TaxTMI 
TaxTMI 
TaxTMI 
2016 (6) TMI 1391
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....d for scrutiny assessment and notice u/s 143(2) of the Act was issued on 17.08.2009. Further a notice u/s 143(2) r.w.s. 129 of the Act was issued on 16.8.2010 followed by notice 142(1) of the Act along with questionnaire. Necessary details were submitted. Case was discussed and income was assessed at Rs.NIL and deemed income u/s 115JB was revised at Rs. 155.29 crores. Various additions were made to the returned income as well as to the book profit against which assessee went in appeal before ld. CIT(A) and got part relief. 3. Now both the assessee and the Revenue are in appeal before us against the order of ld. CIT(A). 4. First we take up Ground no.1 of assessee's appeal and that of Revenue's appeal which read as under :-. 4.1 Ground No.1 of assessee's appeal : 1.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has restricted the additions made under section 14A of the I T Act, 1961 to Rs. 61,45,72,000/- considering the same as attributable to exempt dividend income. It is submitted that the disallowance is uncalled for and be directed to be deleted. 4.2 Ground No. 1 of Revenue's appeal 1. On the facts and in the circumstances of the case....
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....f the expenditure in question has a relation or connection with -or pertains to exempt income, it cannot be allowed as a deduction, even if it otherwise qualifies under other provisions of the Income tax Act. Thus, even if investment in shares etc. was for reasons of commercial expediency and/or expenditure in relation to such investments by way of interest or other expenses was allowable u/s.36(l)(iii)/37, the same would not be allowable as deduction as per provisions of section 14A. As held by ITAT's Special Bench in the case of Cheminvest Ltd.(2009) 124 TTJ (Del) (SB) 577 and also ITAT Ahmedabad in the case of Shanker Chemical Works (2011) 12 taxmann.com 461 (Ahd), if there is any expenditure in relation to earning exempt income, the same has to be disallowed even if there is no actual earning of any exempt income. In the case of Shanker Chemical Works (supra), it was further held that if interest bearing borrowed funds are utilized for the purpose of investment in shares and there is no receipt of dividend income or if there is only meager amount of dividend income, even then, whole amount of interest expenditure incurred for this purpose will be subject to disallowance u/s....
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....#39;s contention that investments were made out of funds received from State Government and out of net profit of the appellant company, due to which interest on loans raised after 1.4.2005 can also not be disallowed is now taken up. Appellant has not maintained separate books of accounts in respect of dividend income. Neither any separate bank account is maintained for tax free income and related expenditure. As held by Hon'ble High Court of Kerala in the case of CIT, Thissur vs. Dhanalaxmi Bank Ltd. (2011) 10 taxmann.com 213 (Kerala), if the assessee had a case that separate funds available or funds sourced other than through borrowing only were utilized for investment in securities, bonds and shares, which yielded tax free income, they could have maintained such accounts and produced the same before the Assessing Officer when proportionate disallowance was proposed by the Assessing Officer. The Hon'ble Court further held that by subsequent amendment through subsection (2) and by prescribing Rule 8D therein, what is achieved is to prescribe specific guidelines for disallowance in cases where separate accounts are not available on expenditure incurred for earning tax free i....
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....Assessing Officer, disallowance of Rs. 61.4572 crore is directed to be made subject to verification by the Assessing Officer that interest of Rs. 167.48 crore was in relation to working capital loans or other loans utilized exclusively for power trading business of appellant company. 6. Now the assessee is in appeal against the confirmation of Rs. 61.46 crores and Revenue is in appeal against the order of ld. CIT(A) for partly deleting the disallowance u/s 14A of the Act r.w.s. Rule 8D of the IT Rules for Rs. 91 crores. 7. At the outset ld. AR submitted that similar type of disallowance u/s 14A was made in assessee's own case for Asst. Years 2006-07 and 2007-08 and the issue went upto the Tribunal in ITA No.1820/Ahd/2010 & in ITA Nos.1874 & 1821/Ahd/2010 for Asst. Year 2007-08. Ld. AR submitted that the Tribunal has decided the issue in ITA Nos.1874 & 1821/Ahd/2010 vide order dated 20.6.2014 by giving reference to the Tribunal's order for Asst. Year 2006-07 dated 30.9.2013. Ld. AR further submitted that the interest expenditure of Rs. 131.22 crores exclusively relates to interest paid on working capital loan and bill discounting and other business loan specifically granted for ....
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....missions and perused the orders of lower authorities and materials available on record. The undisputed facts of the case are that the Assessing Officer found that the assessee has earned tax free dividend income of Rs. 1283.95 lakhs and that the assessee has claimed interest expenditure of Rs. 18,325.41 lakhs. The assessee has not attributed any expenditure towards earning of exempt dividend income. Therefore, by invoking the section 14A read with Rule 8D he made disallowance of Rs. 197.80 crores. We find that a similar issue had come up before this Tribunal in assessee's own case in the immediately preceding Assessment Year 2006-07 wherein the Tribunal restored the matter back to the file of the Assessing Officer for adjudication afresh by observing as under: "2. At the outset, our attention has been drawn on an additional ground of appeal raised by the Revenue Department reads as under: "1(a) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in deleting the addition ofRs. 187.97 crores u/s 14A of the Act on account of interest attributable to investment in shares without appreciating the fact that in view of Section 106 of the Indian Evidenc....
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....idend earned was at Rs. 508.18 lacs. The AO's objection was that on one hand the assessee has diverted the huge funds towards such investment having exempted income and on the other hand borrowed huge funds of Rs. 3,46,272.51 lacs on which claimed interest of Rs. 19360.59 lacs. Therefore, the AO was of the view that the assessee had diverted the borrowed funds for earning exempted income. The assessee's contention was that the investment during the year was only Rs. 102.32 lacs and rest of the investment was made in the earlier years. According to the AO, if the assessee had not made such investment either in the year under consideration or in earlier years then the assessee would not have been required to borrow interest bearing loans. The AO has placed reliance upon the case of H.R Sugar Factory, 187 ITR 366 (Aid) for the legal proposition that the assessee could have otherwise avoided its liability of interest by not giving interest free funds to its group concerns. The addition in the question was thus made by the AO in the following conclusion. "In view of the above discussion and provision of law, the interest attributable to the investment is not allowable expendi....
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....same nature of addition. From the facts of the case, we have noted that there was re-structuring according to which erstwhile GEB was demerged into seven different companies. Post restructuring; the assessment year under consideration is the first year of operation of the assessee company. On one hand, those were the facts which were relied upon by the learned CIT(A). However, on the other hand, the AO has reproduced some of the replies of the assessee through which it was claimed that the said investment was not made by the assessee company out of the borrowed funds but from the consumers, contribution and subsidiaries. There was a reference of the annual accounts of the year 2005-06. The assessee has also informed that during the year under consideration the assessee company had invested only a sum of Rs. 11.25 lacs. Rest of the investments were the share capital of the subsidiary companies as per the terms of the Financial Restructuring Plan approved by the Government of Gujarat. We have noted that the learned CIT(A) has granted relief only on the ground that the assessee company had become the holding company and the investments were in the form of shares of subsidiary companie....
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....ncome. If the source of such investment is out of the interest bearing borrowings, then only the question of disallowance of interest would arise, otherwise not. On the other hand, the claim of the assessee is that there were sufficient non interest bearing reserves or surplus available. The AO is required to investigate the correctness of the claim that whether the assessee had sufficient non interest bearing fund available and in what form those were utilized by the assessee. If the assessee is in a position to demonstrate that the noninterest bearing funds have actually been invested to earn exempted income then the assessee's claim is legally correct. Thereafter, the question of the invocation of Section 14A comes into play. As far as the applicability of the decision of Special Bench is concerned the same now stood covered by the decision of Hon'ble Bombay High Court pronounced in the case of Godrej and Boyce, 328 ITR 81 (Bom). For the sake of completeness herein below reproduced a portion of an ITAT order viz., Aditya Midcals as follows: "5. With this brief background, we have examined the facts of the case as also the law pronounced in this regard. 6. As far as....
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.... of the case. 6.1. In this judgement at the end, the Hon'ble Court has also recapitulated the conclusion and pronounced that a finding is required whether the investment in shares is made out of own funds or out of borrowed funds. A nexus is required to be established between the investments and the borrowings. In section 14A of the Act expenditure incurred in relation to exempted income is to be disallowed only if the Assessing Officer is satisfied with the expenditure claimed by the assessee pertaining to the said exempt income. Rather, the Court was very specific that in case, no such exercise was carried out by the Assessing Officer then the matter is to be remanded back for afresh investigation. It has also been made clear that the proviso to section 14A of the Act was effective from 2001-02. The Hon'ble Court has also pointed out the importance of Rule 8D of the I.T.Rules, 1962. It was made clear that sub-section (1) to section 14A was inserted with retrospective effect from 01/04/1962, however, sub-sections (2) & (3) were made applicable with effect from 01/04/2007. The proviso was inserted with retrospective effect from 11/05/2001 , however Rule 8D was inserted b....
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.... place on the record all relevant material in support of the circumstances which are considered to be relevant and germane. For this purpose and in light of our observations made earlier in this section of the judgment, we deem it appropriate and proper to remand the proceedings back to the Assessing Officer for a fresh determination. Conclusion: 74. Our conclusions in this judgment are as follows; i) Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessment Year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1); ii) The payment by a domestic company under Section 115O(1) of additional income tax on profits declared, distributed or paid is a charge on a component of the profits 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 behal....
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.... purpose." 8. In the absence of any distinguishing features pointed out by the Departmental Representative, facts being identical, respectfully following the precedent we restore this issue back to the file of the Assessing Officer for adjudication afresh with the same directions as given by the Tribunal in the Assessment Year 200607 in the above quoted order. Needless to mention that he shall allow reasonable and proper opportunity of hearing to the assessee before adjudicating the issue. Thus, this ground is allowed for statistical purpose. 11. We further observe that Rule-8D of the IT Rules came into effect from Asst. Year 2008-09 with respect to provisions of section 14A of the Act which reads as follows :- Sec. '14A. Expenditure incurred in relation to income not includible in total income.- (1)For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total inc....
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.... A = Amount of interest, other than the amount of interest which is directly attributable to the exempt income stated in (a) above. 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 relevant accounting year. C = The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year. The term 'Total Assets' means total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. (c) An amount equal to ½ % of the average of the 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 relevant accounting year. 12. We also observe that ld. Assessing Officer applied the facts and figures of the assessee company into the method provided under Rule 8D of the IT Rules because assessee was having an average investment of Rs....
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.... to the assessee before adjudicating the same. These grounds of assessee and the Revenue are allowed for statistical purposes. 15. Now we take ground no.3 of assessee's appeal which reads as below :- 3.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the enhancement of Book Profit computed under section 115JB of the Income Tax Act, 1961 by Rs. 61,45,72,000/- on account of disallowance made under section 14A of the Income Tax Act, 1961. 16. At the outset ld. AR submitted that this ground relates to the disallowance under section 14A of the Act due to which book profit u/s 115JB was enhanced by ld. Assessing Officer and the fate of this ground depends on the decision to be taken for ground no.1 raised by them. 17. We observe that this ground is incidental to ground no.1. As we have already decided while adjudicating ground no.1 that the matter be set aside to the file of Assessing Officer for looking afresh into the disallowance made u/s 14A of the Act as per our observations made in paras 12,13 & 14 above, we accordingly set aside the matter referred in this ground to the file of Assessing Officer to recomputed book profit u/s 1....
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....rniture and fixtures i.e. panels, racks etc. and assets such as recorder machines, LCD projectors, electrical works, air conditioning, public address system, cost towards AMC and ATC etc. Assets of this kind can neither be said to be "computers" nor "computer software". Depreciation rate at the rate of 60% was not applicable on such assets and the Assessing Officer rightly allowed depreciation at rate applicable to blocks of furniture & fixtures and normal plant and machinery. Disallowance of excess claim of depreciation of Rs. 9,17,49,861/- is confirmed." 21. Aggrieved, assessee is now in appeal before us. 22. Ld. AR reiterated the submissions made before the ld. CIT(A) and also submitted that this issue may be set aside to the file of Assessing Officer before whom fresh working of depreciation shall be provided in the light of various facts submitted before ld. CIT(A) so as to arrive at the correct claim of depreciation on computers. 23. On the other hand, ld. DR supported the orders of lower authorities. 24. We have heard the rival contentions and perused the material on record. Through this ground, assessee is aggrieved with the disallowance of depreciation of Rs. 91749....
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....nder :- 7.0 The appellant craves leave to add to, alter, delete or modify any of the grounds of appeal either before or at the time of hearing of this appeal. 31. This ground is general in nature, hence needs no adjudication. 32. Now we take up ground no.2 of Revenue's appeal which reads as under:- 2. On the facts and in the circumstances of the case and in law, the Id.CIT(Appeals) erred in deleting the addition on account of disallowance of claim of guarantee fees of Rs. 4.76 crores without appreciating that the disallowance was made as the same are enduring nature in the assessee's business. 33. In the books of accounts assessee has claimed an expenditure towards guarantee fees of Rs. 4.76 crores paid to Government of Gujarat but the same was held as capital expenditure by ld. Assessing Officer on the basis of his observations that assessee is going to derive benefits in the form of restructuring the debt, rescheduling of repayment schedule, reduction in internet etc. over a long period of time which are in the range of more than 5 years and the assessee will derive advantage of enduring nature. 34. In appeal before ld. CIT(A) the impugned addition of Rs. 4.76 c....
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.... Energy Transmission Corpn. Ltd. (supra), wherein similar issue regarding the claim of guarantee fees paid to Government of Gujarat has been dealt with by the Tribunal as to whether the guarantee fees is an expenditure of capital in nature or revenue in nature and has observed as under :- 35. We find that the Tribunal in its order dated 8.5.2015 cited supra has held as under: "6. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) decided these issues in paras- 5.2 & 5.3 and 6.2 respectively by observing as under:- "5.2. I have considered the submissions of the ld.AR and the facts of the case. The issue relating to whether an item of expenditure lies in the capital or the revenue field has exercised the courts in numerous cases. From an analysis of such cases a few guiding principles/tests can be identified. One of the important tests for categorizing any expenditure as capital in nature is whether the laying out of the impugned expenditure results in the acquisition of creation of any new asset. Where no such asset is created, it would be indicative of an expenditure....
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....y.In India Cements Ltd. vs. CIT, 60 ITR 52, the Supreme Court had also held that the expenditure incurred for securing the use of money for a certain period was revenue expenditure. In the instant case, the assessee has secured the loan by creating a charge (hypothecation of its assets). Hence the ratio of the above mentioned two cases would squarely apply. Accordingly, it is held that the AO was not justified in making the disallowance of Rs. 45,24,582/-, which is directed to be deleted." 6.1 The ld.CIT(A) has followed the decision of the Tribunal passed in ITA No.738/Ahd/2009 for AY 2006-07 in the case of Himalaya Machinery Pvt.Ltd., dated 5.6.2009 and in the case of Shri Rama Multi Tech vs. ACIT reported at 92 TTJ 568. 6.2. The ld.CIT-DR could not distinguish the facts of the case, therefore we do not see any reason to interfere with the order of the ld.CIT(A), same is hereby upheld. Thus, these two grounds raised in the Revenue's appeal are rejected." 36. DR could not point out any good reason as to why the above quoted order of the Tribunal should not be followed for the year under consideration. In the absence of distinguishing features being pointed out by the D....