AI Drafter 
TaxTMI 
TaxTMI 
2019 (10) TMI 126
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....13 as lead case. The Revenue has raised the following grounds of appeal: 1. On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in deleting the addition of Rs.46,44,832/- out of disallowance of Rs. 79,09,770/- made u/s.14A r.w. rule 8D without considering the fact that in a mixed system of accounting the identification of money employed towards exempted and non-exempted income cannot be made. 2. On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in deleting the addition of Rs.46,44,832/- out of disallowance of Rs. 79,09,770/- made u/s.14A r.w.rule 8D without commenting on the judicial decisions relied upon by the A.O. in the assessment order. 3. On the facts and in the circumstances of the case, and in law, learned CIT(A) erred in directing not to consider the investment made in HDFC Fixed mutual fund and HDFC cash management fund for computation of disallowance out of interest paid as per sub clause (ii) to clause 2 of Rule 8D, but to consider these investments for making disallowances as per clause (iii) to clause 2 of Rule 8D without appreciating the fact that as per rule 8D(ii)B the average of val....
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....h rule 8D of Income Tax Rule. 2. Briefly stated facts are that the assessee in the present case is a limited company and engaged in the business of manufacturing and otherwise dealing in worsted (woven blended) made primarily from wool, also manufacturing and otherwise dealing in felt, blanket and filter fabric. The assessee in the year under consideration has claimed exempted income amounting to Rs.86,36,479.00 only under section 10(34) of the Act. The assessee against such income has not made any disallowance of the expenses as per the provisions of section 14A read with rule 8D of Income Tax Rule. Therefore the AO after giving the opportunity of being heard to the assessee made the disallowance under rule 8D of Income Tax Rule as detailed under: i. Direct expenses NIL ii. interest expenses 64, 69, 918.00 iii. administrative expenses 14, 39, 852.00 Total 79, 09, 770.00 In view of the above, the AO added the sum of Rs.79,09,770.00 to the total income of the assessee. 3. Aggrieved assessee preferred an appeal to the learned CIT (A) who has party confirmed the order of the AO by observing as under: "4.1. Since the facts....
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....at on the dates of investment in the Mutual Fund, there was sufficient balance in the bank accounts. Accordingly, it has been proved that own funds generated by the appellant either from the sales proceeds or from the maturity of earlier investments, have been utilized for making the fresh investment in the Mutual Fund resulting into exempt income. Therefore, in my considered view, value of current investments is required to be excluded for the purposes of computation of disallowance of interest u/s. 14A r.w. Rule 8D. However, with the abundant precaution, the Assessing Officer is directed to verify the above investments and then allow consequential relief. Needless to mention, the appellant shall provide documentary evidence to the Assessing Officer in this regard. It is worthwhile to mention here that although the own funds have been utilized for making the current year investment, but the time and energy of the Management and Resources of the company have been utilized for taking the decision and carrying out the actual transactions and accordingly disallowance at 0.5% of the value of said investment is required to be made. The Assessing Officer is, therefore, directed to comput....
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.... • Appellant is attaching herewith chart showing details of investment from A.Y. 2007-08 to A.Y. 2013-14 as per Exhibit-I. • Appellant is also attaching herewith Annual Accounts from F.Y. 2006-07 to F.Y. 2010-11 relevant to A.Y. 2007-08 to A.Y. 2011-12 as per Exhibit - II respectively. Annual Accounts Pages Relevant Pages F.Y. 2006-07 1 to 76 20,28 F.Y. 2007-08 79 to 157 99, 105 F.Y. 2008-09 158 to 238 182, 188 FY 2009-10 239 to 317 259,265 2010-11 318 to 407 344,350 Hence, appellant prays that there is negligible change in the year to year investment holdings of the appellant. Therefore the appellant has not diverted any administrative resources to manage the same and therefore no administrative expenses are incurred by the appellant. It is therefore prayed that in line with earlier years' ITAT orders for AY 2007-08, 2008-09, 2009-10, 2010-11 and 2011-12 disallowance of administrative expenses while determining disallowance u/s 14A be restricted to Rs. 20,000/- and the remaining be deleted." Both the learned DR and the AR before us relied on the order of the authorities below to ....
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....ssessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A." 6.3 Similarly, we also find support from the judgment of Hon'ble Gujarat High Court in the case of UTI Bank Ltd. reported in 32 Taxmann.com 370 where the headnote reads as under : "If there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A". 6.4 In view of the above proposition, we hold that no disallowance of interest expense claimed by the assessee can be made on account of investments as discussed above. 6.5 We also note that there was also the addition on account of interest expenses under section 14A read with rule 8D of Income Tax Rule in the own case of the assessee pertaining to the assessment year 2010-11 in ITA No.77/ AHD/2014, wherein it was held as under: "14. So far ground with regard to deleting the addition of Rs. 21,301/- made u/s.14A read with Rule 8D is concerned, the assessee has claimed exempt dividend income of Rs. 13038588/- and that was earned from non interest bearing funds ....
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....tion of Rs. 3,821,04,858/- by invoking provisions of Section 40(a)(ia) of the Act is concerned, ld. A.O. discussed the issue at page Nos.8 to 11 and ld. CIT(A) has discussed the issue at page nos.24 to 28. In this case, ld. CIT(A) follows assessment years 2008-09 & 2009-10 and Co-ordinate Bench decided the issue in favour of assessee in ITA No.2313 & 2504/Ahd/2011 for Assessment Year 2008-09. Therefore we dismiss this ground of appeal." Respectfully following the finding of the ITAT as discussed above, we uphold the order of the learned CIT-A. Hence the ground of appeal of the Revenue is dismissed. The next issue raised by the Revenue in ground No. 6 is that the learned CIT (A) erred in making the addition of the amount disallowed under section 14A read with rule 8D as per clause(f) of explanation 1 to section 115JB of the Act. 11. At the outset, we note that the identical issue has been decided by us in ITA No. 688/AHD/2015 for the AY 2011-12 vide order dated 25- 02-2019. The relevant extract of the order is reproduced as under: "We have heard the rival contention and perused the materials available on record. It is settled law that the amount of disallowance mad....
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.... such computation to be made by the learned Tribunal. We accept the submission of Mr. Khaitan, learned Senior Advocate that the provision of section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act." Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra). 33.5 Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. In this regard, we also note that there is no mechanism given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the disallowance. Therefore in the given facts & circumstances, we feel that adhoc disallowance will serve the justice to the Revenue and assessee. We, therefore, are directing for the ad-hoc disallowance to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disall....
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....ons of the law and facts. 5. Appellant craves leave to add, alter, amend or delete any of the above grounds at the time of hearing of this appeal. 14. The 1st issue raised by the assessee is that the learned CIT (A) erred in partly confirming the order of the AO by sustaining the disallowance of the expenses as per the provisions of section 14A read with rule 8D of Income Tax Rule. 15. At the outset, we note that, the issue raised by the assessee has already been adjudicated along with the appeal of the Revenue bearing ITA No. 1191/AHD/2016 for the assessment year 2012-13 vide paragraph number 6 of this order. For detailed discussion, please refer the relevant paragraph. Respectfully following the same, the ground of appeal of the assessee is partly allowed. 16. The 2nd issue raised by the assessee is that the learned CIT (A) erred in making the disallowance of Rs.1,24,43,195.00 based on notional interest on account of investment made in the subsidiary companies. 17. The AO during the assessment proceedings found that the assessee on the one hand has made investment in the subsidiary company without charging any interest on the investment and on the other hand ....
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....we are of the view that there is an apparent mistake in the order of Tribunal and therefore recall the order in ITA No. 2369/Ahd/2010 for a limited purpose to decide the issue with respect to disallowance u/s. 14A of the Act. The Registry is directed to fix the hearing the appeal in due course. 5. The revenue preferred an appeal before the Hon'ble High Court of Gujarat in so far as the part which has been decided against the revenue and the Hon'ble Jurisdictional High Court was seized with the following substantial question of law in Tax Appeal No. 769 of 2015. 1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law and on facts in reversing the order of the Commissioner of Income Tax (Appeals) deleting disallowance made by the Assessing Officer on total investment made in shares of subsidiary company? 2. Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law and on facts in holding that the investment made for the purchase of shares of subsidiary company was not a legitimate business activity of the appellant? 6. After considering the....
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....ng interest on investment by the assessee company in the subsidiary company. Entire issue could be looked from a different angle had the premise of Assessing Officer been that in disguise of investment, what the assessee had done was to advance the sum to sister concern without charging interest. That was not even the case of the Assessing Officer. 10. It was in this background the assessee had conveyed to the Assessing Officer that it had purchased shares with business prudence in mind. Merely because during the current year such shares did not yield any return would not imply that in future also no return would accrue. Quite apart from this angle, even the question of investment in subsidiary company has not been properly examined by the Assessing Officer. Merely because the assessee company had interest bearing funds for its capital investment, claiming deduction under section 36(l)(iii) of the Act would not automatically imply that any diversion of funds without interest to a subsidiary would automatically give rise to disallowance. So much has been discussed by the Supreme Court in case of S.A. Builders Ltd.(supra). The assessee had demonstrated before the Assessing O....
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....cally held the said amount has not been rightly disallowed since the same had been expended from interest free funds, though spent for earning exempt dividend income. It is not the question of the total sum of Rs. 471 lacs, but, a limited sum that has been spent for earning the exempt income, therefore, as rightly held, when there was interest free funds available with the assessee, there does not arise a question of disallowing expenditure under Section 14A of the Act." 12.The Tribunal's finding that the investment made by the assessee company for purchase of shares in the subsidiary company was not a legitimate business activity, was in fact, an expansion beyond what the Assessing Officer had himself envisaged. It was not even the case of the Revenue that investment made by the assessee in subsidiary company was for some illegitimate purpose or a mere device to divert its tax bearing income. 13. In view of above, we answer the question in favor of assessee, allow the appeal and reverse the judgement of the Tribunal on this issue. 7. A perusal of the aforementioned judgment of the Hon'ble Jurisdictional High Court qua the facts in issue before ....
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.... of the AO by observing as under: "4.4. Ground No.4 pertains to disallowance of Rs. 18,86,101/- u/s.36(1)(iii) of the Act. It is noticed by the Assessing Officer that the assessee company has utilized interest bearing funds in the form of term loan for purchase of Plant & Machinery. The total investment in purchase of Plant & Machinery amounted to Rs. 21,12,78,953/-. In view of the provision of section 36(1)(iii), the Assessing Officer has disallowed interest on borrowed fund upto the date of actual use of capital assets for business purposes. Utilization of borrowed funds for purchase of the capital assets is not disputed by the Ld. Authorized Representative. However, it has been argued that the assets were not purchased for extension of business or new unit and hence no disallowance is called for. On examination of the sanction letters of the term loan, I find that the appellant has carried out modernization of the business with advanced technology and also ventured into new area of generating electricity through wind mill and hence in my considered view, the purchase of new Plant & Machinery was for the purposes of extension of business. The quantum of investment made t....
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....ty of electricity generation unit and there was no interlacing of the fund utilized in the acquisition of machineries. 26.3 Therefore, taking all facts and circumstances into consideration, we are of the opinion that the issue needs to be re-examined by the AO in the light of the above stated discussion and as per the provision of law. Hence the ground of appeal of the assessee is allowed for statistical purposes. 27. In the result, the appeal of the assessee is partly allowed for the statistical purposes. Coming to assessee's appeal bearing ITA No. 3180/AHD/2016 for AY 2013-14 28. The Assessee has raised the following concise grounds of appeal: 1. Ld.CIT(A) erred in law and on facts in confirming disallowance u/s.14A ignoring fact that investment has been made out of surplus interest free funds and not by utilizing borrowed funds. Ld.CIT(A) ought to have considered the submission of the appellant and delete the disallowance. It be so held now. 2.&3. Ld. CIT(A)erred in law and on facts in confirming disallowance of notional interest of Rs. 1,24,43,195/- for investment made in subsidiary company Dinesh Remedies Ltd. u/s.36(1)(iii) of the Act. Ld. CIT(A)....
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....espectfully following the same we allow the ground of appeal of the Revenue for statistical purposes. 35. In the result, the appeal of the assessee is partly allowed for the statistical purposes. Coming to Revenue's appeal bearing ITA No. 3369/AHD/2016 for AY 2013-14 36. The Revenue has raised the following grounds of appeal: 1.(a) "On the facts and in the circumstances of the case, the learned CIT(A) erred in directing the AO not to consider the investment made in HDFC Fixed mutual fund and HDFC cash management fund for the purpose of computation of disallowance put of interest paid as per sub clause (ii) to clause 2 of Rule 8D, but to consider these investments for making disallowances as per clause (iii) to clause 2 of Rule 8D without appreciating the fact that as per Rule 8D(ii)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 has to be taken for computing the disallowance under sub clause clause(ii) of clause (2) of Rule 8D". (b) "On the facts and circumstances of the case, the learned CI....
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....l It is prayed that the order of the CIT (Appeals) be set aside and that of the Assessing Officer be restored. 37. The 1st issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO in part under the provisions of section 14A read with rule 8D of Income Tax Rule. At the outset, we note that the identical issue has already been adjudicated along with the appeal filed by the Revenue bearing ITA No. 1191/AHD/2016 wherein the appeal of the assessee was partly allowed. For detailed discussion, please refer the relevant paragraph bearing number 6 of this order. Respectfully following the same, we partly allowed the ground of Appeal raised by the Revenue. 38. The 2nd issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO on account of notional interest under section 36(1)(iii) of the Act. 39. At the outset we note that the impugned issue has already been adjudicated in favour of the assessee in its own case pertaining to the assessment year 2012-2013 in ITA No. 781/AHD/2016. Please refer the relevant paragraph bearing number 16 of this order for the detailed discussion. Hence, th....