TaxTMI 
TaxTMI 
2016 (6) TMI 1391
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.... return of income. The case was selected 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 app....
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.... the case of Maxopp Investment Ltd. (2011) 15 taxmann.com 390 (Delhi), if 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 e....
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....ution tax is to be paid by the company distributing dividend. Appellant'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 a....
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....i.e. Rs. 61.4572 crore Thus, instead of disallowance of Rs. 152.4627 crore U/S.14A made by the 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....
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..../Ahd/2010 vide its order dated 20.6.2014 the Tribunal adjudicated the issue relating to disallowance u/s 14A and held as under :- 7. We have heard the rival submissions 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 additi....
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....5 19435.13 Less: Interest Capitalized 74.54 19360.59 4.1 At the same time, it was also found by the AO that the assessee had made the investment of Rs. 5,47,709.74 lacs on which dividend 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 ....
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....ecision of respected Special Bench of ITAT Mumbai in the case of ITO V/s. Daga Capital Management Pvt. Ltd., 117 ITD 169 (Mum) (SB). Learned DR has also pleaded that in one of the assessment year, i.e., in A.Y. 2007-08 learned CIT(A) had sustained the 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 Restruct....
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....assessee. Thereafter, the AO is also required to give a clear finding about the borrowings made by the assessee on which the said interest was paid. The next step is that the AO has to examine the sources of the funds which were invested for earning the dividend income. 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,....
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....ing the apportionment. It has also been observed by the Hon'ble Court that while making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and material having a bearing on the facts and circumstances 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 ma....
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....ny expenditure in relation to the earning of income which does not form pan of the total income under the Act and if so to quantify the extent of the disallowance. The Assessing Officer would have to arrive at his determination after furnishing an opportunity to the assessee to produce its accounts and to 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); ....
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.... of the case." 6.4 Due to the decision of the Hon'ble Bombay High Court, it is legally correct to refer this issue back to the stage of the AO to be decided de novo as per the guidelines of the Hon'ble Court. The outcome of the above discussion is that the "Additional Ground" raised by the Revenue may be treated as allowed but only for statistical 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.- ....
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....e states that the expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts : (a) The amount of expenditure directly relating to income which does not form part of total income. (b) In the case of interest on borrowed funds which is not directly attributable to any particular income or receipt, the amount computed in accordance with this following formula : A x B C 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. ....
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....t. Year 2007-08 is dated 20.6.2014 the matter is set aside to the file of Assessing Officer to examine the facts and figures of the case in the light of our observations made above in order to arrive at a final conclusion as to whether disallowance u/s 14A is to be made and if so, then the amount thereof which in no case should exceed the exempted income earned by assessee during the year under appeal. It is needless to mention that ld. Assessing Officer shall allow reasonable and sufficient opportunity of hearing 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 Office....
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....sing Officer has not held that entire expenditure incurred of Rs. 164,75,39,828/-, i.e. addition towards computer assets was not of capital nature. Appellant's submissions in this regard are therefore not relevant. The dispute is regarding rate of depreciation applicable on such assets. As per rates of depreciation applicable for A.Y.2008-09, computer software was eligible for 60% rate of depreciation as prescribed in New Appendix-I of Income tax Rules. The assets on which Assessing Officer did not allow 60% depreciation rate were furniture 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 submission....
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.... 5.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on fact has dismissed the ground relating to the initiation of penalty proceeding under section 271B of the Income Tax Act, 1961. 27. These two grounds are premature, hence need no adjudication. 28. Ground No. 6 reads as under :- 6.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the charging of interest under section 234B, 234C and 234D of the Income Tax Act, 1961, 29. This ground is consequential. 30. Ground No.7 is as under :- 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. ....
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....cision of the co-ordinate bench in the case of Gujarat Energy Transmission Corpn. Ltd. vs. ACIT, Circle-1(1), Baroda in ITA No.704 & 761/Ahd/2012 for Asst. Year 2008-09 pronounced on 12.06.2015. 38. We have heard the rival contentions and perused the material on record and gone through the decision referred and relied upon by both the parties. Through this ground Revenue has challenged the action of ld. CIT(A) deleting the disallowance of guarantee fees at Rs. 4.76 crores. 39. We observe that ld. AR has referred and relied on the decision of the co-ordinate bench in the case of Gujarat 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 a....
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....eleted. 6.2. I have considered the submissions of the ld.AR and the facts of the case. The jurisdictional Bench of ITAT has held in the case of Shri Rama Multi Tech vs. ACIT, 92 TTJ 568, that in determining the nature of expenditure incurred for obtaining loan, it is irrelevant to consider the purpose of loan. The amount spent on stamp duty, lawyer fees, etc. for obtaining loan secured by charge on its fixed assets is a revenue expenditure, because the transactions were entered into directly to facilitate the business of the company and payment of consultancy charges was made on ground of commercial expediency.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....