TaxTMI 
TaxTMI 
2018 (2) TMI 1934
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....applied by the Assessing Officer (AO) only if he is not satisfied with the correctness of claim of expenditure made by the assessee ; further, the CIT(A) has erred in holding that the disallowance is required to be worked out by the mandatory method prescribed in Rule 8D(2)(iii); (iii) not accepting the contention that where there are mix funds, it cannot be presumed that the borrowed funds are utilized for earning exempt income and (iv) holding that appellant has not been able to establish that no expenditures were incurred to earn exempt income; further, he erred in holding that the appellant has inevitably incurred the expenses for earning exempt income. 3. In a nutshell, the facts of the case are that the appellant has received the following exempt income during the year under consideration Particulars of Exempt Income U/s Amount (Rs.) Divided Income 10(34)/(35) 15,04,54,778 Interest from tax free securities 10(15) 1,81,03,267 Long Term Capital Gain 10(38) 5,04,96,859 Total 21,90,54,904 The AO, then following the decision in Rajasthan State Warehousing Corporation v. CIT 244 ITR 450 (SC) and Godrej & Boyce v. DCIT (2010) 194 Taxman 203, disallowed expenditure of....
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....income. Thus the disallowance should be restricted to Rs. 45,16,714/- [Rs. 73,36,360/- minus Rs. 28,19,646/-]. 5.2 The Ld. counsel further submits that the appellant had sufficient own funds and non-interest bearing funds to make the said investments in tax-free bonds, shares of domestic companies and the same have been used for investment purpose. Reliance is placed by him on the decision in (i) CIT v. HDFC Bank Ltd [2016] 67 taxmann.com 42 (Bom. HC), (ii) CIT v. Karnataka State Industrial & Infrastructure Development Corpn. Ltd. [2016] 65 taxmann.com 295 (Karnataka), (iii) Integrated Coal Mining Ltd. v. DCIT [2016] 67 taxmann.com 260 (Kolkata), (iv) CIT v. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom. HC), (v) Oswal Industries v. ACIT (2000) 109 Taxman 279 (Mum. ITAT), (vi) Maruti Udyog Ltd. (92 ITD 119) (Del. ITAT), (vii)Hero Cycles Ltd. (323 ITR 518) (P&H HC) and (viii)Bunge Agribusiness (India) (P.) Ltd. v. DCIT 132 ITD 549 (Mumbai ITAT). 5.3 The Ld. counsel finally submits that strategic investments should be excluded while calculating average value of investment. It is stated that investments of Rs. 63,96,30,000/- outstanding as on March 31, 2009 and Rs. 60,00,0....
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....Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does 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" Let us go through the assessment record to see the situation. During the course of assessment proceedings, the AO observed at para 3 (page 2) of the assessment order dated 30.12.2010 that the appellant is engaged in various activities like (i) Broking i.e. buying and selling share on behalf of clients, (ii) Managem....
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.... postulate that only the expenses relatable to the earning of income should be matched with it." We find in the instant case that the AO, having regard to the accounts of the assessee, as placed before him, has come to a finding that he is not satisfied with the correctness of the appellant's claim of expenditure. Thereafter, he has invoked Rule 8D. This is evident from the relevant paras of the assessment order we have mentioned hereinbefore. We also find that the same is in conformity with para 37 of the decision in Godrej & Boyce Manufacturing Co. Ltd. (supra). As it conforms to the above decision by the Hon'ble Supreme Court, we are not adverting to the other decisions relied on by the Ld. counsel. In view of the above, we dismiss the ground raised by the appellant in this appeal that no reason was recorded for dissatisfaction by the AO of the correctness of the claim of the appellant. 7.1 We now turn to the disallowances made by the AO. We find that the appellant had sufficient own funds and non-interest bearing funds to make the said investment in tax-free bonds, share of domestic companies and the same have been used for investing purpose. This is evident from the balance....
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....are also of the considered view that strategic investments made by the appellant in its subsidiaries which are capable of yielding exempt income i.e. by way of dividend etc. shall be included while computing disallowance u/s 14A of the Act. The rationale for enactment of section 14A was explained by the Hon'ble Bombay High Court in Godrej and Boyce Mfg. Co. Ltd (supra) as under: "Section 14A was enacted by the Parliament in order to overcome the judgments of the Supreme Court in the cases of CIT v. Indian Bank Ltd. AIR 1965 SC 1473, CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 and Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450/109 Taxman 145, in which it was held that in the case of a composite and indivisible business, which results in earning of taxable and non-taxable income, it is impermissible to apportion the expenditure between what was laid out for the earning of taxable income as opposed to non-taxable income. The effect of section 14A is to widen the theory of the apportionment of expenditure. Prior to the enactment of section 14A, where the business of an assessee was not a composite and indivisible business and the assessee earned both taxable a....
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....llowance should also be linked to the value of the investment rather than the amount of exempt income. Under Portfolio Management Schemes (PMS), the fee charged ranges between 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed administrative expenses were excluded on the ground that in the case of a large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment. The justification that has been offered in support of the rationale for rule 8D cannot be regarded as being capricious, perverse or arbitrary." 7.3.1 In Godrej & Boyce Manufacturing Company Ltd. (supra), the Hon'ble Supreme Court has held that the literal meaning of Section 14A, far from giving rise to any absurdity, appears to be wholly consistent with the scheme of the Act and the object/purpose of levy of tax on income. 7.3.2 The statute does not grant any exemption to the strategic investments which are capable of yielding exempt income to be excluded while computing disallowance u/s 14A. Our decision is fortified by the deci....