AO to delete the addition. Therefore, ground Nos 1 to 1.2 raised by the assessee in its cross objection are allowed. " 4. Counsel for the Revenue submitted that the Assessing Officer as well as CIT(Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 2009-2010 Since in the present case, we ar....
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....llowed u/s. 14A of the Income Tax Act? (B) Whether on the facts and in the circumstance of the case and in law the Hon'ble Tribunal was right in. holding that the Assessing Officer cannot consider notional interest on deposit received by the Assessee Company while arriving at the fair market value uls.23(1) (a) of the Income-tax Act?" 2. In so far as Question (A) is concerned, on facts we find that there is no profit for the relevant assessment year. Hence the question as framed would not arise. " 10. Similar view has been taken by the Hon'be Punjab & Haryana High Court in the case of CIT Vs. M/s. Lakhani Marketing Incl. in ITA NO.970 of 2008 dated 2.4.2014. The Hon'ble High Court while affirming the decisions of CIT(A) as well as the Tribunal in deleting the disallowance made under section 14A observed as under:- "7. After hearing learned counsel for the parties, we do not find any merit in :the appeals. 8. The primary -issue that arises for consideration in these apepals is whether the CfT(A) as well as the Tribunal were right in allowing deduction of interest liability out of other income and the claim of the revenue to disallow the same un....
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....h as the entire income of the assessee is taxable under the Act. Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relating to that part of income is claimed by the assessee as deduction. In such cases only, the expenditure relating to the exempted income can be disallowed and not otherwise. Since in the present case the entire income is found to be taxable, no disallowance can be made under section 14A of the Act .' 10. Moreover. the AO has not established the nexus between invested funds and the interest bearing funds. since the investments in shares are in the years 1995-96, 1998- 99 and 1999-2000 and the interest disallowance is for the assessment years 2000-01 and 2001 -02. On the contrary perusal of the balance sheet for the year ending 31.3.1995, 31.3.1998 and 31.3.1999. it is clear that interest bearing funds have not been utilized for investment for purchase of shares. 11. For the aforesaid reasons, we see no reason to interfere with the order of CIT(A) concerning assessment year 2000-01 and 2001-02 and hence the decision of CIT (A) in deleting the disallowance of i....