TaxTMI 
TaxTMI 
2017 (6) TMI 827
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....12/2015 (F No.279/Misc./142/ 2007-IT(PT) is applicable, wherein, the Department was advised/directed by the Board not to file appeal in the cases where the tax effect does not exceed the following monetary limit.:- Sl. No. Appeals in Income -tax matters Monetary Limit (in Rs.) 1. Before ITAT 10,00,000/- 2. U/s 260 A before Hon'ble High Court 20,00,000/- 3. Before Hon'ble Supreme Court 25,00,000/- In view of the above instruction, since, the tax effect is less than Rs. 10,00,000/-, consequently, the appeal of the Revenue is not maintainable, therefore, dismissed. 3. Now, we shall take up the appeal of the assessee in ITA No.5732/Mum/2011, wherein, first ground pertains to disallowing an additional sum of Rs. 1,78,69,431/- u/s 14A of the Income Tax Act, 1961 (hereinafter the Act) read with Rule-8D of the Rules. The ld. counsel for the assessee explained that the total exempt income earned by the assessee is Rs. 1.13 crores, whereas, the assessee suo-moto disallowed the interest portion of Rs. 6.36 lakhs and indirect expenses to the tune of Rs. 8.74 lakhs. The ld. counsel further contended that ignoring the explanation of the assessee, the Ld. Assessing Officer upheld th....
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....hanced the disallowance by Rs. 1,78,69,431/- applying Rule-8D of the rules. Right from beginning, the assessee had claimed that the assessee is pre-dominantly, in the business of financial services/facilities to its customers like loan against securities, IPO finance, bill discounting, working capital loan etc. It is further noted that the assessee made the investment in mutual funds out of excess funds, temporarily available, for a short span of period. The assessee explained that the appellant is a cash profit making company and generated cash flows from internal accruals and its promoters also contributed share capital. The assessee's cash net-worth as on 31/03/2008 was as under:- (Amount in Rs. In Lakh) Share Capital 10596.48 Preference Share 7500.00 Reserves & Surplus 1932.36 Deferred Tax Liabilities 1.56 Accumulated depreciation 136.16 Gross Cash Net Worth 20166.65 3.2. During hearing before us, the ld.counsel for the assessee explained that the investment was made out of own surplus funds. Before we go into the questions at hand it would be appropriate to not only examine the provisions of section 14A of the Act but also to notice its legislative histor....
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....red by him in relation to income which does not form part of the total income under this Act. 3.3 Consequent upon the Finance Act, 2006, section 14A as it now stands is as under:- Expenditure incurred in relation to income not includible in total income . 14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (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 assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under ....
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.... = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. (3) For the purposes of this rule, the total assets shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. The law prior to insertion of Section 14A 3.5. Prior to the introduction of section 14A in the said Act, the position of law was as laid down by the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd: 82 ITR 452 (SC) and Rajasthan State Warehousing Corporation v. CIT: 242 ITR 450 (SC) was different. In Maharashtra sugar Mills Ltd (supra) the assessee's business comprised of two parts, namely, (1) cultivation of sugar cane and (2) the manufacture of sugar. The Revenue had contended that as the income from the cultivation of sugar cane, being the ....
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....etc., and income from one or more items alone is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible; and (iii) in computing profits and gains of business or profession when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under section 37 of the Act will depend on: (a) fulfillment of requirements of that provision noted above; and (b) on the facts whether all the ventures carried on by him constituted one indivisible business or not; if they do, the entire expenditure will be a permissible deduction but if they do not, the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee." 3.7. Thus, prior to the introduction of section 14A in the said Act, the law was that when an assessee had a composite and indivisible business which had elements of bot....
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.... other words, section 14 A clarifies that expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income" "..Expenses allowed can only be in respect of earning taxable income. This is the purport of section 14A. In section 14A, the first phrase is for the purposes of computing the total income under this Chapter which makes it clear that various heads of income as prescribed in the Chapter IV would fall within section 14A. The next phrase is, in relation to income which does not form part of total income under the Act . It means that if an income....
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....t matter. In other words, according to the Ld. Counsel, only that actual expenditure which is made directly and for the object of earning exempt income could be disallowed under section 14A. He submitted that if the dominant and main objective of spending was not the earning of 'exempt' income then, the expenditure could not be disallowed under section 14A provided it was otherwise allowable under sections 15 to 59 of the said Act. It was emphasized that the expenditure must be actual and cannot be computed on the basis of some formula as stipulated under Rule 8D read with sub-sections (2) & (3) of section 14A. 3.12. Let us examine the expression in relation to . we may refer to the Supreme Court decision in Madhav Rao Scindia v. Union of India: AIR 1971 SC 530 where, in paragraph 134, it is observed as under:- "The expression provisions of this Constitution relating to in article 363 means provisions having a dominant and immediate connection with: it does not mean merely having a reference to." 3.13. In Doypack Systems Pvt Ltd v. Union of India: AIR 1988 SC 782, the Supreme Court observed that the expressions pertaining to , in relation to and arising out of , used in the dee....
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.... relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section ....
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....h the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules. 3.18. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. (i) The first component being the amount of expenditure directly relating to income which does not form part of the total income. (ii) The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of exp....
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....st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years. 3.20. Furthermore, in the Memorandum explaining the provisions in the Finance Bill, 2006 [281 ITR (ST) at pages 281-281], it is once again stated with reference to clause 7 which pertains to the amendment to Section 14A of the said Act that:- "This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years." 3.21. We may also refer to the CBDT Circular No.14/2006 dated 28.12.2006 and to paragraphs 11 to 11.3 thereof. Paragraph 11 dealt with the method for allocating expenditure in relation to exempt income and paragraphs 11.1 and 11.2 explained the basis and logic behind the introduction of sub-section (2) of Section 14A of the said Act. Paragraph 11.3 specifically provided for applicability of the provisions of subsection (2) and it clearly indicated that it would be applicable from the assessment year 2007-08 onwards . It is, therefore, clear that sub-sections (2) and (3) of Section 14A were introduced with prospective effect from the assessment year 2007-08 onwards. However, sub-section....
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.... which does not form part of total income, the assessing officer will have to verify the correctness of such claim. In case, the Assessing Officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment. 3.23. In view of the foregoing discussion, we find that the assessee suo-moto disallowed Rs. 6.36 lakhs on account of interest ....
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....mpugned order on the ground that this Court did not entertain an appeal of the Revenue from the order of the Tribunal holding that Section 14A of the Act is inapplicable where the investment has been made in stock in trade. This non entertainment of an appeal being on the ground that this Court found no substantial question of law. (Para18) That if appeal is not admitted from an order of the Tribunal, then it is open to the Tribunal in another case to decide directly contrary to the view taken by the earlier order of the Tribunal, which is not entertained by this court in appeal. This without even as much as a whisper of any explanation with regard to how and why the facts of the two cases are different warranting a view different from that taken by the Tribunal earlier. In fact when an appeal is not entertained then the order of the Tribunal holds the field and the coordinate benches of the Tribunal are obliged to follow the same unless there is some difference in the facts or law applicable and the difference in fact and / or law should be reflected in its order taking a different view. Tribunal has acted beyond the limits of its authority. (Para19) Impugned order of th....
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....of the Tribunal dated 23rd September, 2015 in its entirety and restore the issue to the Tribunal to decide it afresh on its own merits and in accordance with law. However the Tribunal would scrupulously follow the decisions rendered by this Court wherein a view a has been taken on identical issues arising before it. It is not open to the Tribunal to disregard the binding decisions of High Court, the grounds indicated in the impugned order which are not at all sustainable. (Para25) 3.25 In the light of the above decisions from Hon'ble jurisdictional High Court, it can be concluded that since the investment was made out of surplus funds, no further disallowance is required to be made u/s 14A of the Act as section 14A provides for disallowance of expenditure incurred in relation to income which does not form the part of the total income, meaning thereby, there should be direct nexus between the actual expenditure incurred for the purpose of earning tax free income. No doubt, the word in relation to appears to be broad at firm impression but on deeper examination and read in conjunction with the word incurred it seems that these are restrictive words, restricting the power of A....
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.... evident frompage-14 of the paper book. In such a situation, the decision from jurisdictional High Court in CIT vs Jubilant Enterprises Pvt. Ltd. (ITA No.1512 of 2014) order dated 28/02/2017 supports the case of the assessee. Likewise, the decision in Paresh K Shah of coordinate Bench (ITA No.8214/Mum/2011) and Kolkata Bench in Trade Apartments Ltd. (ITA No.1277/Kol/2011) further supports the case of the assessee. In Paresh K. Shah vs DCIT order dated 05/06/2013, the coordinate Bench held as under: "This appeal by the assessee is directed against the order dated 30.8.2011 of the Commissioner of Income Tax(Appeals) for the Assessment Year 2008-09. 2. The assessee has raised the following grounds in this appeal: "On the facts and in the circumstances of the case and in law, the Commissioner of Income Tax(Appeals) erred in upholding the disallowance u/s 14A of Rs. 17,65,069/- u/r 8D of I T Rules without appreciating that the appellant had sufficient interest free funds to make the investments. 2. On the facts and in the circumstances of the case and in laws the Commissioner of Income Tax(Appeals) erred in not considering the fact that the borrowed funds were not utilized for ....
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....ing Officer has disallowed the same by computing the disallowance on account of interest as well as administrative expenditure as per the formula provided u/r 8D of the I T Rules. The assessee has used the mixed funds comprising own funds and borrowed funds; therefore, disallowance is required to be made u/r 8D. In support of his contention, he has relied upon the order of the Ahmedabad Benches of the Tribunal in the case of Advance Finstock P Ltd in ITA No.3221/Ahd/2011 and submitted that the Tribunal has upheld the disallowance made u/s 14A when the assessee has used mixed funds for the purpose of investments in shares. 5 Having considered the rival submissions as well as the relevant material on record, we find that the assessee's own funds comprising share capitals reserves and surplus is Rs. 4,48,47,798/-, which is equalant to the cost of investment in the shares. Further, there is no fresh investments during the year under consideration and all these investments were made in the earlier year; therefore, there is no question of utilization of the borrowed funds during the year under consideration. 5.1 It is pertinent to note that when the Assessing Officer had not made a....