TaxTMI 
TaxTMI 
2019 (12) TMI 1036
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.... of appeal relate to determination of expenses require to be disallowed for the purpose of section 14A of the Income Tax Act read with Rule 8D of Income Tax Rules. 3. Facts on all vital points are common. Therefore, for facility of reference we take up the facts from the Asstt.Year 2014-15. There is no dispute with regard to the fact that in all these three assessment years, the assessee had dividend income which is exempt from tax. The assessee itself has allocated a sum of Rs. 1,00,000/- for the Asstt.Year 2012-13, Rs. 1,20,000/- for the Asstt.Year 2013-14 and Rs. 2,35,000/- for the Asstt.Year 2014-15 attributable to earning of exempt income. In other words, assessee itself added back this much of amount towards expenditure require to be disallowed under section 14A. This allocation was not found to be sufficient by the AO. He accordingly made additions of Rs. 97,57,920/-, Rs. 63,72,000/- and Rs. 79,05,000/- in the Asstt.years 2012-13 to 2014-15 respectively in addition to amount already disallowed by the assessee itself. This working has been made with help of Rule 8D. Dissatisfied with the disallowance, the assessee carried the matter in appeal before the ld.CIT(A). In the A....
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....e record carefully. There is no dispute with regard to the proposition that if an assessee has earned exempt income then the expenses attributable to earning of such exempt income would require to be disallowed under section 14A of the Act. It is also not in dispute that if the expenditure are not identifiable viz. interest expenditure and the funds are mixed funds, then such expenditure are to be worked out with help of Rule 8D. The AO in all these years formed an opinion that funds of the assessee are mixed, and therefore, the disallowance is to be worked out on the basis of Rule 8D. He computed the disallowance in each assessment year under Rule 8D. The case of the assessee, on the other hand is that interest on specific loan/charges to be excluded, taxable investment to be excluded, only net interest income is to be considered for the purpose of working out the disallowance. At the time of hearing, the ld.counsel for the assessee relied upon the judgment of Hon'ble Gujarat High Court in the case of Nirma Credit & Chemical Ltd., 85 taxmann.com 72 (Guj). In order to buttress his contention, the assessee has submitted that it had sufficient interest free funds to carry out investm....
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....ments increased by Rs. 9,82,78,400/-. Thus, it is clearly evident that the incremental investments have been made out of own funds. As on 31.3.2006 there has been a decrease in borrowings by Rs. 99,01,352/- with no increase in investments. As on 31.3.2007 there has been a substantial increase in borrowed funds by 47,76,37,580 /- and whereas the investments merely increased by 4, 75,48,314/-. The said increase in borrowings was for paying off the liabilities towards ONGC amounting to Rs. 45,39,90,000/-. Also, during AY 07-08, your office has verified the fact that the ONGC payments were made out of borrowed funds. Your office also allowed the benefit of exclusion of interest paid on ONGC liability while working out disallowance u/s 14 A r.w.r 8D in AY 07-08, AY 08-09, AY 09-10 andAY10-ll. Thus, it is very clear that the incremental investment amounting to Rs. 4,75,48,314/- have been made out of interest free own funds of the Appellant As on 31.3.2008 borrowed funds have decreased by 91,36,000/- and the investments increased by 1,94,72,995/-. Thus, the incremental investments have clearly not been totally funded ....
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....ecision of the Hon'ble Bombay High Court. In this case, the Hon'ble Bombay HC has held that where there are funds available, both interest free and borrowed funds, then a presumption would arise that the investments are out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investment and accordingly there ought not be any disallowance u/s. 14A of the interest paid on the borrowings. Consequently, the ITAT rightly held that where there are both interest free and borrowed funds then there was no basis for deeming that the assessee had used borrowed funds for investment in tax free securities. Copy of decision is enclosed as Annexure 4(d)." 6. Identical note has been filed in other two assessment years, whereby the assessee has quantified the investment upto the end of the accounting years in those years. For example, in the Asstt.Year 2012-13, the total amount of share capital and reserve available with the assessee was Rs. 10419.10 lakhs, and he cost of investment made was Rs. 2634.60 lakhs. In the Asstt.Year 2013-14, again total funds in the shape of share capital and reserves were of Rs. 1....
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....e book profit for the purpose of section 115JB of the Act. Though theoretically, we have deleted the disallowance worked out by the AO, and nothing left for making adjustment except the amounts the assessee itself added back, but apart from that we find that this issue is squarely covered in favour of the assessee by the decision of Special Bench of the Tribunal in the case of Vireet Investment, 165 ITD 27 (SB). From the Asstt.Year 2008-09 to 2010-11, the issue has been decided in favour of the assessee by the ITAT. It is also covered by the decision of Hon'ble Bombay high Court rendered in the case of Reliance Industries Ltd., 102 taxmann.com 142 (Bom). The ITAT has considered this aspect in the case of Gujarat Flurochemicals Ltd. and other appeals. This order of the ITAT has been upheld by the Hon'ble Gujarat High Court. ITAT has followed order of the Special Bench in the case of Vireet Investment (supra). In brief, the outcome of this order is that the disallowance under section 14A is not required to be added back in the book profit under section 115JB of the Act. Therefore, we allow ground no.2 of the assessee's appeal (ITA No.675/Ahd/2016 - Asstt.Yar 2012-13) and rejected gro....
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....on this very ground, the business expediency has been established in the case of appellant in respect of advances given to sister concern. As a matter of fact, due to huge losses incurred in the case of Quick Flight Ltd., the appellant has not charged interest in the year under consideration which in no way will change the purpose of advances given'to Quick Flight Ltd. It is also noticed that if the business of subsidiary company is not revived, then the appellant will lose entire investment therein in the form of share capital (Rs. 2 crores) and advances (Rs. 22.78 crores) as on 31.03.2012 also. In view of these facts, the claim of appellant that the advances given to Quick Flight Ltd. were on account of business expediency and for commercial consideration is found to be acceptable. 6.4.1. It is also noticed that under the similar facts and circumstances of the case, the interest expenditure has been held to be an allowable expenditure u/s. 36(l)(iii) of the Act by the Hon'ble Supreme Court in the following cases:- (a) S.A. Builders Ltd. 288 ITR 1 (SC) (b) Hero Cycles (P) Ltd. Vs. CIT, 2015 - TIOL - 280 - SC - IT, order dated 05.11.2015. ....
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.... "16. In ground no.3, the assessee has raised the following grievance :- "3. Disallowance of foreign travel expenditure Rs. 9,74,612/- : 3.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming 75% of the disallowance made by the Assessing officer of expenditure on foreign travel incurred by the Appellant presuming it to be for non business purposes." 17. So far as this disallowance is concerned, the relevant material facts are like this. During the course of the assessment proceedings, the Assessing Officer noted that the assessee has incurred expenditure of Rs. 12,99,483 on UK and USA visit undertaken by Ms Y R Amin. It was stated by the assessee that this visit was undertaken to understand opportunities available in expanding and diversifying in the markets. It was also stated that Ms Amin had visited various manufacturing plants and interacted with key personnel, technology professionals and consultants et. The Assessing Officer was, however, not convinced with these explanations. He was of the view that "no tangible ad reliable evidence was filed to prove that the foreign visit of Ms Y R Amin was f....
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.... expenses incurred on the visit cannot be disallowed as personal expenses. This is at best expense of the assessee company which resulted in benefit to the director. In any event, there is no material whatsoever to come to the conclusion that 75% time on this trip was used for personal purposes of the director. The case relied upon by the CIT(A) was a case in which a detailed analysis of the activities of the director was carried out and then this conclusion was drawn. There is no such material on record in this case. Once the CIT(A) came to the conclusion that the trip was for some business purposes, it was not open to him to deny any part of deduction for these expenses- particularly when there is no material to hold that the visit was for personal purposes. In view of these discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned disallowance of Rs. 9,74,612." There is no disparity on facts. Therefore, respectfully following the order of the Tribunal, we delete the disallowance in this year also." 17. A perusal of order of the ld.CIT(A) would indicate that the ld.CIT(A) ....
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....ng will be at risk if subsidiary is not being revived. Thus, genuineness of the advancement in the shape of ICDs was not in doubt. These were for the purpose of business. The assessee has shown the interest income of Rs. 738 lakhs from F.Y.2008- 09 to F.Y.2010-11. This amount was offered for taxation. If some balance outstanding remains, and written off in the accounts, then it is not for the Revenue to verify the genuineness or to ask the assessee to show whether debts have actually been become bad or not. The moment debts have been written off in the books, it is to be allowed without expecting the assessee to demonstrate whether debts have actually become bad or not. A reliance can be made to the decision of Hon'ble Supreme Court in the case of TRF Ltd. 230 CTR 14 (SC). It is altogether irrelevant, whether QFL actually paid tax or not. If a liability has ceased, then it will be added back in the taxable income of the QFL. Now, if that concern was suffering huge loss, then that cannot be the reason to disallow claim of the assessee. If this type of logic is being accepted, then every business organization was required to show profit only. This is a misplaced notion at the end ....
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....he Hon'ble Court was "whether the Tribunal was justified in allowing set off of brought forward business loss against deemed short term capital gain arising from sale of building and plant and machinery." From perusal of the judgment we find that Hon'ble Court held that the question referred above does not give rise to any substantial question of law and the issue was not admitted for adjudication. 30. On the other hand we find that special Bench decision by Coordinate Bench Bangalore in ITA No. 1546/Bang/2008 dated 09.12.2011in the case of Nandi Steels vs. ACIT adjudicated similar issue of claiming set off of brought forward business loss against income from capital gain. Special bench has extensively discussed various judgment which mostly includes the judgment referred and relied by the assessee. Special Bench decided the issue favour of the Revenue by holding that brought forward business loss can be set off only against the business income of the assessee. In holding so Coordinate bench observed as follows:- (a) The impugned order of the Tribunal allowed the appeal of the respondentassessee on the issue of set off of brought forward business losses against de....
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....on by him and assessable for that assessment year;.... Much stress has been laid by both the parties on the term "profits and gains if any, of any business or profession" mentioned in sub-clause -(i) of subsec.( l) of sec.72 of the IT Act. What are the profits and gains of business or profession ?. Whether it should be the income earned out of the business carried on by the assessee or it may be the income in any way connected to the business or profession carried on by the assessee ?. The answer to this question entirely depends on the interpretation to be given to the term "of any business or profession carried on by the assessee and assessable for that assessment year" for determination of the issue. It is not in dispute that the land, building and bore well sold by the assessee were used by the assessee for its business purposes. It is also not disputed that these assets were fixed assets of the assessee. The only argument of the assessee has been that they have direct nexus with the business carried on by the assessee and therefore, are business assets and any gains from the sale of such assets would also have the character of business income. We are unable t....
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.... In our opinion, the decision of the Hon'ble Supreme Court in the case of M/s Express Newspapers Ltd., is fairly applicable to the facts of the case before us. The Coordinate Bench of the Tribunal in the case of M/s Steelcon Industries Pvt.Ltd., cited supra, has misplaced its reliance upon the decision of the Apex Court in the cases of M/s United Commercial Bank Ltd., and M/s Cocanada Radhaswami Bank Ltd., In view of the same, we are inclined to reject the grounds of appeal nos.5 & 6 raised by the assessee. Thus, the reference is answered in favour of revenue. 11. The case is now to be posted before the Division Bench to give effect to the order of the special Bench and also to give effect to the order of the Division Bench on the grounds of appeal nos. 1 to 4 decided by it while making the reference to the Hon'ble President for the Constitution of a Special Bench. 31. From going through the above discussion as well as the judgment in favour of both the parties we find that in the judgment favouring assessee it was observed that the net income shown under the head house property/income from other sources/capital gain has a direct nexus with the regular b....
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....ct and therefore while interpreting the provision u/s. 72(1) of the Act which clearly specify that for the particular assessment year if the net result of the computation under the head "profit and gains of business or profession" is a loss to the assessee, not being a loss sustained in speculation loss, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provision of section 71 (which deals with set off of loss from one head against income from another) then so much of the loss as has not been so set off or where it has no income under any other heads, meaning thereby that after setting off the business loss other than the speculation loss, assessee can set off the business against other heads of income in accordance with provision u/s. 71 and still if there remain unabsorbed business loss then the same can be carry forward to subsequent years for not more than eight assessment years and can be set off against the "profit and gains if any of any business or profession carry on by him". In our view this particular phrase the "profit and gains, if any, of any business or profession" refers to the third head of inco....
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....t has shown long term capital loss on sale of shares at Rs. 5,17,02,554/-. Thus, under long term capital gain of Rs. 3,16,04,608/- was offered to tax by the assessee. The ld.AO has directed the assessee to explain the long term capital loss suffered by the assessee with supporting documentary evidence. He also confronted the assessee to show as to why this capital loss should not be treated as a speculative loss in view provisions of Explanation to section 73 of the Act. The details of long term loss arising on account of sale of preferential shares are being noticed by the ld.CIT(A) on page no.27 of the paper book while taking cognizance of the finding of the AO. These details have been noticed on page no.32 also while dealing with assessee's submissions. They read as under: Name No of Preference shares Purchase Price per share Sales price per share Sales Value Indexed Cost Indexed Loss Sierra Investments Ltd. 3,00,000 100 80 2,40,00,000 4,90,62,500 (2,50,62,500) Nirayu Private Ltd. 5,00,000 100 100 5,00,00,000 7,56,26,20-1 (2,56,26,204) Sale price was determined based on valuation report given by independent ....
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....interest of justice as no such detail was called for by the Assessing Officer except a day before passing of the assessment order. 26. The ld.CIT(A), thereafter proceeded to find out the fair market value of these shares on the date of sale. The ld.CIT(A) was of the view that the sale price adopted at Rs. 80/- in the case of Sierra Investments Ltd. and Nirayu P.Ltd. at Rs. 100/-. On the strength of report submitted by the valuer, valuation is not correct. This valuation report ought to be as under: Name No of Preference shares Purchase Price per share Sales price per share Sales Value Indexed Cost Indexed Loss Sierra Investments Ltd. 3,00,000 100 163 4,89,00,000 4,90,62,500 (1,62,500) Nirayu Private Ltd. 5,00,000 100 118 59,90,00,000 7,56,26,204 (1,66,26,204) 27. Thereafter, after taking into consideration fair market value of the shares on the date of sale at Rs. 163/- per share, in the case of Sierra Investments Ltd. and Rs. 118/- in the case of Nirayu P.Ltd., the ld.CIT(A) has worked out the fair market value of the shares, and directed the AO to work out the capital loss, if any. 28. While impugning the act....
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....der the Income Tax Act. Relevant judgments are mentioned in chart of assessee's appeal against Ground No.4. 5. Further, CIT(A) referring to general disclaimer by the Valuer has held as under The valuation report clearly indicates that in preparation of valuation report, valuer have solely relied on a statement of account and data supplied by the Shreno Ltd. and Sierra Ltd. without establishing the reliability of such information and also without carrying out any due diligence. Thus valuation report is not reliable and deserves to be rejected and accordingly same is rejected" (Pg 64 Para 4.3.6) Rebuttal: This is a standard disclaimer. The disclaimer does not in any manner provide any other adverse comment rather it is merely a reflection of the approach followed by the independent valuer to its end user. Valuation report cannot be rejected based on general disclaimer. - The valuer has relied on financial statements audited by Statutory Auditors of the company and hence information provided is reliable. This is general practice followed by the valuers 6. Further, CIT(A) while calculating fair market value of shares has added unpaid div....
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....the balance sheet is shown at Rs. 9.87 Crs. (Pg 65 Para 4.3.7) CIT(A) has erred in considering R&S amount. Nirayu has profit & loss account credit balance to tune of 1.31 crs as on 31-03-2011 as evident from page no 244 of paper book of submission which was not sufficient for declaration of dividend as on 31.03.2011. Hence, no dividend was declared as on 31.03.2011. Further, balance reserve shown in balance sheet is created on account of capital redemption reserve, security premium and revaluation reserve and as per provisions of Companies Act, dividend cannot be distributed out ot such reserves - evidences in form of provisions of Companies Act were submitted. PI refer relevant page no: 401 for amalgamation reserve created in Sierra and page no: 414-415 for restriction on declaration of dividend out of such reserves. There was no sufficient reserves & surplus in the hands of Nirayu for the purpose of declaration of dividend as alleged by CIT(A) 8. In view of above, the learned CIT(A) erred in treating the sale price of the preference shares of Sierra Investments Limited and Nirayu Private Limited sold by the Appellant as sham." 29. On the other hand, ....