TaxTMI 
TaxTMI 
TaxTMI 
2016 (7) TMI 1252
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....f own funds and not from the borrowed funds. Our attention was invited to page-12 of the assessment order, wherein, working of average value of investment has been provided. It was pointed out that for Assessment year 2005- 06 (vide order in ITA No.1629/Mum/2009), the issue of disallowance made out of interest expenditure (page-3, para- 5 onwards of the order) was discussed and decided in favour of the assessee, by further explaining that item no. 2 & 3 were confirmed by Hon'ble Bombay High Court. Plea was also raised that there was strategic investment by the assessee for which certain case laws (available at pages 59 to 130 of the paper book) were relied upon. It was also pleaded that there are only three transactions during the year and own business was demerged, where assessee got the shares out of non-cash transactions. The ld. counsel explained that with respect to one company, the Assessing Officer accepted the version of the assessee(Assessment year 2008-09) and in Assessment year 2007-08, the Ld. Commissioner of Income Tax (Appeal) himself allowed the claim of the assessee, against which no appeal was filed by the Department. This factual matrix was consented to be correct....
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....s is not allowable on merit. However, as it is clearly evident from the relevant portion of the Tribunal's order dtd. 10.9.09(supra) reproduced hereinabove, the claim of the assessee for depreciation on goodwill and non-compete fees has been allowed by the Tribunal by applying the rule of consistency as well as relying on the concept of "block of assets". As the issues involved in the year under consideration as well as all the material facts relevant thereto are admittedly similar in A.Y. 2003-04 and 2004-05, we respectfully follow the order of the Tribunal dtd. 10.9.09 (supra) and delete the disallowance made by the A.O. and confirmed by the ld. CIT(A) on account of assessee's claim for depreciation on goodwill and non-compete fees. Ground No. 1 to 3 of the assessee's appeal are accordingly allowed. 5. The issues relating to the disallowance made by the A.O. and confirmed by the ld. CIT(A) out of interest expenses and other expenses by invoking the provisions of section 14A are raised by the assessee in ground No. 4 to 8 of this appeal which read as under:- "4) The learned Commissioner of Income Tax (Appeals) erred in holding that disallowance under section 14A was required to....
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....of the relevant record, it was accepted by the A.O. himself while completing the assessment for the earlier years that the said amount was entirely utilised by the assessee for the purpose of its business and the same was not utlised for making any investment which fetched the dividend income. It was submitted that even the sum ofRs.10.39 crores borrowed by the assessee in the year under consideration was entirely utilized for the purpose of its business and only the own funds generated in that year were utilized for the purpose of making investment in shares. It was pointed out that a separate current account was opened and operated with IDBI Bank wherein surplus funds were deposited for making the investment in shares. It was contended that interest expenditure incurred by the assessee company thus was not at all attributable to earning of dividend income and no disallowance out of the said expenditure u/s 14A was called for. 7. The A.O. did not find the submission of the assessee to be acceptable. According to him, although the assessee had enough surplus funds to make investment in shares, he could have utilized the said funds for repaying the borrowings instead of making the ....
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....sions were made on behalf of the assessee before the A.O. as well as before the ld. CIT(A) to establish that the investment in shares was made out of its own funds and the borrowed funds ofRs.31.98 crores were entirely utilized for the purpose of its business. At the time of hearing before us, the ld. Counsel for the assessee has taken us through the copies of such submissions placed in his paper book to demonstrate that the entire amount of borrowed funds was utilized for the purpose of its business by the assessee company and the investment in shares was made by it out of its own funds. As pointed out by him, the said borrowed funds to the extent ofRs.21.59 crores were availed by the assessee in the earlier year and in the assessment completed for A.Y. 2004-05, the A.O. had accepted after verification of the relevant record that the borrowed funds to that extent were utilized by the assessee company for the purpose of its business and the investment in shares was made by it out of its own funds. As further pointed out by him, even the investment in shares in the year under consideration was made by the assessee company from a separate current account maintained in IDBI where the ....
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....ly allowed. The relevant portion from the aforesaid order is reproduced hereunder:- "10. As regards the issue relating to the disallowance out of common administrative expenses u/s 14A raised in ground No. 8, it is observed that this disallowance made by the A.O. atRs.28,35,440/- on pro-rata basis was restricted by the ld. CIT(A) to Rs. 13,77,000/- by applying Rule 8D of Income Tax Rules, 1962. As held by the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (ITA No. 626 of 2010 dtd. 12.08.2010), Rule 8D of the Income Tax Rules 1962 is applicable only prospectively i.e. from A.Y. 2008- 09. As further held by the Hon'ble Bombay High Court in the said case, the quantum of disallowance u/s 14A for the years earlier to A.Y. 2008-09 has to be worked out by adopting some reasonable method. In this context, the ld. Counsel for the assessee has submitted that in the earlier years, a similar disallowance made by the A.O. has been sustained by the ld. CIT(A) to the extent of 2% of the total exempt income earned by the assessee and the same being reasonable, the assessee has accepted it. We, therefore, direct the A.O. to verify this aspect from the assessment records of the....
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....39;s share holding in the said company is 45% only. Therefore, the appellant's share of profit and loss in the said company should have been only 45%. However, the appellant's share of profit/loss in the said company is 70%. The appellant has explained that as per laws/Rules of Abu Dhabi, Nonresident cannot have share capital of more than 45%. However, this restriction is not applicable in case of profit/loss sharing ratio. The appellant has explained that for getting more share of profit/loss i.e. 70%, it had invested / given an amount of Rs. 3.30 crore to that company as interest free loan/advance. Thus, the appellant has satisfactorily explained that the interest free loan of Rs. 3.30 crore has been given to the said company for the purpose of business only i.e. for getting more share of profit in that company. In the facts and circumstances, thedecision of Supreme Court in the case of S.A. Builders (supra) is applicable in appellant's case that the appellant has given interest free loan of Rs. 3.30 crore to the said company considering the commercial expediency. In other words, the appellant has given interest free loans to the said company wholly and exclusively fo....
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....der for ready reference:- "This appeal by the assessee is directed against the order dated 11.04.2012 of CIT(A) for A.Y. 2009-10. The assessee has raised following grounds in this appeal:- 2. During the year under consideration the assessee earned dividend income of Rs. 14,14,000/- which is exempt u/s 10 (34). The assessee has disallowed a sum of Rs. 1,40,000/- u/s 14A. However the AO did notaccept the disallowance made by the assessee and proceeded to make the disallowance u/s 14A by applying Rule 8D. Accordingly, the AO made the disallowance of Rs. 7,61,37,727/- as per Rule 8D of Income Tax Rules. 3. Assessee challenged the action of AO before CIT(A) and contended that Rule 8D cannot be applied without recording the satisfaction that the claim of the assessee was not proper. It was further contended that the investment made by the assessee was strategic investment and in the subsidiary companies. Accordingly no expenditure was required to be incurred for maintaining the portfolio. CIT(A) did not accept the contention of the assessee and confirmed the disallowance made by AO. 4. Before us, the Ld. AR of the assessee has pointed out that though an identical issue was conside....
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....as vehemently contended that it is immaterial whether the investment is in subsidiary companies or in unrelated companies. The disallowance of expenditure u/s 14A has to be computed as per Rule 8D of the Income Tax Rules. The AO has calculatedthe amount of disallowance as per Rule 8D and, therefore, there is no question of accepting the disallowance made by the assessee which is not in accordance with the formula given in Rule 8D. The Ld. DR has submitted that for the purpose of disallowance under Rule 8D, the entire investment as well as the entire expenditure which is booked to the profit & loss account has to be taken into account. He has referred para 51 of the decision of Hon'ble Jurisdictional High Court in the case of Godrej & Boyce Manufacturing Co. Ltd (supra) and submitted that once the proximate relationship between the expenditure and the exempt income is established the disallowance has to be made as per Rule 8D. He has relied upon the orders of authorities below. 6. In rebuttal, the Ld. AR has submitted that Hon'ble High Court in para 32 and 33 has clearly laid down the principles for disallowance u/s 14A and held that sub section 2 does not ifso facto enable the AO....
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....sed." 8. As it is clear from the finding of Tribunal that the assessee failed to furnish the details of disallowance under section 14A and, therefore, the disallowance made by the AO was found by the Tribunal without any infirmity. For the year under consideration the assessee has specifically raised a point before the AO that 97.82% of the investment is in the subsidiary companies and joint venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basisbecause these investments are strategic in nature in the subsidiary companies on long term basis and, therefore, no direct or indirect expenditure is incurred. We find that the department has not disputed this fact that out of the total investment about 98% of the investment are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. Therefore, prima facie the assessee h....
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....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 assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year beginning on or before the 1st day of April, 2001." (The proviso was inserted earlier by the Finance Act of 2002 with retrospective effect from May 11, 2001) 33. Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning ....
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.... section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154." 10. It has been made clear by the Hon'ble High Court that sub-section (2) does not ifso facto empower the AO to apply the method prescribed by Rules straightaway without considering whether the claim made by the assessee is correct. 11. The assessee has relied upon various decisions of this Tribunal wherein an identical issue has been considered. In the case of Garware Wall Ropes Limited Vs. Addl. CIT (supra), the Tribunal while deciding an identical issue has held in para 2.4 as under:- "We have considered the rival submission and carefully perused the relevant records. So far as the issue regarding disallowance u/s 14A in the case where no dividend has been received, the same is covered against the assessee by the order of Tribunal in assessee's own case for the assessment year 2008-09, wherein the Tribunal has followed the decision of special bench of Tribunal while deciding the issue. Therefore, we do agree with the finding of the Tribunal on this point. Further since the assessee has raised the new plea in t....
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....rred any expenditure in relation to income which does not form part of the total income and if so to quantify the expenditure of disallowance. The AO has not brought on record any fact or material to show that any expenditure has been incurred on the activity which has resulted into both taxable and non taxable income. Therefore, in our view when the assessee has prima facie brought out a case that no expenditure has been incurred for earning the income which does not form part of the total income then in the absence of any finding that expenditure has been incurred for earning the exempt income the provisions of section 14A cannot be applied. Accordingly we delete the addition/disallowance made by AO u/s 14A r.w. Rule 8D." 12. A similar view was taken by the Delhi Bench of this Tribunal in the case of M/s Oriental Structural Engineers (P) Ltd (supra) which has been confirmed by the Hon'ble Delhi High Court vide decision dated 15.01.2013 in para 6.3 as under:- "'6.3 We have carefully considered the submissions and perused the records. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that only interest of Rs. 2,96,731/- was paid on funds utilized fo....
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....ted the claim and in Assessment year 2007-08, the Ld. Commissioner of Income Tax (Appeal) allowed the claim of the assessee against which no appeal was filed by the Department. The ld. counsel invited our attention to pages 131 to 134 of the paper book. This factual matrix was not controverted by the Revenue. In the absence of any contrary facts/case laws, we find merit in the claim of the assessee. It was also explained that for Assessment year 2008-09 in computation of income (page-44 of the paper book), the assessee disallowed 24.60 lakhs and in the revised return (page-53 of the paper book) in the calculation Rs. 13.66 was reduced and nothing was on account of interest. Thus, it was pleaded that the same may be restricted to Rs. 13.66 lakhs. To sum up grounds no. 1 to 8 with respect to u/s 14A of the Act read with rule 8D(2)(iii), we find that so far as golden feeds products Ltd. is concerned, the value of investment as on 01/04/2007 is Rs. 5 lakh and as on 31/03/2008 is also Rs. 5 lakh. The investment made prior to AY 2008-09 is Rs. 5 lakh and no investment was made during the present assessment year, which is verified from the note given by the assessee. Even, in the case of ....
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....e Poultry Feed Products from the assessee. Similar is the situation for Colgate Palmolive India Ltd. So far as Cauveri Oil Plantation is concerned, the investment was made out of own funds and the oil palm plantation business was started by the assessee company in early 90s, thus, it is a strategic investment. Considering the totality of facts and in the absence of any contrary material from the Revenue side, we find merit in the explanation of the assessee and accordingly direct the Assessing Officer to examine the claim of the assessee and decide afresh in the light of our aforesaid observation. The assessee be given opportunity. 4. The next ground i.e. ground no.9 is with respect to making disallowance u/s 14A while computing minimum alternate tax u/s 115JB of the Act. The argument on behalf of the assessee is that the amount should be restricted to 13.66 lakhs or 2% of the dividend income for calculating income for the purposes of section 115 JB of the Act. The ld. Assessing Officer is directed to examine the claim of the assessee. Thus, this ground is allowed for statistical purposes. 5. Now, we shall take up the appeal of the Revenue (ITA No.152/Mum/2012) Assessment year 20....