TaxTMI 
TaxTMI 
2017 (11) TMI 963
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....case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to re-compute the disallowance u/s 14A on a reasonable basis relying on the judgement of Bombay High Court in the case of Godrej & Boyce Mfg. Ltd. without appreciating the fact that the judgment of Bombay High Court has not been accepted by the Revenue and SLP has been proposed." 2. "The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored". 3. "The appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 3. The grounds of appeal raised by the assessee in ITA no. 4284/Mum/2014 in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called "the tribunal") read as under:- "The appellant objects to the order dated 10 December 2010 passed by the Commissioner of Income-tax (Appeals)-14, Mumbai ["CIT(A)"] for the aforesaid assessment year on the following among other grounds: 1. The learned CIT(A) erred in not deleting the entire disallowance made by the Assessing Officer under section 14A of Rs. 4,10,78,401/-. 2. The learned CIT(A....
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....ve retrospective effect as the same is clarificatory in nature. The assessee considered interest on ICD while the AO also included administrative expenses for computing disallowance u/s 14A read with Rule 8D. Thus, the disallowance u/s. 14A of the Act was worked out by the AO at Rs. 4,10,78,401/- instead of Rs. 3,64,34,450/-, vide assessment order dated 28-11-2008 passed by the AO u/s 143(3). 5. Aggrieved by the assessment order dated 28-11-2008 passed by the AO u/s 143(3), the assessee filed an appeal before the learned CIT(A), who held vide appellate order dated 10-12-2010, as under:- " 7. I have gone through the above submissions very carefully and facts of the case. The appellant company submitted that the provisions of Sec. 14A is not applicable in its case as no expenditure was incurred by them during the year for earning tax free income. It has also been argued that the provisions of Rule 8D is to be applied on the AY. 2008-09 in view of the recent decision of Hon'ble Bombay High Court. The Hon'ble Bombay High Court in the case of Godrej & Boyce Mtg. Co. Ltd. vs. DCIT. Rg. 10(2). Mumbai and Anr. has held that even prior to A.Y. 2008-09, the Rule ....
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.... aforesaid orders dated 11-05-2016 had given relief to the assessee, by holding as under: " 2. The assessee company is engaged in the business of investing and dealing in shares and securities. The company derives its income from short term and long term investments in shares, mutual fund, equities and investment in real estate. The assessee company is a 100% subsidiary of the Tata Power Company Ltd. The assessee company invested in the subsidiary company and earned exempt income but the contention of the assessee is that the expenditure incurred upon the strategic investment is not liable to be added in the income of the assessee. But the Assessing Officer assessed the same as income of assessee and the learned CIT(A) confirmed the order of Assessing Officer therefore the assessee filed an appeal for the above mentioned assessment year before us. 3. However, the assessee has raised number of issues but the learned representative of the assessee only raised the issue u/s.14A of the Income Tax Act, 1961( in short "the Act") wherein the learned CIT(A) confirmed the disallowance the interest expenditure to the tune of Rs. 8,42,08,035/- for A.Y.2004-05 and Rs. 9,70,01....
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....ereby allowed for statistical purpose." It was submitted by learned counsel for the assessee that the department has already passed order giving effect to the aforestated tribunal orders dated 11-05-2016 and the addition made u/s 14A stood deleted, which order dated 05-06-2017 passed by the AO is placed in file, wherein it is held by the AO as under:- " Name of Assessee Af-Taab Investment Co. Ltd, Address 24, Homi Modi Street, Bombay House, Mumbai-400001 PAN AAACA4800H Status Company Assessment Year 2005-06 Date of the order 05.06.2017 Order Giving Effect to ITAT's order In view of the Hon'ble ITAT's order ITA no. 3684/Mum/2012 and ITA no. 8981/Mum/2010 dated 11.05.2017. The total assessed income is recomputed as under: Particulars Rs. Total income as per order giving effect dated 05.06.2017 (2,28,25,500) Less: Relief granted by ITAT vide order dated 11th May 2016 (3,92,31,324+9,70,012) Disallowance u/s 14A (4,02,01,336) Total income/Loss (6,30,26,836/-) Total income as per the provisions of section 115JB is computed as under: Particulars Rs. Book profits assessed under secti....
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....red upon the strategic investment is not liable to be added in the income of the assessee. But the Assessing Officer assessed the same as income of assessee and the learned CIT(A) confirmed the order of Assessing Officer therefore the assessee filed an appeal for the above mentioned assessment year before us. 3. However, the assessee has raised number of issues but the learned representative of the assessee only raised the issue u/s.14A of the Income Tax Act, 1961( in short "the Act") wherein the learned CIT(A) confirmed the disallowance the interest expenditure to the tune of Rs. 8,42,08,035/- for A.Y.2004-05 and Rs. 9,70,012/- for A.Y.2005-06. The learned representative of the assessee has argued that the assessee expended the money for strategic investment with the object to control the stake in group concern and not to earn the income, therefore, in the said circumstances no disallowance of any kind is required in connection with the expenditure incurred if any for the said investment in view of the law settled in [2014] 46 taxmann.com 18, Income Tax Appellate Tribunal, Mumbai bench in case of Garware Wall Ropes Ltd. Vs. Additional Commissioner of Income Tax Range 5(1)....
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....6 Date of the order 05.06.2017 Order Giving Effect to ITAT's order In view of the Hon'ble ITAT's order ITA no. 3684/Mum/2012 and ITA no. 8981/Mum/2010 dated 11.05.2017. The total assessed income is recomputed as under: Particulars Rs. Total income as per order giving effect dated 05.06.2017 (2,28,25,500) Less: Relief granted by ITAT vide order dated 11th May 2016 (3,92,31,324+9,70,012) Disallowance u/s 14A (4,02,01,336) Total income/Loss (6,30,26,836/-) Total income as per the provisions of section 115JB is computed as under: Particulars Rs. Book profits assessed under section 115JB- as per order giving effect dated 05.06.2017 20,76,01,107 Less: Relief granted by ITAT vide order dated 11 May 2016 (3,92,31,324 +9,70,012) Disallowance u/s. 14A (4,02,01,336) Taxable book profit 16,73,99,771 Similar order giving effect to the tribunal order for AY 2004-05 was passed by the AO which is placed in file. Subsequent to the aforesaid orders of the tribunal, we have observed that Hon‟ble Karnataka High Court vide order dated 31-05-2016 in the case of United Breweries Ltd. v DCIT (2016) 72 Tax....
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....o ordered by the Tribunal. Hence, it can be said that the Tribunal has exercised the discretion where rights of both sides are kept open for admissible deduction under Sec.14A. When such a discretion is exercised and the rights of the appellant-assessee is also kept open to satisfy the Assessing Officer, it cannot be said that any substantial questions of law would arise for consideration, as sought to be canvassed. In our view, at the stage of enquiry under Sec.14A, it is open to the Assessing Officer to independently consider the matter for admissibility of the interest on borrowings and if yes to what extent. Hence, when the question at large is further to be considered by the Assessing Officer, we do not find that any further observations are required to be made in this regard. In any case, the question of law as sought to be canvassed would not arise for consideration at this stage on the said aspects as sought to be canvassed." We have also observed that Hon‟ble Supreme Court in the recent decision dated 08-05-2017 in the case of Godrej and Boyce Manufacturing Company Limited v. DCIT reported in (2017) 81 taxmann.com 111(SC) has dealt with applicability of Sect....
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....not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. 38. In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact o....
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....visory fees. The assessee has invested its own surplus fund in various investments and earned income thereon which included exempt dividend income and exempt capital gains. Once the main activity is of Investment Manager and the expenses are primarily in relation to this activity, the assessee invested the surplus funds into various securities which has given them exempt income. The Tribunal has found that the total investments made are of Rs. 70.62 crores as on 142007 and which has come down to 68.26 crores as on 3132008. The investment is mainly made by the assessee in various schemes of Reliance Mutual Fund and its subsidiaries. There should not be any dispute that the investments made in the various schemes of Reliance Mutual Fund and also in the group concerns are on account of business policy. The assessee received dividend from 27 transactions, out of which 8 receipts were by way of direct credit to its Bank account and 19 receipts were in the form of reinvestment of dividend, namely, the dividend amount was reinvested and it did not physically receive the sum. The transactions relating to earning of dividend income as well as long term capital gains are limited. Even the In....
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....rest on funds borrowed by an investment company for making investment in shares which may be held as investment or stock in trade or for the purposes of controlling interest in other companies shall be allowed as deduction u/s 36(1)(iii). . The assessee has voluntarily suo motu disallowed an interest expenditure on ICD to the tune of Rs. 3,64,34,451/- u/s 14A which disallowance was raised by the AO to Rs. 4,10,78,401/-, wherein administrative expenses were also considered by the AO for making disallowance u/s 14A r.w.r. 8D which was not considered earlier by the assessee. The matter need to be set aside and restored to the file of the AO for computing disallowance u/s 14A afresh and the ratio of aforesaid decisions of Hon‟ble Courts read with provisions of Section 14A and 36(1)(iii) shall be applied by the A.O. to factual matrix of the case while computing disallowance u/s 14A keeping also in view the claim of the assessee that it is an investment company holding more than 99% investments in subsidiaries companies/strategic investments and also that the assessee is a single segment company being an investor and dealer in shares & securities and consequently all the business e....
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....ng of exempt dividend income of Rs. 6,69,80,635/- consisting of the following: 1. Dematerialisation charges Rs. 36,910/- 2. Transaction tax on sale of investment Rs.54,738/- 3. Transaction tax on purchase of investment Rs.43,719/- Rs.1,35,367/- Out of balance amount of Rs. 36,69,206/- expenses like rates and taxes, professional fees, directors sitting fees, legal expenses, insurance premium internal audit fees, auditors remuneration, maintenance charges, or electricity charges have no relation or nexus to dividend income. Therefore, proposed disallowance of the above expenses as being attributable to earning of dividend income is unfair" The A.O observed that all the expenses which are connected with the exempt income have to be disallowed u/s. 14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial and the same is to be worked out as per the mechanism laid down in 14A(3) in accordance with the method as prescribed under Rule 8D . The AO worked out disallowance of direct expenditure being dematerialisation expenses to the tune of Rs. 36,910/- under Rule 8D(2)(i) r.w.s. 14A and disal....
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....xempt income have to be disallowed u/s.14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial in accordance with law. It is further evident that deduction in respect of expenditure incurred by the assessee in relation to exempt income and taxable income has to be determined as per the mechanism laid down in sub-section (B) of section 14A and the method as prescribed under Rule-8D. Therefore, the Assessing Officer was justified in invoking the provisions of Rule 8D. 3.3.2 If one reads subsection (3) along with subsection (2), it simply means that in a case where the assessee claims that no expenditure has been incurred in respect of the exempt income, the AO shall determine the amount of expenditure incurred in relation to such income in accordance with the method as may be prescribed in view of the provisions of subsection (2). Therefore, since from assessment year 2008-09, rule 8D is applicable, the AO shall be free to compute the disallowance of expenditure as per this rule in respect of the exempt income in all such cases where the assessee claims that no expenditure has been incurred in respect of the said income and no suo....
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....to in Section 14A . It was submitted that the A.O. has adopted 0.5% of average investments while computing disallowance u/s 14A which led to the disallowance of Rs. 41,76,018/- (including disallowance of direct expenses of Rs. 36,910/-) which is higher than the total expenses of 38,04,573/- claimed by the assessee in its P&L A/c as an expense for the entire year. It was submitted that strategic investments/stock in trade are to be excluded for computing disallowance under 14A . It was submitted that strategic investments were more than 91% of the total investment . It was also submitted that no satisfaction was recorded by the A.O as is contemplated u/s 14A(2). It was submitted that Rule 8D is applied and disallowance have been made more than the expenses debited to the P&L Account which is not permissible. However, it is submitted that learned CIT(A) gave the relief on this account by restricting disallowance to the actual expenditure incurred by the assessee as claimed in Profit and Loss Account. Ld. DR on the other hand relied upon the order of the learned CIT(A) . 14. We have considered rival contentions and perused the material on record. We have observed that the assess....
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....isfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable." Thus, the A.O is directed to compute the disallowance u/s 14A in accordance with the ratio of decision of the Hon‟ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd.(supra). We would also like to hasten to add that our decision regarding investments in subsidiary company/ strategic investment as detailed in cross appeals being ITA no. 1807/Mum/2011 and ITA no. 4284/Mum/2014 for AY 2006-07 shall apply mutatis mutandis to the issue in this appeal in ITA no. 7069/Mum/2013 for AY 2009-10. We are also of the considered view that only those investments which have yielded exempt income shall be considered for computing average value of investment for the purposes of Rule 8D(2)(iii) keeping in view ratio of decision of Special Bench of the tribunal in the case of Vireet Investment Private Limited(supra), wherein tribunal held as under: "11.16 Therefore, in our considered opinion, no contrary vie....
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....d not stock-in-trade. Rule 8D, therefore, would not come into play in relation to exempt income by way of dividend and interest from stock-in-trade and, accordingly, section 14A would not be applicable in relation to incidental income by way of tax free income, namely, interest or dividend which is exempt under sections 10(15)(iv)(h), (34) and (35). The term "investment" does not include stock-in-trade. He relied upon Accounting Standard (AS) 13, issued by the Institute of Chartered Accountants of India, to contend that there is a distinction between investment and stock-in-trade. Stock-in-trade is not investment as per clause 3.1 of AS 13. Rule 8D refers only to investment and not stock-in-trade. Section 14A and rule 8D constitute an integrated code and as the computation provisions do not apply, as the word used therein is investment and not stock-in-trade, the charging section cannot be read to include stock-in-trade. Mr. Bansal then relied upon the fact that variable-B in rule 8D(2)(ii) refers to "the average value of investment". He emphasised the word "investment". He relied upon clause 3.1 of AS 13 issued by the Institute of Chartered Accountants of India, recognized under s....