TaxTMI 
TaxTMI 
2019 (9) TMI 1312
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....)] erred in confirming the addition made by Learned Assistant Commissioner of Income Tax [hereinafter referred to as the Ld. ACIT] under section 14A of the Income Tax Act, 1961 ('the Act') calculated by applying Rule 8D of Income Tax Rules, 1962. (b) The CIT(A) erred in disregarding the following facts ignored by ACIT as well while reaching to the conclusion that the loans taken by the appellant are for the purpose of making investments yielding tax free income: The investments generating tax free income were funded out of the company's own funds. Term loans have been utilized for specific business purposes which generated taxable income. Further, the RBI guidelines restricts Banks to finance NBFC for making investments in shares/debentures etc. and also the term loan agreements have restrictive clauses prohibiting the company from investing in capital markets. As per the RBI guidelines on Asset Liability mismatch, short term loans cannot be used for making long term investments including shares and securities. (c) Without prejudice to the above, the CIT (A) erred in ignoring Appellant's submissions that....
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....were used for advancing loans and earning interest therefrom. Accordingly, it was submitted by the assessee that a reasonable amount of salary and other over heads were attributed for earning of the exempt dividend income and resultantly disallowed under Sec. 14A. However, the A.O after deliberating on the contentions advanced by the assessee was not persuaded to subscribe to the same. It was observed by the A.O, that though the increase in the share capital and reserves was only Rs. 103.56 crores, however, the increase in the investments amounted to Rs. 2,224.60 crores. Accordingly, the A.O was of the view that the investments made by the assessee were funded from the interest bearing funds raised by way of loans. On the basis of his aforesaid observations, the A.O held a conviction that there was a direct correlation between the investments and the loan funds. It was observed by him that out of the total increase in the investments, the increase in the investments made in mutual funds amounted to Rs. 1544.63 crores, while for the balance increase was in respect of quoted and unquoted shares. On the basis of his aforesaid deliberations, the A.O called upon the assessee to correlat....
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....al before us. The ld. Authorized Representative (for short "A.R‟) for the assessee took us through the orders of the lower authorities in context of the issue under consideration. It was submitted by the ld. A.R, that the assessee had earned a dividend income of Rs. 14,49,99,258/-, against which it had offered a suo motto disallowance u/s 14A of Rs. 54,86,307/- in its return of income. It was submitted by the ld. A.R that both the lower authorities had erred in failing to appreciate that for the purpose of computing the disallowance under Sec. 14A only the investments yielding tax free income were to be considered. It was further submitted by the ld. A.R, that the disallowance of Rs. 146,82,00,000/- made by the A.O under Sec.14A was thereafter reduced by him to an amount of Rs. 71,37,00,000/-, vide his order passed under Sec. 154 of the Act. It was submitted by the ld. A.R, that as the assessee had sufficient own funds to justify the investments made in the exempt income yielding assets, therefore, no disallowance of any part of the interest expenditure was called for in its hands. In support of his aforesaid contention the ld. A.R had relied on the judgment of the Hon‟....
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....hat the disallowance under Sec.14A may be restricted to the extent the same was offered by the assessee in its return of income for the year under consideration. 6. Per contra, the ld. Departmental Representative (for short "D.R‟) relied on the orders of the lower authorities. It was submitted by the ld. D.R, that as the assessee had failed to establish a nexus between the investments made in the exempt income yielding assets and its self owned funds, therefore, the A.O had rightly worked out the disallowance of the correlating interest expenditure under Sec. 14A of the Act. Apart there from, it was submitted by the ld. D.R, that the A.O after duly recording his dissatisfaction as regards the correctness of the disallowance under Sec.14A, as claimed by the assessee, had rightly worked out the same as per the mandate of law. 7. We have heard the ld. authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. Admittedly, the assessee during the year under consideration had earned exempt dividend income of Rs. 14,49,99,258/-. Also, it is a fact....
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....ssee to produce the bank statements/bank books to establish that interest bearing loans were not utilised for making of investments yielding exempt income, was not discharged. We find that the ld. A.R had filed before us a "chart‟ in support of his claim that it had sufficient own funds for making of investments in exempt income yielding assets, and no part of the interest bearing funds were utilised for the said purpose. A perusal of the "chart‟ reveals as under: Particulars Amt. (Rs. In lacs) Amt. (Rs. in lacs) Total investments as at 31.03.2009(Refer page 22 of the paper- book-Financials) 295,866 Less: Investments yielding taxable income: 1. Investment in shares of foreign subsidiaryTata Capital Pte ltd. (5,644) 2. Investment in Bonds and Debentures 12.5% Steel Strips Wheels Ltd. Indian Hotels Company Ltd. (1,000) ( 1) 3. Investment in Pass Through Certificates Auto Securities (7,293) 4. Investment in quoted Govt. securities (962) 5. Investment in units of Mutual Funds (Growth Scheme) (1,77,500) (1,92,400) Total investments generating exem....
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....s recorded by the ITAT, undisputedly the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax free securities. The ITAT therefore held that there was no basis for deeming that the Assessee had used the borrowed funds for investment in tax free securities. On this factual aspect, the ITAT did not find any merit in the contention raised by the Revenue and therefore, accordingly answered the question in favour of the Assessee. On going through the order of the CIT (Appeals) dated 28th March 2005 as well as the impugned order, we do not find that the CIT (Appeals) or the ITAT erred in holding in favour of the Assessee. In this regard, the submission of Mr Mistry, the learned Senior Counsel appearing on behalf of the Assessee, that this issue is squarely covered by a judgment of this Court in the case of Commissioner of Income Tax v/s Reliance Utilities and Power Ltd., reported in (2009) 313 ITR 340 (Bom) is well founded. The facts of that case were that the Assessee viz. M/s Reliance Utilities and Power Ltd. had invested certain amounts in Reliance Gas Ltd. and Reliance Strategic Investments Ltd. It was the case of the Assessee that the....
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....ot out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (1982) 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there were funds available both interest-free and over draft and/or loans taken, then a presumption would arise that 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 inv....
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....f any part of the administrative expenses for earning of the exempt dividend income is concerned, therefore, the disallowance made by him under Sec. 14A r.w.Rule 8D(2)(iii) cannot be sustained and is liable to be vacated. We find that the ld. A.R in order to drive home his aforesaid claim had placed heavy reliance on the judgment of the Hon'ble Supreme Court in case of Godrej & Boyce Manufacturing Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC). We have given a thoughtful consideration to the contentions advanced by the authorized representatives for both the parties in context of the issue under consideration. As is discernible from the assessment order, the A.O had failed to record any dissatisfaction as regards the correctness of the claim of the assessee insofar disallowance on account of administrative expenses offered by him under Sec. 14A is concerned. In fact, there is not even any whisper on the part of the A.O as to why the disallowance of the amount of salary and other overheads as had been offered by the assessee in its return of income was not be accepted. In our considered view, the very process of determination of the amount of expenditure incurred in relation to exempt....
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....eading to his dissatisfaction. In fact, we are of a strong conviction, that in case the A.O was not satisfied with the claim of disallowance of the assessee under Sec. 14A, then it was obligatory for him to have recorded cogent reasons which had led to such dissatisfaction on his part. We are of the view that as the A.O had failed to record the requisite satisfaction, therefore, the very assumption of jurisdiction by him for dislodging the claim of disallowance made by the assessee and substituting the same by the amount worked out as per the method prescribed in Sec. 14A r.w Rule 8D cannot be sustained and is liable to be vacated. We thus set aside the disallowance of Rs. 923 lacs made under Sec. 14A r.w. Rule 8D(2)(iii) by the A.O and sustained by the CIT(A). Accordingly, in terms of our aforesaid observations, the disallowance made by the A.O under Sec. 14A r.w. Rule 8D(2)(ii) in respect of the interest expenditure is restored to his file for fresh adjudication, in terms of our aforesaid observations. As for the disallowance made by the A.O under Sec. 14A r.w. Rule 8D(2)(iii), the same in the absence of any dissatisfaction recorded by the A.O as regards the correctness of the cl....
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....ee company in Japan. It was submitted by the ld. D.R, that as the assessee had failed to place on record any evidence of services rendered by Mr. Arata Nambu, therefore, the aforesaid expenditure of Rs. 43 lacs which was debited in the profit and loss account was disallowed. It was averred by the ld. D.R, that the CIT(A) had grossly erred in summarily vacating the aforesaid disallowance without appreciating the facts in the right perspective. Apart there from, it was submitted by the ld. D.R, that the CIT(A) was also in error in setting aside the issue as regards the disallowance of commission that was claimed by the assessee to have been paid to M/s Galaxy Automobiles Pvt. Ltd. and IKON Solutions, to the file of the A.O. It was the claim of the ld. D.R, that as the CIT(A) subsequent to 01.06.2001 was not vested with any power to "set aside‟ an issue to the file of the A.O, therefore, he had clearly erred in traversing beyond the limited scope of his jurisdiction as was vested with him under Sec.251 of the Act 14. Per contra, the ld. A.R submitted, that the professional fee of Rs. 43 lacs was paid by the assessee company to Mr Arata Nambu for the services which were provid....
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....ntial force in the claim of the ld. A.R that the payments made to the said person were for the services which were rendered by him viz. creating awareness about the assessee company and its products amongst the foreign parties, supporting it in its marketing efforts, arranging meetings with Japanese business contacts, and also assisting in translation and supplying of information. We find that the aforesaid documentary evidence which had been relied upon by the ld. A.R to support the aforesaid claim of expenses debited by the assessee in its profit and loss account for the year under consideration, had neither been dislodged by the lower authorities, nor anything proving to the contrary had been placed on our record by the ld. D.R in the course of the hearing of the appeal. Accordingly, finding no force in the claim of the revenue that the CIT(A) was in error in deleting the disallowance of the consultancy charges of Rs. 43 lacs that was paid by the assessee company to Mr. Arata Nambu, we uphold his order to the said extent. 16. We shall now advert to the contention advanced by the ld. A.R, that the CIT(A) was in error in setting aside the issue pertaining to the disallowance of....