TaxTMI 
TaxTMI 
2017 (6) TMI 827
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....re, CBDT instruction No.21 of 2015, dated 10/12/2015 (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 igno....
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....nt attributable to earning such exempt income. The Ld. Assessing Officer enhanced 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 appropria....
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....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. 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 ....
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....vious year ; B = the average of 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 ; C = 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 ....
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....led to claim deduction admissible under the respective head whether or not computation under each head results in taxable income; (ii) if income of an assessee arises under any of the heads of income but from different items, e.g., different house properties or different securities, 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 t....
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....on 14 A with retrospective effect reflects the serious attempt on the part of Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the said act against the taxable income. The Supreme Court further observed as under:- "In 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 sectio....
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....e word incurred must be taken literally in the sense that the expenditure must have actually taken place. Moreover, the expenditure must also have taken place in relation to income which does not form part of total income. The Ld. Counsel contended that the expression in relation to implies that there must be a direct and proximate connection with the subject 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 ....
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....red in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only 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 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. Su....
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.... accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with 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 compone....
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....07 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years." This is apparent, first of all, from the Notes on Clauses of the Finance Bill, 2006 [Reported in 281 ITR (ST) at pages 139-140]. The said Notes on Clauses refers to clause 7 of the Bill which had sought to amend Section 14A of the said Act. It is specifically mentioned in the said Notes on Clauses 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. 3.20. 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 explaine....
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....g was free to adopt any reasonable and acceptable method. So, even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income 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 ....
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....n is established considering the finding of fact both by the CIT(A) and Tribunal-Woolcombers of India Ltd. vs. CIT (1981) 23 CTR (Cal) 204 : (1982) 134 ITR 219 (Cal) and East India Pharmaceutical Works Ltd. vs. CIT (1997) 139 CTR (SC) 372 : (1997) 224 ITR 627 (SC) relied on." 3.24 Likewise, Hon'ble jurisdictional High Court in HDFC Bank Ltd. (supra) also held as under:- "Section 14A of the Act would be inapplicable. However this was also disregarded by the impugned 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 differe....
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....ercise our powers under Article 227 of the Constitution of India. This is in view of the manner in which the impugned order of the Tribunal has chosen to disregard and/or circumvent the binding decision of this Court in respect of the same assessee for an earlier assessment year. This is a clear case of judicial indiscipline and creating confusion in respect of issues which stand settled by the decision of High Court. (Para24) It is in the above view, that High Court set aside the impugned order 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 requir....
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....out of its own funds, therefore, the provision cannot be invoked arbitrarily. It is also noted that the assessee suo-moto made the disallowance, wherever, it was suppose to do so. Thus, on this count, we allow this ground of the assessee, more specifically when own funds are much more in excess of the borrowed funds. 3.27. So far as, the additional ground (ground no.5), is concerned, tt is also noted that the assessee is in the Finance business and the interest income is more than the interest expenditure as is 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 a....
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.... offered net income to tax and therefore, no question of disallowance u/s 14A arises. He has further submitted that the assessee's own fund is sufficient for making the investments in the shares of the sister concern. Further, there is no new investments during the year and all investments in the earlier year and the revenue has not made any disallowance u/s 14A in the earlier year. 4.1 On the other hand, the ld DR has relied upon the orders of the authorities below and submitted that Rule 8D is applicable for the year under consideration; therefore, the Assessing 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 sh....