TaxTMI 
TaxTMI 
2018 (12) TMI 984
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....e addition of Rs. 2,00,000/- made by the AO on account of disallowance of various expenses without considering the fact that the assessee had failed to furnish proof to establish genuineness of various expenses in the light of the fact that certain expenses were made in cash and some vouchers were self prepared by the assessee". 3. Briefly stated the facts as culled out from the records are that the assessee is a limited company engaged in real estate and construction business. Income of Rs. 2,00,92,710/- disclosed in the e-return filed for Assessment Year 2012-13 on 30.9.2012. The return was further revised on 13.4.2014 declaring same income at Rs. 2,00,92,710/-. Case picked up for scrutiny and statutory notices u/s 143(2) and 142(1) was duly served upon the assessee along with questionnaire. Learned Assessing Officer (In short 'Ld. A.O) observed that considerable amount has been invested by the assessee in the group companies and though no exempt income has been earned but still deduction u/s 14A of the Act is called for, as the interest bearing funds have been applied towards interest free loans and advances and investments given to group concerns. 4. In reply to the show ....
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....dividend income was earned during the year and only the funds out of the share capital and the accumulated reserve in surplus were applied for investing in the group companies. He also submitted that there is no satisfaction of the Ld. A.O on record to indicate about the nexus of interest bearing funds being applied for investment in the group companies. The written submission filed by the assessee reads as follows; "1. The Respondent Company is a closely held limited company incorporated in India, deriving income from real estate business, construction and letting of immovable properties on rent. It is the flagship company of the group owned and operated by Shri Sanjay Choudhary styled as Brilliant Group. 2. The Respondent company filed its Return of Income ('ROI') initially for AY 2012-13 u/s 139(1) on 30 September 2012 vide acknowledgement no. 505873361300912 declaring a total income of Rs. 2,00,92,710/- under normal provisions and Rs. 5,61,10,685/- as book profits u/s 115JB. The Respondent further revised its ROl on 13 March 2014 vide acknowledgment no. 124285401130314 offered the same income. The taxes as per book profits being higher the Respondent company paid ....
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....wned funds' amounted to Rs. 43,77,87,548/-. 5.7 The Respondent company explained that the sale of shares of private/unlisted group companies are subject to capital gain tax upon their liquidation and will never yield any tax free income. The investments held by the Respondent in its group companies have neither earned any exempt income in the past nor there is any probability of fetching any tax free income in the future. Such investments were purely out of commercial and business expediency to promote the business of \such group companies. The Respondent company is also not required to monitor these investments on day to day basis and therefore no expenses were incurred in relation to this activity. 5.8 The Learned AO without appreciating the facts of the case, particularly that the respondent company has not earned any exempt income in respect of its these investments made in unlisted closely held companies, nor is there any possibility of earning such income, considering the fact that capital gains on liquidation of such investments will be taxable, without drawing the requisite satisfaction as envisaged by section 14A, and relying on the decision of the Honourable Spe....
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....ing Officer has to first consider the correctness of the claim of the Assessee having regard to the accounts of the Assessee. The satisfaction of the Assessing Officer has to be objectively arrived at on the basis of those accounts and after considering all the relevant facts and circumstances. The Assessing Officer has not established the proximity between fund utilized and investment made. 5.18 Lack of recording of dissatisfaction: There is no dissatisfaction, or even a whisper of dissatisfaction, as envisaged u/s 14A and which is a sine qua non for invoking these provisions. This being a charging section, strict interpretation is a legal mandate. The fact that the AO is not satisfied with the explanation of the Respondent regarding the source funds for the investment should be opined by way of a categorical finding, which is not at all in this case. A mere observation that the explanation offered is not found to the satisfaction of the AO does not meet the requirements of law, rather the Learned AO should have brought in categorical findings as to how and why he is not so satisfied. The satisfaction as envisaged u/s 14A ought to have spelled out in clear and unambiguous manne....
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....he judgments referred and relied by both the parties. Revenue is aggrieved with the finding of Ld.CIT(A) relating to the disallowance of Rs. 2,31,50,925/- made by the Ld.A.O u/s 14A of the Act by applying Rule 8D of the IT rules for the alleged application of interest bearing funds being utilized for investment in group concerns. There is no dispute to the fact that no dividend income/exempt income have been earned by the assessee during the year and also there is no satisfaction recorded in the body of the assessment order by the Ld.A.O which could show the particular instance, where the interest bearing funds have flown to the investment in group concerns which are not fetching any interest income. 12. We find that Ld.CIT(A) deleted the impugned disallowance made u/s 14A of the Act at Rs. 2,31,50,925/- relying on various judgments by observing as follows; "3.2. I have gone through the appellant's contentions, the assessment order and various decisions in the matter. No exempt income has been earned from such investments during the year and in the past also. The decision of Special Bench decision of ITAT, Delhi in the case of Cheminvest Ltd. has been overruled by the Hon....
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....ourse of appellate proceedings) and hence the same is treated as expense attributable to exempt income, In respect of investments of Rs. 60,77,75,000 made in subsidiary companies as per documents produced before me, they are attributable to commercial experienced because as per submission made by the appellant, it had to form. special purpose vehicles (SPVs) in order to obtain contracts from the National Highway Authority c:" India and the special purpose vehicles so formed engaged the appellant company (E contract to execute the works awarded to them (i.e. SPVs) by the National Highway Authority of India, In its profit and loss account for the year, the appellant has show, the turnover from execution of these contracts and therefore no expense and interest attributable to the investments made by the appellant in the special purpose vehicles can be disallowed under section 14A read with rule 8D because it cannot be termed as expense/ interest incurred for earning exempted income, In view of the facts mentioned above: (i) Interest expenses amounting to Rs, 2,96,731 have been directly found to be incurred for earning exempt income and hence disallowed under section 14A (i....
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.... in subsidiary companies as per documents produced before him, they are attributable to commercial expediency, because as per submission made by the assessee, it had to form special purpose vehicles (SPVs) in order to obtain contracts from the National Highway Authority of India and the special purpose vehicles so formed engaged the assessee-company as contract to execute the works awarded to them (i.e. SPVs) by the National Highway Authority of India. In its profit and loss account for the year, the assessee has shown the turnover from execution of these contracts and therefore no expense and interest attributable to the investments made by the appellant in the special purpose vehicles can be disallowed under section 14A read with rule 3D because it cannot be termed as expense/interest incurred for earning exempted income. Under the circumstances, the learned Commissioner of Income-tax (Appeals) is correct in holding that disallowance of a further sum Rs. 40,556 calculated at 2 per cen. of he dividend earned is sufficient. Under the circumstances, we do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals), hence, we uphold the same. " 3.3.1 T&....
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....earing funds, proceed to infer that interest bearing income must have beer. used to earn exempted income. Section 14A of the Act, being in the nature of :an exception, has to be construed strictly and only where the Assessing Officer records satisfaction, on the basis of clear and cogent material, shall an order be passed vi] s 14A disallowing such a claim. The Hori'ble Punjaz & Haryana High Court in M/ s Max India Ltd. (Supra) has held that presumption as regards the utilization of interest fee funds and borrowed funds in a mixed pool ought to be in favour of assessee. The Department could have rebutted this presumption by calling for the records from the bank itself. The Hon'ble Gujrat High Court in CIT vs. Kalthia Engineering and Constructi0n Ltd. 2015 (2) TMI 666 Gujrat High Court has also held that where both interest free funds are 'available and over draft/ loans taken than a presumption would arrives that the investments would be out of the interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investments. 3.5 In view of the facts and circumstances of the case the disallowance of Rs. 2,31,50,925/- ....
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....xpenditure" The Respondent hereby most humbly submits that, the facts of the Respondent's case are altogether on a divergent alley as compared to the facts of the case of 'Maxopp Investment Limited' wherein investments were made in listed concerns during the year under consideration and dividend income was earned and was claimed as exempt in the return of income. It was an admitted position that the investments were made out of borrowed funds. Whereas in the respondent's case all the investments have been made in the shares of unlisted and unquoted companies from which it never earned any dividend income or any other exempt income" "In nutshell, the facts of the present case are distinguishable from the facts of the case of Maxopp Investments Limited v/s CIT on the various footings tabulated hereunder: Sl. No Facts of Maxopp Investment Ltd. And findings of the Hon'ble Supreme Court Facts of the Respondents case and its contentions 1. Major investments were made Here the entire investments in the shares of widely held are in the shares of closely quoted/ listed public limited held unlisted/ unquoted group company. Here the entire investments are in ....
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....T. Amritsar Bench is also not applicable to the facts of the assessee. 15. Further we are of the considered view that disallowance u/s 14A of the Act is not called for in the case of the assessee as there is no dividend income earned during the year and the assessee's case is squarely covered in the judgment of Hon'ble Gujarat High Court in the case of CIT V/s Corrtech Energy (P) Ltd (supra) wherein the Hon'ble High Court has held that "where the assessee has not made any claim for any exemption then in such situation the disallowance u/s 14A of the Act have no application". 16. Perusal of the audited balance sheet of the assessee shows that as on 31.03.2012 the total of the share capital and reserve and surplus at the end of the year stands at Rs. 39,28,44,695/- and against these interest free funds available with the assessee, the average value of investment is Rs. 29,83,62,600/-, which means that the average investments are less than the interest free fund available with the assessee. Further there is no specific satisfaction by the Ld.A.O which could prove that interest bearing funds have been applied for the investments in group concerns for non business purposes. In such si....
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....ance amounting to Rs. 2,00,000/- has been made by observing that the vouchers were self prepared and some of the payments were made in cash and the same were not cross verifiable. 6.2 The books of accounts along with all the bills and vouchers were produced before the learned AO during the course of assessment proceedings and were subject to test check by the learned AO and it was explained that the expenses have been properly incurred and also accounted for and that considering the nature and volume of business also the expenditure is justified. 6.3 However, the disallowance was made by the Learned AO for the sake of making the disallowance by making general and vague allegation without pointing out any specific defect in any specific expenditure and an adhoc disallowance of Rs. 2,00,000/- was made. 6.4 That since the disallowance was made without pointing out any discrepancy in any specific expenditure, the disallowance made without any basis is wrong and ought to be deleted." 22. Ld. Counsel for the assessee has also placed reliance on following judgments; a) Hon'ble I.T.A.T. Pune Bench in the case of Lavrids Knudsen Maskinfabrik (India) Ltd. Vs. Addl. C.I.T rep....