TaxTMI 
TaxTMI 
TaxTMI 
2020 (10) TMI 1021
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.... and on facts has restricted the additions made under Section 14A of the I T Act, 1961 to 50,85,00,000/- considering the same as attributable to exempt dividend income. It is submitted that the disallowance is uncalled for and be directed to be deleted. 2.0 The Learned Commissioner of Income Tax (Appeals) has erred in law and on facts has set aside the additions of Rs. 4,44,00,000/- being Guarantee Fees paid to the Government of Gujarat in consideration of it issuing the guarantee for various unsecured loans with the direction to re-verify the claim despite the fact that the documents establishing the facts were submitted at the time of appeal hearing. 3.0 The Commissioner of Income Tax (Appeals) has erred in law and on facts has set aside the addition with respect to the prior period expense of Rs. 21,47,000/-with the direction to re-verify the claim despite the fact that the documents establishing the facts that the same is a credit entry and already included in the Net Profits considered for computing the taxable income were submitted at the time of appeal hearing. 4.0 The Learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the disallow....
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....gly, the AO invoked the provisions of Section 14A read with Rule 8D and made the disallowance of the following expenses: "S.No. Particulars Amount i. Direct expenses NIL ii. Interest expenses _21,879.34432 Lacs iii. Administrative expenses _3,057.65195 Lacs _24,937.01627 Lacs" 5. However, the AO found that the assessee has not offered the dividend income in the profit and loss account and no exempted income was claimed. Accordingly, the AO reduced the amount of dividend income of Rs. 1,116.61 lakhs from the disallowance made under Section 14A read with Rule 8D and the balance amount of Rs. 238,20,40,627/- was added to the total income of the assessee. 6. Aggrieved assessee preferred an appeal to the Learned CIT (A) who has partly allowed the appeal filed by the assessee after making the reference to the order of his predecessor for the Assessment Year 2008-09. The relevant finding of the Learned CIT (A) is placed on pages 12 to 15 of his order. 7. Being aggrieved by the order of Learned CIT-A, both the assessee and the Revenue are in appeal before us. The assessee is in appeal against the confirmation of the addition made by the AO for Rs. 5....
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....nd 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 Evidence Act, it was up to the assessee company to adduce evidence that all the borrowings were used for the purposes of business and its is assessee' s own surplus fund that were invested in the shares and deposits earning exempted income, and, even in case of mixed funds, the disallowance of interest could be made." 1(b) As an alternate plea, the Id. CIT(A) erred in not upholding the additi....
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..... 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 expenditure. The assessee was required to give the rates of interest paid to various sources. The assessee vide its reply did not furnish the rates of interest paid. It simply submitted that loans from various banks with varying interest rates were obtained. During the year under consideration, the market rate of interest was 12%. Therefore, interest at the rate of 12% works out to Rs. 65725.17 lacs....
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.... 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 companies which was an integral part of the demerger arrangement. Therefore, it was nothing but commercial decision. 6.2 According to us, the issue has been mixed up by the Revenue Department. The first step should be to examine the scheme of demerger and thereafter the issue could have been streamlined. As per the definition of "demerger" prescribed u/s.2(19AA) means; the transfer pursuant to a schem....
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....earing fund available and in what form those were utilized by the assessee. If the assessee is in a position to demonstrate that the non-interest 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 the Assessing Officer's action is concerned, the disallowance has been made on the basis of a calculation of the proportionate interest alleged to be attributable to the investment earning exempted dividend income. It is also to be noted that while doing so for the years under consideration the A.O. has not followed the past method of calculation of the disallowance. As per AO it was seen that the wo....
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....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 by the Income Tax (Fifth Amendment), Rules, 2008 by publication in the Gazette dated 24/03/2008; reproduced below:- "a) The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the di....
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....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 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....
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....ble 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 income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an as....
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....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. 5529.57 crores , interest paid during the year at Rs. 131.22 crores and exempt income of Rs. 249 crores. Going through these figures ld. Assessing Officer felt appropriate to applying the method of Rule 8D but did not look into the following facts :- (i) As on 1.7.205 when the company was given a balance sheet duly notified by the State Govt., the company had total investment of Rs. 5580.20 crores considering all investme....
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....nce 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." 10.1 As the facts of the case on hand are identical to the facts of the case as discussed above which has been set aside to the file of the AO for fresh adjudication as per the provisions of law by the ITAT as discussed above. Respectfully following the order of this Coordinate Bench in the own case of the assessee, we set aside the issue on hand to the file of the AO for fresh adjudication in terms of the finding of the ITAT in its own case for the Assessment Year 2008-09 (Supra) as well as in accordance to the provisions of law. Hence, the ground of appeal of the assessee and the Revenue are allowed for the statistical purposes. 11. The second issue raised by the assessee is that the Learned CIT (A) erred in allowing the deduction of Rs. 4,44,00,000/- being guarantee fees paid to the Government of Gujarat after necessary verification as directed ....
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....ost of such asset. Appellant has certified that guarantee fees was paid in respect of loans for acquisition of capital assets which were put to use prior to 1.4.2007. Guarantee fees of Rs. 4,44,00,000/- is directed to be allowed as revenue expenditure, subject to verification by the Assessing Officer of the certificate filed during appellate proceedings, i.e. loans on which guarantee fees was paid were utilized for construction of power plants at that time and there was no capital work-in-progress in respect of such loans during F.Y.2008-09." 4.3 The A.O. is directed to follow the directions issued by my predecessor for the A.Y. 2008-09 in the year under consideration too." 15. Being aggrieved by the order of the Learned CIT (A), both the assessee and Revenue are in appeal before us. The assessee is in appeal against the direction of the Ld. CIT-A for allowing the guarantee commission after necessary verification as discussed above whereas the Revenue is in appeal against the finding of the ld. CIT-A that the guarantee fees is not resulting any enduring benefit to the assessee. 16. The Learned AR before us submitted that the ITAT in the own case of the assessee for the Assessme....
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....ng 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 which was not capital in nature. Another test relates to the principle of "enduring benefit". "Enduring benefit" may be in the form of long lasting use of an asset or the acquisition of a right to exploit certain commercial processes, etc. In the instant case, the assessee did not acquire any right to exploit a commercial technology or process, and neither was the benefit "enduring", since the payment of guarantee commission was an annual charge. The benefit derived from payment of such commission thus lasted for exactly one year only. Such ITA No.704 and 761/Ahd/2012shortlived benefit cannot be categorized as "enduring". Hence, I am inclined to the view that the payment of guarantee commission was a revenue expenditure. 5.3. Further, the jurisdictional Bench of ITAT had occasion to consider the allowability of guarantee commission paid to a Director of the company in respect of loans taken from the bank. In the case of Himalaya Machinery Pvt.Ltd. (ITA No.738/....
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....cted." 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 DR, and the facts being identical, respectfully following the above quoted decision of the Tribunal, we confirm the order of the CIT(A), and dismiss this ground of appeal of the Revenue. 40. We are of the view that the issue raised in this ground is squarely covered by the decision of co-ordinate bench referred above in the case of Gujarat Energy Transmission Corpn. (supra) and respectfully following the same, we find no reason to interfere with the order of ld. CIT(A) and uphold the same. This ground of Revenue is dismissed." 20. As the facts of the case on hand are identical to the facts of the case as discussed above, we are incline to uphold the finding of the Ld. CIT-A. 21. Before parting, it is important to note that the revenue was in appeal in the immediate preceding Assessment Year i.e. 2008-09 before us on the following grounds of appeal: "On the facts and in the circumstances of the case and in law, the ld. CIT (Appeals) erred in deleting the a....
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.... of the ITAT in the own case of the assessee for the Assessment Year 2008-09 as contended by the ld. AR for the assessee. In view of the above and after considering the facts in totality, the grounds of appeal of the assessee and the Revenue are dismissed. 23. The next issue raised by the assessee is that the Learned CIT-A erred in allowing the deduction of Rs. 21.47 Lacs after necessary verification despite having all the requisite details before him. 24. The AO during the assessment proceedings found that the assessee has claimed deduction of the prior period expenses amounting to Rs. 21.40 lakhs which were not allowable for deduction in the year under consideration for the simple reason that the assessee, based on mercantile system of accounting, should have claimed the deduction of such expenses in the year to which it relates. Accordingly, the AO disallowed the same and added to the total income of the assessee. 25. On appeal before the ld. CIT-A, the assessee submitted that amount of Rs. 21.47 Lacs represents the credit entries which were offered to tax by crediting the profit and loss account. Accordingly, further addition of Rs. 21.47 Lacs will lead to the double additio....
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....sions. Assessing Officer has not held that entire expenditure incurred, 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 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 these kinds can neither be said to be "computers" nor "computer software" per-se. Depreciation 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 and fixtures and normal plant and machinery. Disallowance of excess claim of depreciation of Rs. 1,21,06,721/- is confirmed." 6.3 Following the decision in the preceding year i.e. A.Y. 2008-09, the disallowance of Rs. 1,21,06,721/- made in the year under consideration is also confirmed." 32. Being aggrieved b....
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....in his decision. 25. We are, therefore, of the view that in the given circumstances this issue needs to go back to the file of ld. Assessing Officer for re-examination and calculation of depreciation on computers in the light of submissions made by assessee before ld. CIT(A) after giving sufficient and reasonable opportunity to the assessee for providing necessary details so as to arrive at the correct amount of depreciation on computers for which the assessee is eligible. Accordingly this ground is allowed for statistical purposes." 36. As the facts of the case on hand are identical to the facts of the case as discussed above, we are incline to set aside the issue to the file of the AO for fresh adjudication as per the provisions of law and in the light of the direction issued by the ITAT for the Assessment Year 2008-09 which is reproduced here in above. Hence, the ground of appeal of the assessee is allowed for the statistical purposes. 37. The next issue raised by the assessee is that the Learned CIT(A) erred in confirming the order of the AO by sustaining the addition of Rs. 50.85 crores disallowed under the provisions of Section 14A read with Rule 8D while determining the ....
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....ining the expenses as mentioned under Clause (f) to Explanation 1 to Section 115JB of the Act. 45. However, it is also flawless that the disallowance needs to be made with respect to the exempted income in terms of the provisions of Clause (f) to Section 115JB of the Act while determining the book profit. In holding so, we draw support from the judgment of Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance regarding the exempted income needs to be made as per the Clause (f) to Explanation-1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:- "We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 under Section 115JB of the Act. We remand the matter for such computation to be made by the Learned Tribunal. We accept the submission of Mr. Khaitan, Learned Senior Advocate that the provision of Section 115JB in the matter of co....
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....in directing the Assessing Officer to re-work the disallowance U/S.14A read with rule 8D after verifying the working capital loans and investments in equity shares made during the year in the equity shares of subsidiary companies and investments made in other companies without appreciating that the disallowance made by the Assessing Officer was as per the formula given in 8D for deriving proportionate interest disallowance. 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 ^ 4.44 crores without appreciating that the disallowance was made as the same are enduring nature in the assessee's business. 3. On the facts and in the circumstances of the case and in law, without following the ratio taken in the decision of Id.CIT(A) in the case of M/s.Dakshin Gujrat Vij Co. Ltd. and other subsidiary companies of the assessee, the Id. CIT(A) erred in deleting the addition of ? 3550 lacs being 15% of capital grant received by the assessee which was neither reduced from the cost of capital assets nor offered portion of it as revenue receipts as treatments of grants/ ....
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.... furnished the necessary details about the receipt of the grant by the assessee in the year under consideration from the Government of Gujarat. Accordingly, the AO was of the opinion that 15% of the grant and subsidies should be offered to tax out of every yearend balance. Accordingly, the AO worked out sum of Rs. 3750 lakh being 15% of 25,000 lakhs and added the same to the total income of the assessee. 56. On appeal, the assessee submitted that the grant received by it from the Government of Gujarat was utilized for making investment in other distribution companies for the implementation of Jyoti Gram Yojna. As such, the grant received by it from the Government of Gujarat was converted into share capital. Accordingly, the assessee contended that there cannot be any addition of Rs. 3750 lakh being 15% of the grant credited in the year under consideration under the head reserve and surplus. 57. The Learned CIT(A) after considering the submission of the assessee deleted the addition made by the AO by observing as under: "7.2 I have considered the facts of the case and appellant's submissions. The appellant has received the capital grant for making investments in equity capital o....
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....f the aforesaid scheme of the State Government. In view of the above facts and circumstances, we do not find any infirmity with the decision of the Ld. therefore, the aforesaid grants received cannot be treated as income of the assessee company. Accordingly , this ground of the appeal is dismissed." 60.1 As the facts of the case are identical to the facts of the case as discussed above, respectfully following the same, we do not find no merit in the grounds of appeal raised by the Revenue. Hence, the ground of appeal of the Revenue is dismissed. 61. The next issue raised by the Revenue is that the Learned CIT(A) erred in treating the interest income of Rs. 547.36 Lacs as business income instead of income from other sources. 62. The assessee in the year under consideration has shown interest income on the advances/loans to the staff, interest on other loans and advances, interest on Unscheduled Interchange pool account amounting to Rs. 547.36 Lacs which was treated as income from the business activities. However, the AO disregarded the contention of the assessee by observing that the impugned income does not relate to the business activities of the assessee and, therefore, the ....
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....power and interest of UL pool account received from M/s. Power Grid Corporation India Ltd were directly related to the business of the assessee therefore, this ground of appeal of the Revenue stands dismissed." 67. As the facts of the case are identical to the facts of the case as discussed above, respectfully following the same, we do not find any merits in the grounds of appeal raised by the Revenue. Hence, the ground of appeal of the Revenue is dismissed. 68. In the result, the appeal filed by the Revenue is partly allowed for statistical purposes. Coming to the ITA No.3103/AHD/2014(Assessee's Appeal) A.Y. 2009-10:- 69. The assessee has raised the following grounds of appeal: "1.0 The learned Commissioner of Income Tax (Appeals) has confirmed the effect given by the Assessing Officer in respect of the Disallowance under section 14A of the I T Act. The learned Commissioner (Appeals) ought to have appreciated that amount of interest expenditure for the purpose of computing the disallowance under section 14A was directed to be considered at Rs. 21,92,00,000/- as against the amount of Rs. 30,82,00,000/- considered by the Assessing Officer while passing order giving to the CI....