2017 (9) TMI 805

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....essment year 2011-12 on 29-09-2011 declaring total income of Rs. 6,76,58,135. The case was selected for scrutiny and accordingly notices u/s 143(2) & 142(1) were issued. In response to notices, the authorized representative of the assessee attended from time to time and filed the details, as called for. During the course of assessment proceedings, the AO noticed that the assessee was holding investments worth Rs. 2,465.47 lakhs and Rs. 390536.42 lakhs at the beginning of the year and at the end of the year, respectively, income from which does not or was not forming part of total income. The AO further noticed that the assessee ought to have made disallowance of expenditure in relation to such income which does not or was not forming part o....

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.... earn exempt income. Accordingly the AO disallowed 0.5% of average value of investments u/s 14A r.w.r. 8D of IT Rules, 1962. Aggrieved by the assessment order, the assessee preferred appeal before the CIT(A). 3. Before CIT(A), the assessee reiterated its submissions made before the AO. The assessee further contended that it has invested in various subsidiaries and associate companies as part of its business strategy to acquire control over business of group companies, but not to earn dividend income from said investments. The assessee further submitted that the intention was not to earn dividend income and in fact most of the companies have not declared dividend since their inception, which is evident from the fact that during the year i....

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....n appeal before us. 5. The Ld.AR of the assessee submitted that the Ld.CIT(A) erred in confirming the action of the AO making disallowance u/s 14A r.w.r. 8D of IT Rules, 1962 despite the fact that the assessee's case was not covered by section 14A of the Act. In any case, no disallowance was called for under this section. The Ld.AR further submitted that when shares are held by way of amalgamation, in pursuance of a Court order, the assessee need not incur any expenditure to acquire such shares, as such, need not disallow any expenditure to earn exempt income. The Ld.AR further submitted that the assessee has earned a meager dividend income of Rs. 24,138 whereas the AO has disallowed an amount of Rs. 3,36,286 which is more than the amoun....

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....ntends that it did not incur any expenditure to earn exempt income as the dividend income is earned from shares held in subsidiary and other group companies as a promoter. The shares were acquired, and made investments solely and exclusively for the purpose in the course of business as part of its business strategy. The intention was not to earn dividend income. In fact, most of the companies did not declare any dividend which is evident from the fact that it had earned a meager dividend of Rs. 24,138. The assessee further contended that it did not incur any expenditure to earn exempt income and that the exempt income is earned from shares acquired by way of amalgamation. The assessee even challenged the computation of average value of inve....

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....t income. As per Rule 8D(2)(i) & (ii) provides for disallowance of direct expenditure incurred to exempt income and interest expenses worked out on the basis of formula prescribed thereunder. Rule 8D(2)(iii) provides for disallowance of expenditure on the basis of 0.5% of average value of investments. From a conjoined reading of section 14A r.w.r. 8D of IT Rules makes it clear that the AO shall compute disallowance as per the prescribed formula, even if the assessee claims to have incurred no expenditure to earn exempt income. This legal position is further supported by the decision of Hon'ble Bombay High Court in the case of Godrej Boyce & Mfg Co Ltd vs CIT 328 ITR 81 (Bom), wherein the Hon'ble High Court held that provisions of Rule 8D sh....

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....ned dividend income from shares held by way of amalgamation and has not incurred any expenditure to earn exempt income. In this case, the assessee has various investments including investments in subsidiaries and also it is a fact that the details filed by the assessee does not throw any light to prove that dividend income is earned form shares held by way of amalgamation only, therefore, the case laws relied upon by the assessee is not applicable to the facts of the case. 10. Coming to the second argument of the assessee, the assessee argued that it had earned meager dividend income of Rs. 24,138 as against which, the AO disallowed a sum of Rs. 3,36,28,000 which is more than the exempt income. The assessee further argued that disallowan....