TaxTMI 
TaxTMI 
2015 (7) TMI 1344
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....lant. 4. That even otherwise the investments on which no dividend had been earned were not to be taken into account for working out the disallowance if any." 3. After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that assessee has shown investment of Rs. 23.31 crores as on 31.3.2009 in comparison to 21.71 crores on 31.3.2008. Since income from such shares etc. was exempt and, therefore, Assessing Officer issued a show cause notice that why the provisions of section 14A read with Rule 8D should not be applied. In response it was mainly stated that most of the investment were brought forward from the earlier years and the investments have been made on the long term basis to manage the surplus funds and does not require any expenditure. It was also contended that investments were in the mutual funds, no dividend would accrue and the assessee would get only capital appreciation. The Assessing Officer discussed the issue in detail and no disallowance was made under Rule 8D(i) &(ii) because there was no direct expenditure and there was no interest cost. However, he computed the disallowance under rule 8D(ii)(iii) at Rs. 11,2....
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....07-08 and there is serious difference between assessment year 2007-08 and present assessment year 2009-10 because after assessment year 2008-09, Rule 8D is applicable. He referred to the impugned order and pointed out that Ld. CIT(A) has already accepted the contention of the assessee that there were some investments on which no income was there and Ld. CIT(A) has remanded this aspect to the file of the Assessing Officer for verification and therefore, the assessee cannot be aggrieved by the impugned order. 8. We have considered the rival submissions carefully. It is important to note here that present assessment year is 2009-10 where Rule 8D would be applicable. In this regard, we would like to reproduce the detail analysis given by Tribunal regarding interpretation of section 14A as well as implication of Rule 8D in the case of M/s. Chandha Super Cars P. Ltd. Ludhiana v ACIT in ITA No. 1241/Chd/2011. This issue was discussed in paras 17 to 28 which are as under:- "17. We have considered the rival submissions carefully and find that during the year the assessee has made investment in partnership and mutual fund. The profit from mutual fund in the form of dividend is ex....
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.... the provisions of ss. 10(2A), 28(v), 40(b) and relevant procedural sections which conclusively prove that partnership firm as such is independent from its partners as far as provisions of IT Act, 1961 are concerned. Specific provisions mentioned hereinabove read with Circular No. 636 :, dt. 31st Aug., 1992 go to show that a firm is to be taxed as separate entity and the gross total income of the firm is to be determined in the normal way under different heads as in the case of any taxable entity, hence, any expenditure which has been incurred by firm for the purposes of its business is to be allowed as a deduction in computing the total income of the firm subject to any specific limitation/prohibition provided for the allowance of such expenditure. Having regard to judicial opinion and also the legislative changes in the Act, a partnership firm is a separate entity than that of its partners under the IT Act and if there exists any specific provision in the income-tax law modifying the partnership law then, such specific provision shall be applied and if the tax law is silent on a specific issue, then a reference will have to be made to the provisions of partnership law for the adj....
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....ing that the assessee had made investment using its own funds and no interest was incurred. The Tribunal confirmed the findings of the ld. CIT(A). Before the Hon'ble High Court the contention was raised that even if the assessee made investment out of its own funds the assessee had taken loans on which interest was paid and therefore, the money available with the assessee was in common kitty in view of the decision of the Court in case of CIT V. Abhishek Industries (supra). Hon'ble High Court held vide para 7 as under:- "We do not find any merit in this submission. The judgment of this court in Abhishek Industries Ltd. (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present cased, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application." 19. Second decision relied on is....
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....(P&H), (decided on August 25, 2009), wherein it was observed as under: "The contention raised on behalf of the Revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this court in CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1 and, therefore, disallowance under section 14A was justified. We do not find any merit in this submission. The judgment of this court in Abhishek Industries Ltd. [2006] 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application." In view of the above, we are of the opinion that no substantial question of law arise." 22. It ....
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....s of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of section 10(33). Income from mutual funds stands on the same basis; (iii) The provisions of sub-sections (2) and "(3) of section 14A of the Income-tax Act 1961 are constitutionally valid; (iv) The provisions of rule 8D of the Income-tax Rules as inserted by the Income-tax (Fifth Amendment) Rules, 2008, are not ultra vires the provisions of section 14A, more particularly sub-section (2) and do not offend article 14 of the Constitution; (v) The provisions of rule 8D of the Income-tax Rules which have been notified with effect from March 24, 2008, shall apply with effect from the assessment year 2008-09; (vi) Even prior to the assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub-section (1) of section 14A. For that purpose, the Asses....
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....hat the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is again the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. The proposed amendment will take effect retrospectively from April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent Assessment Year." 24. Hon'ble Bombay High Court noted this decision and then confirmed the theory of apportionment of expenses and held that same ....
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....gathered from the decision of the Rajasthan High Court in Shekhavati General Traders Ltd. v. Commissioner of Income Tax (1987) 167 ITR116 and the judgment of this Court in Income Tax Appeal No. 530 of 2006 (The Punjab State Cooperative Milk Producer's Federation Ltd., v. Commissioner of Income Tax-if and another) decided on 28,3,2011 and of the Apex Court in Commissioner of income Tax v. Walfort Share & Stock Brokers (P) Ltd. (2010) 41 DTR Judgments 233. 12. Controverting the aforesaid submission, learned counsel for the assessee relied upon the decision of the Calcutta High Court in Commissioner of Income Tax v. United Collieries Ltd. (1993) 203 ITR 857 (Calcutta). Learned counsel also relied upon Commissioner of Income Tax v. Central Bank of India (2003) 264 ITR 522 (Bombay) and State Bank of Indore v. Commissioner of Income Tax (2005) 275 ITR 23 (MP). It was contended that it was only the actual expense incurred for earning dividend which was to be deducted from the dividend income for calculating the admissible deductions under Section 80M of the Act. It was urged that the plea of the Revenue that proportional expenses should also be reduced, was against the statut....
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....xation is to tax the net income, i.e., gross income minus the expenditure. Oh the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of Section 14A. In Section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within Section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of Section 14A. Further, Section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in Sections 15 to 59 are now to be allowed only with reference to income which is brought under one of ....
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.... under: "(1) Where the Assessing Officer having regard to the account of the assessee of a previous year, is not satisfied with - (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he hall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:- A X B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the pre....
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....ej & Boycee (supra). Many observations were made under the head "parameters of judicial review at para 62 to 72 of the order". Without unnecessarily burdening this order with these observations we will quote para 73 which deals with justification of Rule 8D: In the affidavit in reply that has been filed on behalf of the Revenue an explanation has been provided of the rationale underlying rule 8D. In the written submissions which have been filed by the Additional Solicitor General it has been stated, with reference to rule 8D(2)(ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax free investment. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as "A" in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example - any aspect of the assessee's business such as plant/machinery etc.). As regards rule 8D(2)(iii) it has been submitted that some mechanism or formula had to be adopted for attributing part of the administra....
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....introduced so that reasonable disallowance is made. In the above findings, the theory of proportionate disallowance as confirmed by Hon'ble Punjab & Haryana High Court in the case of CIT-1 v. Punjab Station Industrial Development Corporation Ltd. in Income Tax Appeal No. 565 of 2006 vide order dated 18.7.2011 has been discussed in above noted paras. Justification of Rule 8D as given by Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. v. DCIT 328 ITR 81 (Bom.) has also been discussed. In conclusion it can be said that Rule 8D is applicable from assessment year 2008-9 and, therefore, issue arising in this appeal have to be discussed on the premise that Rule 8D was applicable. 10. The Ld. Counsel for the assessee has emphasized that assessee has itself disallowed a sum of Rs. 50,000/- which was confirmed by Tribunal in the earlier years. The decision of earlier year pertains to assessment year 2007-08 and therefore, as emphasized earlier Rule 8D was not applicable and that decision cannot be relied in the present year. In any case the Hon'ble Punjab & Haryana High Court itself has held in CIT v A.B. Sugar Mills Ltd. in Income Tax Appeal No.....
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.... it is clear that estimation of expenditure, if any, on the reasonable basis has to be made by Assessing Officer and Appellate authorities have no such power. Consequently, it become absolutely clear that order of the Tribunal for earlier assessment year confirming the estimated disallowance of Rs. 50,000/- cannot be relied in view of this judgement of the Hon'ble Punjab & Haryana High Court. 11. We may also note that in another decision by Hon'ble Punjab & Haryana High Court of M/s. Avon Cycles Ltd. Ludhiana v CIT & Another in ITA No. 277 of 2013 vide order dated 20.08.2014, the following questions of law arose before the High Court. "(i) Whether in facts and circumstances of the present case, the learned authorities have erred in invoking the provisions of Section 14A read with Rule 8D without any finding that any expenditure has been incurred for earning exempt income is legally unsustainable the eyes of law? (ii) Whether in facts and circumstances of the case, the learned authorities below erred in law in making the provisions of Section 14A read with Rule 8D applicable to the assessee in a mechanical manner without controverting the fact finding in....
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.... In view of this finding of fact, disallowance under Section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, it is a question of fact......" In the present case, after examining the balance-sheet of the assessee, a finding of fact has been recorded that the funds utilized by the assessee being mixed funds, therefore, the interest paid by the assessee is also an ITA No. 277 of 2013 5 interest on the investments made. Such being a finding of fact, we do not find that any substantial question of law arises for consideration of this Court." 13. From the above it becomes clear that Hon'ble Court has confirmed that once there are mixed funds, Rule 8D has to be resorted. The same principle would apply in the case of expenditure incurred in earning exempt income. 14. The last important contention made by the Ld. Counsel for the assessee is that section 14A read with Rule 8D can be applied only if the Assessing Officer has recorded a satisfaction that disallowance made by the assessee is not correct. We find that section 14A reads as under:- "EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE....
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....r other show that disallowance already made by the assessee is not correct with reference to the accounts of the assessee. Therefore, such satisfaction has to be inferred from the order. Here we may like to point out that decisions of investments are not easy to make and in fact large corporations invest their surplus funds continuously in various investments of Bank FDRs, govt. securities, mutual funds, shares of other companies. These operations in the commercial parlance are known as treasury operations. The necessity for these operations arise because of two situations namely, either a company has surplus funds which may not be required immediately for investments but may be required for investments later on. In such a situation the funds are temporarily deployed to earn reasonable returns. In the second situation, there are certain companies where cash credits and other limits are taken from the bank and such funds may not be required for some intervals of time because of slackness in the business cycle or because of the business being of seasonal character. Such companies can also not return the funds to the banks because it may not be easy to obtain the same limits later on.....
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.... Statute. Now it is significant to note that the Assessing Officer is required to have satisfaction having regard to the accounts of the assessee which means various operations of the assessee. 17. Having understood the basic logic behind the incorporation of Rule 8D, let us consider the judgement cited by Ld. Counsel for the assessee. The first decision referred to is in the case of CIT v. Deepak Mittal & Amrit Sagar (supra). This decision has been rendered by the Hon'ble Supreme Court for assessment year 2007-08. Further, the Hon'ble Court has referred to the decision of CIT v. Hero Cycles which has already been distinguished by us and that decision has been confirmed by Hon'ble Punjab & Haryana High Court itself in the case of Avon Cycles Ltd. v. CIT in ITA No. 277 of 2013 and the relevant paras have already been reproduced above. In this decision it is to be noted that no expenditure was allocated by the assessee whereas in the case before us the assessee has itself allocated a sum of Rs. 50,000/- towards expenditure incurred for earning the exempt income. There is another aspect in this case for which matter has been set aside by Ld. CIT(A) to the file of Assess....
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.... MUTUAL FUNDS-GROWTH (WITHSTT) HDFC Long Term Equity Fund -Growth 35,000,000 35,000,000 - IDFC Small And Midcap Equity (Sme) Fund Growth (Previousaly Standard Chartered Small & Midcap Fd) 40,000,000 40,000,000 IDFCStrategic Sector (50 - 50) Equity Fund Growth 5,000,000 - - TOTAL (B) 80,000,000 75,000,000 - MUTUAL FUNDS-DIVIDEND (WITH STT) AJG India Equity Fund Regular Dividend 50.000,000 50,000,000 - Reliance Natural Resource Fund Dividend Plan 10,000,000 10,000,000 - Jm Multi Stratigy Fund - Dividend Plan 15,000,000 - - TOTAL (C) 75,000,000 60,000,000 - INVESTMENT FROM WHICH INCOME IS EXEMPT TOTAL (A+B+C) 184,600,955 164,600,955 - FUNDS FROM WHICH INCOME FULLY TAXABLE: MUTUAL FUNDS-GROWTH (WITHOUT STT) JM Fixed Maturity Fund -Series Iv - Growth Plan - 2.500,000 TOTAL (D) - 2,500,000 DEBENTURES CITI Bank Debenture....