TaxTMI 
TaxTMI 
2017 (2) TMI 647
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.... applying the provisions of Rule 8D(2)(ii) to the interest paid as opposed to the net interest earned by the appellant? The appellant also raised the following question of law which it did not press:- iv) Whether in facts and circumstances of the case, the Income Tax Appellate Tribunal had fallen in error in not excluding the value of investment in subsidiaries from the computation under Rule 8D? 3. The appellant filed its return of income declaring a business income of Rs. 1,05,52,20,790/-. The case was taken under scrutiny. The assessee derives income from the manufacturing and sale of tractors, harvester combines, forklifts and components/spares. During the assessment year 2008-09 it declared a profit of about Rs. 97.10 crores on a turnover of about Rs. 988 crores. 4. The Assessing Officer sought details of the bifurcation of the expenses incurred on exempt income and taxable income and called upon the assessee to show-cause why the expenses attributable to exempt income should not be disallowed on pro-rata basis and added to the returned income. The Assessing Officer rejected the assessee's contention that no expenditure was incurred for earning th....
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....4.03 lacs is made to the returned income of the assessee. Penalty proceedings u/s 271(1)(c ) of I.T. Act for concealment/furnishing inaccurate particulars have been initiated separately.". 5. Before the CIT (Appeals) the assessee relied upon the fact that for the assessment year 2004-05 the issue had been settled in its favour by the Tribunal and that an appeal against that order had been dismissed by this Court in ITA No. 453 of 2010. The CIT (Appeals), however, noted that the appellant ultimately admitted that the facts in that year and the facts in the assessment year in this appeal were not the same as in the assessment year 2004-05 the addition made under section 14A was deleted mainly on the ground that the investments in the shares of the Indian Companies had been made in the past years and the dividend income from those investments was claimed as exempt in the year 2004-05 and that no part of the interest expenditure was attributable to those investments. On the other hand in the assessment year 2008-09 which falls for consideration, fresh investments yielding tax free income had been made. Moreover the facts of the assessment year 2009-10 were similar to the assessment ....
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....recorded his satisfaction also that expenditure is incurred for earning the tax free income. Moreover, the appellant has also not substantiated with proof that investments are not made out of borrowed fund. Under the facts and circumstances of the case, disallowance of expenditure is called for under the provisions of section 14A on the tax free income earned from the investments etc. The appellant himself has also given a suo moto calculation for disallowance to be made under Rule 8D(ii) and has also contended that the method adopted by the A.O. is not correct. The case laws cited by the appellant are distinguishable as rule 8D has not been apparently considered therein. Considering the entirety of the facts, I am of the opinion that the tax free income calls for disallowance under section 14A. The A.O. is directed to verify the working given by the appellant and thereafter apply rule 8D to compute the disallowance under section 14A. The A.O. during the course of assessment proceeding has made the additions u/s 14A of the I.T. Act'61 in line with previous year and initiated penal proceedings. As discussed above, because of the changed circumstances in this year, in my opinion, the....
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....ade." Although paragraph-19 refers to the assessment year 2009-10, it is a general proposition. For reasons we will shortly state we are entirely in agreement with the observations made in paragraph-19. 9. We had reserved the judgment in this appeal. Subsequently Mrs. Suri, the learned senior counsel appearing on behalf of the appellant-assessee requested us not to deliver the judgment stating that she had come across certain judgments in view of which our judgment dated 19.09.2016 in Commissioner of Income Tax (Central) Ludhiana v. M/s Hero Cycles Limited, Ludhiana, ITA No. 44 of 2003 which was relied upon by Mr.Klar for the respondent is per-incurium. By our order dated 01.12.2016, we recorded that this appeal alongwith certain other appeals had been placed on board for further arguments in the circumstances and for the reasons stated in our order dated 30.11.2016 passed in ITA Nos. 457 and 461 of 2015. In the order dated 30.09.2016, we recorded that even on an earlier occasion Mrs. Suri requested us not to deliver the judgment in this matter as she contended that our judgment dated 19.09.2016 in ITA No. 44 of 2003 Commissioner of Income Tax, Ludhiana v. M/s Hero Cycles Ltd....
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....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." "RULE 8-D [Method for determining amount of expenditure in relation to income not includible in total income. 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- a. the correctness of the claim of expenditure made by the assessee; or b. the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- i) the amount of expenditure directly relating to income which does not form part of total income; and ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to ....
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....the assessee claims that no expenditure has been incurred by him in relation to exempt income. The opening words of sub- section (3) make the provisions of sub section (2) applicable in relation to cases under sub section (3). Thus where an assessee claims that no expenditure has been incurred by him in relation to exempt income, the Assessing Officer can resort to Rule 8D only if having regard to the accounts of the assessee he is not satisfied with the correctness of the claim of the assessee that no expenditure has been incurred by him in relation to the income which does not form part of the total income under this Act. 13. Thus under sub sections (2) and (3) of Section 14A, an Assessing Officer can resort to Rule 8D only if he is not satisfied with the correctness of the assessee's claim in respect of the expenditure in relation to the income which does not form part of the total income under the Act or if he is not satisfied with the correctness of the assessee's claim that no expenditure has been incurred by him in relation to such income. 14. It is not necessary that the conditions specified both in sub-section (2) and sub-section(3) must be satisfied in order to enab....
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....ee 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 the prescribed method is mandated by law. Sub section (3) of Section 14A provides for the application of sub section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an Assessment Year beginning on or before 1 April 2001 either to reassess under 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." 16. A Division Bench of the Delhi High Court has taken a similar view in Maxopp Investment Ltd. v. Commissioner of In....
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....of 2013, where the Division Bench held:- "Section 14A of the Act requires the Assessing Officer to record satisfaction that interest bearing funds have been used to earn tax free income. The satisfaction to be recorded must be based upon credible and relevant evidence......................................" 21. The judgment in Maxopp Investment Ltd. (supra) also supports this view namely that the Assessing Officer must record reasons for not being satisfied with the correctness of the assessee's contentions with regard to the aspects mentioned in sub sections (2) and (3) of Section 14A. It is true that the Delhi High Court merely states that such rejection must be for disclosed cogent reasons. The disclosure, however, can only be in writing. It can hardly be suggested that the disclosure remains in the Assessing Officer's mind. The assessee is entitled to test the basis of the rejection of his contentions. This can be done only if the Assessing Officer records his reasons for his not being satisfied in writing. 22. The next question, therefore, is whether the Assessing Officer has disclosed cogent reasons for invoking the method prescribed in section 14A(1), namely Rule 8D.....
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.......... ....... 80-AA. Computation of deduction under Section 80-M Where any deduction is required to be allowed under Section 80-M in respect of any income by way of dividends from a domestic company which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, the deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act (before making any deduction under this chapter) and not with reference to the gross amount of such dividends." 16. Admittedly, Section 80M applies only to income from other sources. Both the counsel agreed that in view of the judgment of the Supreme Court in Distributors (Baroda) P. Ltd. vs. Union of India and others, [1985] 155 ITR 120, it is the net dividend on which the deduction is to be determined for the purpose of Section 80M. 18. Mr. Mittal contended that in the present case the assessee's gross dividend is also the net dividend as the assessee has not incurred any expenses for earning the dividend received. No amount had been borrowed and no interest was paid in connection therewith. 19A....
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....ied in presuming that some expenditure had been incurred for the purpose of earning the dividend. Even if the investments yielding the dividend are in group companies, it cannot be said that no expenditure for making the investments which yielded the dividend had been incurred. For instance there is a decision making process that is undertaken before making the investment. Group companies do not blindly invest in each other. Even the decision whether or not to invest in the group companies requires application of mind. If the investment is merely to yield the dividend the management of the investing company is bound to apply its mind as to whether it would be a prudent investment or not. Even if an investment is only for the larger benefit of the group itself or for the benefit of the particular company in the group, the management of the investing company would have to apply its mind on a variety of issues including as to whether the investment would serve this purpose; whether the investment would be detrimental to the investing company and to weigh the pros and cons of such investment for itself and for the members of the group. Further the management of the funds on a regular b....
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....e of shares referred to therein and that, therefore, no disallowance was warranted under section 40A. The entire discussion by the Tribunal was related to whether the assessee had made the investment for purchase of shares out of the borrowed funds or invested its own funds. The question of administrative expenses and the effect thereof on Section 14A was neither raised before nor decided by this Court. Our judgment in Commissioner of Income Tax v. Hero Cycles Ltd. [2010] 323 ITR 518 (P&H) cannot be held to be per-incurium in view of the judgment of Commissioner of Income Tax v. Winsome Textile Industries (supra). 29. For the same reason our judgment in Commissioner of Income Tax (Central) Ludhiana v. Hero Cycles Ltd. [2016] 74 Taxmann.com 254 (P&H) cannot be said to be per-incurium in view of the judgment in Commissioner of Income Tax v. Hero Cycles Ltd. [2010] 323 ITR 518 (P&H). Here again the Division Bench set out the observations of the Tribunal in considerable detail and we will presume, affirmed them. These observations make it clear that the discussion related to the utilization of funds. The assessee contended that the entire investment had been made out of the dividend....
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....incurred, disallowance under section 14A cannot stand. In the present case, finding on this aspect, against the Revenue, is not shown to be perverse. Consequently, disallowance is not permissible. We have taken this view earlier also in I.T.A. No. 504 of 2008 in CTT v. Winsome Textile Industries Ltd., [2009] 319 ITR 204 (P&H), (decided on August 25, 2009), wherein it was observed as under (page 207): "The contention raised on behalf of the Revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this court in CIT v. Abhishek Industries Ltd., [2006] 286 ITR 1 and, therefore, disallowance under section 14A was justified." These observations are in the context of the nature of the funds utilized/deployed for the purpose of making investments. As is evident from the first sentence in paragraph-5, the Division Bench proceeded on the finding of fact that the investment was out of dividend proceeds i.e. the assessee's own funds. It is with respect to such a situation that the Division Bench rejected the contention....
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....ssessing Officer had failed to prove that the interest bearing fund was used by the assessee and the Tribunal affirmed the same. The question of administrative expenses and the presumption to be drawn in respect thereof were neither raised before nor decided by the Division Bench. 31. Mrs. Suri submitted that the Assessing Officer can resort to Rule 8D only if he determines that the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income under the Act is incorrect or where he determines that the assessee's claim that no expenditure has been incurred by him in relation to such income is incorrect. She further submitted that in order to come to such a conclusion the Assessing Officer must first determine the amount of expenditure incurred in relation to exempt income or he must determine that no expenditure was incurred in relation to exempt income for it is only then that he would be in a position to come to the conclusion that he is not satisfied with the correctness of the assessee's claim in either case. 32. The first part of Mrs. Suri's submission is well founded but not the second. Both parts require a consider....
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.... conclusion that the claim is incorrect but would be unable to assess the extent of the inaccuracy. That is precisely the purpose of Rule 8D. For instance in the present case, the Assessing Officer was entitled to presume that a part of the expenses from the common fund are attributable to the expenditure incurred for earning the exempt income. He was entitled to resort to Rule 8D without determining the amount expended by the assessee towards earning the exempt income. Indeed if he could have done so, it would not have been necessary for him to resort to Rule 8D at all. 37. It follows, therefore, that Mrs. Suri's submission that a determination means an actual quantification of the expenditure incurred for earning exempt income is erroneous. As Mr.Klar rightly pointed out an Assessing Officer can on the basis of inferences, adverse inferences and reasonable presumptions come to the conclusion that the claim of the assessee in relation to such expenditure is not correct. 38. In the case before us, the Assessing Officer cannot be faulted for not being satisfied with the claim of the assessee. As we noted earlier the Assessing Officer was entirely justified in presuming that th....
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.... amount in clause (ii) of sub rule (2) of Rule 8D, would be nil where the assessee establishes that it has not incurred any expenditure by way of interest during the previous year to earn the exempt income. Mrs. Suri's submission that if the value of clause-2 of Rule 8D is nil, Rule 8D would be inapplicable altogether is erroneous. Rule 8D is applicable whether the amount computed in respect of any part of it is nil or not. One variable may be nil and others may have a positive value. A nil value does not make the rule inapplicable. It only reflects upon the aggregate of the amounts determined under the three sub clauses of sub-rule (2). 44. Further to establish this, the assessee is entitled to invite the Assessing Officer to raise a presumption or draw inferences permissible in law. For instance, if an assessee establishes that its interest free funds were equal to or more than the interest bearing funds, it would be open to it to contend that presumption arises that the expenditure for earning exempt income was incurred from out of its interest free funds. By our order and judgment dated 06.09.2016 in Commissioner of Income Tax, Jalandhar-1, Jalandhar v. M/s Max India Ltd.....