TaxTMI 
TaxTMI 
2017 (3) TMI 1042
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....culture activities which is taxable under state agriculture income tax, beyond the purview of Central Income Tax and on the same issue SLP is pending is the case of AFT Industries. 2. The Ld. CIT(A) erred in law as well as on facts in holding that the disallowance u/s. 14A is not applicable in this case, ignoring the fats that the assessee failed to prove that borrowed found was not used for investment through fund flow statement with date of transactions. 3. The Ld. CIT(A) erred in law as well as on facts in deleting the disallowance u/s 14A for computing book profit u/s. 115JB." 3. The first issue raised in this appeal is whether the ld. CIT-A is justified in deleting the disallowance of expenditure incurred for Rs. 57,41,347/- towards the cess on green leaf from composite income. 4. The brief facts of the case are that the assessee is a limited company and engaged in the business of cultivation, manufacture and sale of tea. The AO during assessment observed that the assessee had debited a sum of Rs. 57.41 lacs under the head 'Cess on Green Leaf' which were paid to Governments of Assam. The AO placed reliance on the decision of the Hon'ble Gauhati High Cou....
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.... internal accruals only. However, the AO during the course of assessment proceedings observed that the disallowance u/s 14A offered by the assessee is not in accordance with the provisions of rule 8D of Income Tax Rules 1962 (hereinafter referred as 'the Rule'). The AO further observed that the investments have been made out of the mixed bank account maintained by the assessee. Therefore, the claim of the assessee that no borrowed fund has been utilized in making the aforesaid investment is not maintainable. Accordingly the AO invoked the provisions of Rule 8D of the Rule r.w.s. 14A of the Act and worked out the disallowances as under : Direct expenses Nil Interest expenses 38,28,749.00 Administrative expenses 7,64,556.00 The aforesaid amount was disallowed under the provisions of rule 8D read with section 14A of the Act and added to the total income of the assessee. 9. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted as under : 1. The surplus fund has been invested in shares and securities. The decision for the investment was taken by the executive chairman of the company who has been vested wi....
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....apital loan have been used in the aforesaid investments. 6. The assessee further submitted that for making the disallowance as per rule 8D the investment which has given dividend income in the year under consideration will only be considered for the purpose of disallowance. The ld. CIT(A) after considering the submission of the assessee deleted the addition by AO by observing as under:- "4.2 I have examined the assessment order as well as the contention of the appellant. The appellant has submitted that no direct expenses have been incurred for earning of exempt dividend income. It is observed that the appellant has suo-motto identified and offered 10% of office expenses of Rs. 2,17,552/- of its Executive Chairman office at Delhi who are engaged in taking investment decision. It is observed that the said basis was also followed in subsequent year which has been accepted in assessment and no disallowance was inflicted u/s 14A. The Assessing officer has not given any finding for rejecting the basis adopted by the appellant and applying Rule 8D. The appellant has relied upon various judgments wherein it has been held that provisions of Rule 8D comes into play only when the AO....
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.... were utilised for making investment. The appellant has placed reliance on the recent decision of jurisdictional Kolkata Tribunal in the case of Rei Agro Ltd. -vs.- DCIT [2013] 3S taxmann.com 404 (Kolkata - Trib.) to support its argument. 4.6 The appellant's argument in respect of non-disallowance of interest cost under Rule BD(2)(ii), merits consideration. The appellant has placed sufficient evidence on record to prove that investment were funded out of equity raised during the year/reserves and sale proceeds of investment sold. The Assessing Officer argument that the investment were made out of mixed funds does not by itself prove that the loan funds were utilized in making investment when the appellant has brought various evidence of funding of investment. 4.7 Even otherwise it is observed that the loans on which interest cost has been incurred by the appellant were specific purpose loan to meet working capital need/other specific purpose and were not permitted for investment in shares. It is observed that in the case of Dhanuka & Sons the appellant had failed to provide any evidence of the fact that the investment were made out of owned funds. However, in the instant cas....
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....er Rule 8D(2)(iii) amounts to Rs. 1,06,531/- being lower than the amount identified and offered by the appellant. 4.10 It is further observed that in AY 2010-11, the appellant adopted similar methodology while considering the amount disallowable u/s 14A of the Act. The same was duly been accepted by the Assessing officer and no further disallowance has been inflicted. Hence, the disallowance of Rs. 5,93,305/- as made by the Assessing officer is deleted and the amount as computed by the appellant in its return of income is considered for addition under section 14A of the Act." Being aggrieved by this, Revenue has come up in appeal before us. 10. Before us Ld. DR for the Revenue submitted that the finding of Ld. CIT(A) that assessing officer has not given any finding for rejecting the basis adopted by assessee and applying Rule 8D is not correct. As the A.O. had discussed although in brief at last Para of the assessment order the reasons for rejecting assessee's claim and applying Rule 8D. The submission filed by assessee for the source of investment is a fresh submission not placed before the assessing officer. The Ld. CIT(A) without allowing the opportunity to the A....
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....at portion by borrowed funds. It is exactly due to such a situation which has necessitated the introduction of Rule 8D by the CBDT so as to standardize the procedure for disallowance u/s 14A. So keeping all these in view and also the provisions of sub-sections (2) and (3) of sec. 14A and Sub-rule(l) of Rule 80, assessing officer had rightly invoked the said Rules for determining that portion of interest which is to be disallowed u/s 14A. Ld. CIT(A)'s observation was not correct more so when no opportunity was allowed to A.O. under Rule 46A to examine the fresh submission made by assessee. So Ld. CIT(A)'s decision deleting the disallowance of Rs. 38,28,749/- u/s 14A read with Rule 8D(2)(ii) should be reversed. Now coming to the Ld. CIT(A)'s observation regarding disallowance made under Rule 8D(2)(iii), Assessing officer had made a disallowance of one half percent on the average of total investments over a period of two years. At para-4.8 and 4.9 of his order, Ld.CIT(A) has quoted the judgment of this Tribunal in the case of Rei Agro Ltd. vs DCIT reported in 35 taxman.com 404 where the reasoning given is that while determining the average of investment, only those inve....
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..../s. 14A and has arbitrarily and incorrectly applied Rule 8D. Disallowance u/s. 14A(i) is called for only in respect of expenditure actually incurred by the respondent directly and for the object of/in relation to or in connection with earning exempt income. Thus, disallowance u/s 14A of the Act requires factual finding by the AO of incurrence of expenses in relation to earning exempt income. The AO has failed to discharge his onus of establishing the fact that any expenditure over and above identified by the respondent was incurred in earning dividend income. Reliance is placed on the following judgments :- CIT vs. Walfort Share & Stock Brokers P Ltd. (2010) 326 ITR 1 (SC) CIT vs. Ashish Jhunjhunwala [GA No.2990 of 2013](Cal) DCIT vs. Allahabad Bank [ITA No.1282 of 2012 dated 01.06.2016 (Kol) ACIT vs. Pawan Kumar Jhunjhunwala (2016) 157 ITD 667 (Kol) CIT vs. Hero Cycles Ltd (2010) 323 ITR 518 (P&H) Godrej and Boyee Mfg. Co. Ltd. vs. DCIT (2010) 328 ITR 81 (Bom) As per Sec. 14A(2), provisions of Rule 8D comes into play only when the AO records a finding that he is not satisfied with the respondent's method. The AO has failed to record any finding/reasons as to why ....
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....ive Bank Ltd. vs. DCIT [ITA No. 1983 & 1984/Kol/2014 dtd. 02.09.2016] DCIT vs. EIH Ltd. (2015) ITA No. 426/Kol/2006 CIT vs. Karnataka State Industrial & Infrastructure Development Corporation Ltd. (2016) 237 Taxmn 240 (Kar) CIT vs. UTI Bank Ltd. (2013) 215 Taxman 8 (Guj) ACIT vs. Mohan Exports (P) Ltd (2012) 138 ITD 108 (Del) CIT vs. Hero Cycles Ltd. (2010) 323 ITR 518 (P&H) CIT vs. Reliance Utilities & Power Ltd. (2009) 178 taxman 135 (Bom) Shreno Ltd. vs. ACIT (2016) ITA No. 1452/Ahd/2012 dtd. 2712.2016] iv) As judicially held only common interest expenses are required to be allocated in terms of the formula under rule 8D(2)(i). In other words, interest expenses as are (a) directly attributable to borrowings specifically used for tax exempt incomes or (b) are directly attributable to borrowings specifically used for earning taxable incomes are required to be excluded. In the case of the company, there are no specific borrowings which have been taken for making investments out of which tax exempt income has been earned. v) The interest expenditure has been primarily incurred on loans which have been sanc....
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....essee earned dividend and not the total investment at the beginning of the year and at the end of the year. v) Reliance in this regard is placed on the decision of jurisdictional Kolkata Tribunal in the case of Raniganj Co-operative Bank Ltd. vs. CIT (2016) ITA No.1983 & 1984/Kol/2014 dated 02.09.2016, REI Agro Ltd. vs. DCIT (2013) 144 ITD 141 (Kol Trib.) Usha Martin Ventures Ltd. vs. DCIT [ITA No. 847/Kol/2013], Integrated Coal Mining Ltd. s. DICIT [ITA No. 1146/Kol/2012], All Bank Finane Ltd. vs. JCIT [ITA No. 465/Kol/2013], ACB India Ltd. vs. ACIT (2015) 374 ITR 108 (Del) and Cheminvest Ltd vs. CIT (2015) 378 ITR 33 (Del). 5) Without prejudice to the above, it is further submitted that while considering the average value of assets for the purpose of applying Rule 8D(2)(ii) AO erred in considering incorrect figure of average value of total assets amounting to Rs. 83,68,33,876/- which should be Rs. 137,16,71,303/- [refer page 262 of the PB] 6) In addition to above, it is humbly submitted before your kindself that the respondent while filing the return for the subsequent assessment year i.e., AY 2010-11 adopted the same method/basis in quantifying the amount required....
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....17.10.2008 5,20,00,000 HDFC Bank 11.04.2009 2,000 ABN Amro Bank Total paid for Sl. No. 2 above 5,20,02,000 Copies of the relevant bank statement are enclosed. The funds to the ABN Amro Bank were earlier transferred from HDFC Bank Ltd. and State Bank of India. The relevant bank statement for that transaction is also enclosed. Please note that during the year the company made a preferential issue and allotment of 10,25,000 equity shares of Rs. 10 each at a premium of Rs. 90 per equity share aggregating to Rs. 100 per equity share to the following FIIs: Name of FII No. of equity shares Amount (Rs) Elara India Opportunities Fund Ltd. 7,00,000 7,00,00,000 Sophia Growth 3,25,000 3,25,00,000 Total 10,25,000 10,25,00,000 The above issue and allotment was made after obtaining approval from the Government of India, Ministry of Finance, Department of Economic Affairs, FIPB Unit as per their approval letter No.FC.I.225 (2008)/ 258(2008) dated November, 24, 2008. A copy of the said approval letter is enclosed. The said approval letter clearly indicated that the proceeds of the issue ....
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....were exempt from income tax. The assessee realized 117.97 crores from the sale of its investments in the earlier years; Rs. 46 crores was generated from the assessee's operating activities; Rs. 6.87 crores was received from sale of fixed assets and there was an opening cash balance of Rs. 8.90 crores. The aggregate of surplus funds on which there was no interest burden was Rs. 179.74 crores. This amount was available during the relevant previous year. Thus such funds were in excess of the investment of Rs. 123.87 crores. In addition thereto the assessee had generated cash from its financing activities of an aggregate amount of Rs. 24.24 crores. It had purchased fixed assets aggregating only to Rs. 54.62 crores during the relevant period. The findings, therefore, that the assessee had sufficient interest free funds to make the investment yielding tax free returns cannot be faulted. The absence of bank books in these circumstances would not justify an adverse inference being drawn for whichever way the matter is viewed, the assessee had sufficient funds available to it on which no interest was payable. This brings us to the legal issue of a presumption to be made when there is a ....