TaxTMI 
TaxTMI 
TaxTMI 
2020 (9) TMI 234
X X X X Extracts X X X X
X X X X Extracts X X X X
....nditure to earn exempt income was not correct. 2] The learned CIT(A) erred in not appreciating that the own funds available with the assessee company were far more than the amount of tax free investments and hence, there was no reason to make any disallowance of interest u/s 14A of the Act. 3] The learned CIT(A) failed to appreciate that the major amount of investment in partnership firm was as a result of addition of the assessee's share in the profit of the firm to the capital account and hence, the question of utilizing any borrowed funds for investing in partnership firm did not arise. 4] The learned CIT(A) erred in confirming the disallowance u/s 14A r.w.r. 8D(2)(iii) of Rs. 82,41,026/- in respect of indirect expenditure incurred for earning tax free income even though no such disallowance was warranted on the facts of the case. 5] The learned CIT(A) failed to appreciate that the assessee had not incurred indirect expenditure of Rs. 82,41,026/- for earning the exempt income and hence, and therefore, the disallowance made was not justified on the facts of the case. 6] Without prejudice to the above grounds, the assessee submits that the investment made in partners....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich exempt income had been earned were made from its own interest free funds and not from the interest bearing borrowed funds. He held that there was a failure on the part of assessee to discharge the said onus satisfactorily. He also observed that the disallowance u/s 14A of the Act to be worked out by applying rule 8D of the Rules on proportionate basis itself was based on the concept of mixed funds as involved in the case of the assessee. As regards disallowance to be made on account of other expenses, the AO observed that the decision making in respect of investments involved higher management of the assessee company and the same required expending time and resources. He held that expenses incurred by the assessee on account of various heads claimed under general administrative expenses, thus were partly attributable to the earning of the exempt income and disallowance out of the same on proportionate basis was called for u/s 14A of the Act. He accordingly, applied rule 8D of the Income Tax Rules to work out the disallowance to be made u/s 14A of the Act on account of interest at Rs. 24,26,253/- and on account of other common expenses at Rs. 82,41,026/- and a total disallowanc....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... claim made by the assessee that it has not incurred any expenditure to earn tax free income is not correct. Accordingly, it is submitted that in the absence of proper satisfaction recorded by the Ld. AO, no disallowance u/s. 14A is warranted. 3] As stated above, the Ld. AO has disallowed interest expenditure of Rs. 24,26,253/- under rule 8D (ii). The assessee submits that this disallowance is not warranted at all. It is submitted that the borrowed funds have no nexus with the tax free investments and hence, the disallowance of interest on proportionate basis is not justified. In the assessment order, the Ld. AO has considered Rs. 155.87 Crores as opening tax free investments and Rs. 173.77 Crores as closing tax free investments. However, the correct amount is Rs. 173.77 Crores as opening tax free investments and Rs. 155.87 Crores as closing tax free investments. The relevant chart is enclosed on page 37 of the paper book. Now, it is submitted that the assessee has own funds available with it in the form of share capital and reserves which are much higher than the opening the closing tax free investments. The copy of the balance sheet of the assessee is enclosed on pages, 1-25 of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....estment in the above two partnership firms, an amount of almost Rs. 84.99 Crores is on account of the accretion to the capital of the assessee on account of share of profit. Now, if the assessee had withdrawn its capital from the said firms, to that extent, its investments would have reduced. Secondly, the assessee does not have to incur any expenditure to earn the said profit. Accordingly, it is submitted that the total investment in the partnership firm should be excluded while computing the disallowance u/s. 14A r. w. Rule 8D. Without prejudice, the assessee submits that the profit earned by it over the years which has resulted in higher capital investment amounting to Rs. 84.99 Crores should be reduced while computing the disallowance u/s. 14A r.w. Rule 8D. 6] Without prejudice to the above contentions, assuming without admitting that some disallowance is justified u/s 14A r. w. Rule 8D, the assessee submits that the investment made in partnership firms is not a tax free investment. It is to be noted that the income earned by the firm is already subjected to income tax and hence, the same cannot be treated as a tax free investment for the purposes of section 14A r. w. Rule 8D....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... case of the appellant is 2008-09. There has been an amendment of provisions of Section 14A of the Act read with Rule 8D of the IT Rules,l962 w.e.f 1.06.2007, which is effective from A.Y 2008-09 onwards. It is mandatory on the part of the AO to consider for disallowance u/s 14A in case the appellant could not otherwise prove that no interest was actually incurred for earning such exempt income. The computation for disallowing such interest is to be made mandatorily within the provisions of Rule 8D(2) of the Act. The appellant has not made any such material submission before the undersigned so as to ensure the above that the provisions of Rule 8D(2) was not applicable in its case for not considering the entire investment for the purpose of computation of disallowance under the said provisions. The various decisions cited by the appellant, in my opinion, are not applicable on the facts of appellant's case and also after the amendment of the provisions of Rule 8D(2) as above. I, therefore, do not find any reason to interfere with the findings given by the AO. Accordingly, the disallowance made of Rs. 1,06,67,279/- is hereby confirmed. Ground Nos. 1 to 7 raised by the appellant is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l and free reserves to the tuned of Rs. 271.85 crores as on 31.03.2013 as pointed by the Ld. Counsel for the assessee from the balance sheet placed at page 2 of paper book. The assessee company thus had sufficient own funds in the form of share capital and free reserves at the relevant time which were higher than actual investments made by it which were capable of yielding exempt income. As rightly contended by the Ld. Counsel for the assessee, there was a presumption that the investment capable of yielding exempt income was made by the assessee company out of its own interest free funds and there was no utilization of interest bearing borrowed funds for making such investment so as to warrant any disallowance of interest u/s 14A of the Act. This contention of the Ld. Counsel for the assessee is duly supported by the decision of Hon'ble Jurisdictional High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. (supra), wherein it was held that if the assessee had interest free funds of its own which were more than the investment capable of earning exempt income, it could be presumed that the said investments were made from interest free funds available with the assessee and n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of the Ld. Counsel for the assessee. In our opinion, once the claim of assessee of having not incurred any common expenses in relation to the earning of exempt income is found to be not correct and the disallowance u/s 14A of the Act on account of such expenses is liable to be worked out by applying the formula given in rule 8D(2)(iii) of the Rules, the basis given therein cannot be altered or changed as sought by the Ld. Counsel for the assessee, unless and until the basis so given in the formula is found to be patently untenable in the facts and circumstances of a particular case. We, therefore, find no merit in this contention of the assessee and reject the same. The issue raised by the assessee relating to the disallowance u/s 14A of the Act read with rule 8D of the Rules as raised in ground Nos.1 to 6 is thus, partly allowed. 10. During the course of appellate proceedings before the Tribunal, the assessee has raised an additional ground, which reads as under: "1] The assessee submits that the education cess and secondary and high education cess amounting to Rs. 20,37,889/- may kindly be allowed as a deduction while computing the total income of the assessee." 11. We ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ixed after consideration of the 'circumstances' of the assessee, including his business income. The Privy Council held that the rate was not 'assessed on the basis of profits' and was allowable as a business expense. Following this decision, the Supreme Court held in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [82 ITR 580] that the expression 'profits or gains of any business or profession' has reference only to profits and gains as determined in accordance with Section 29 of this Act and that any rate or tax levied upon profits calculated in a manner other than that provided by that section could not be disallowed under this sub-clause. Similarly, this sub-clause is inapplicable, and a deduction should be allowed, where a tax is imposed by a district board on business with reference to 'estimated income' or by a municipality with reference to 'gross income'. Besides, unlike Section 10(4) of the 1922 Act, this sub-clause does not refer to 'cess' and therefore, a 'cess' even if levied upon or calculated on the basis of business profits may be allowed in computing such profits under this Act. 30. The Division Bench of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ares, has relied upon M/s Unicorn Industries v. Union of India and others, 2019 SCC Online SC 1567 in support other contention that "cess" is nothing but "tax" and therefore, there is no question of deduction of amounts paid towards "cess" when it comes to computation of income chargeable under the head profits or gains of any business or profession. 35. The issue involved in Unicorn Industries (supra) was not in the context of provisions in Section 40(a)(ii) of the IT Act. Rather, the issue involved was whether the 'education cess, higher education cess and National Calamity Contingent Duty (NCCD)' on it could be construed as "duty of excise" which was exempted in terms of Notification dated 9th September, 2003 in respect of goods specified in the Notification and cleared from a unit located in the Industrial Growth Centre or other specified areas with the State of Sikkim. The High Court had held that the levy of education cess, higher education cess and NCCD could not be included in the expression "duty of excise" and consequently, the amounts paid towards such cess or NCCD did not qualify for exemption under the exemption Notification. This view of the High Court was u....