TaxTMI 
TaxTMI 
2020 (10) TMI 1021
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....rned 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 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 In....
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....hat the borrowed fund has been utilized in the investments which have generated the dividend income. Accordingly, 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 as....
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....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 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 dep....
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....t 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 expenditure. The assessee was required to give the rates of interest paid to various sources. The assessee vide its reply did not furnis....
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....hich 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 companies which was an integral part of the demerger arrangement. Therefore, it was nothing but commercial decision. ....
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....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 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....
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....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 by the Income Tax (Fifth Amendment), Rules, 2008 by publication in the Gazette ....
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....n 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 behalf of or as ....
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....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 2006-07 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 i....
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....irectly 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. (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. As....
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....nt 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 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 prov....
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....d by the appellant (Guarantee fees was payable to Government of Gujarat every year in respect of loans taken by appellant and guaranteed by Government of Gujarat. As held by Hon'ble Supreme Court in the case of India Cements Ltd. 60 ITR 52 (SC), loan cannot be treated as asset or advantage resulting in enduring benefit. Guarantee fees paid to Government of Gujarat was in connection with raising of loans and enduring benefit or advantage could not be said to have resulted by taking such loans. Only if the assets acquired out of such loans were not put to use till the end of previous year, i.e. 31.3.2008, guarantee fees to such extent, i.e. in respect of such loans only needs to be capitalized as cost 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-p....
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....e 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 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 certa....
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....ssee 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 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 th....
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....fy whether such guarantee fee relates to the capital working progress. As the assessee did not challenge such direction of the Learned CIT(A) for the assessment Year 2008-09 before the ITAT, it implies that such direction has reached to its finality for that assessment year. Therefore, there was no dispute for the ITAT for the Assessment Year 2008-09 for the direction issued by the Learned CIT(A). Accordingly, it cannot be inferred that the order of the Learned CIT(A) for the Assessment Year 2008-09 has merged with the order of the Learned ITAT insofar the direction issued by the Learned CIT(A) to verify the claim of the assessee for the guarantee fees whether such fees relates to the capital work in progress. Accordingly, it cannot be said that the issue raised by the assessee is a covered issue by the order 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....
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....ate of 15% on the computerized plant and machinery and not 60% on the same. On question, the assessee could not substantiate its claim for depreciation at the rate of 60% based on documentary evidence. Accordingly, the AO disallowed the excess depreciation (more than 15%) amounting to Rs. 1,21,06,721/- and added the same to the total income. 31. Aggrieved assessee preferred an appeal to the Learned CIT(A) who has confirmed the order of the AO by placing reliance on the order of his predecessor for the Assessment Year 2008-09. The relevant extract of the order is reproduced as under: "6.2. Similar issue was involved in appeal No. CAB/1/152/10-11 in appellant's own case for A.Y. 2008-09. My predecessor had observed as follows in his appellate order dated 3.2.2012. "I have considered the facts of the case and appellant's submissions. 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....
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.... and has agreed that depreciation has been claimed excess by Rs. 9174986/-. Thereafter the matter which was almost closed due to the submission made by assessee, was revived back by the assessee by raising ground against this addition before ld. CIT(A) and gave various details and documents supporting the ground that depreciation disallowed needs to be re-worked as various types of expenditure which are fully allowable during the year are included in addition of block of assets, computers and similarly there are various machines which are actually eligible for depreciation @ 60% have been subjected to depreciation @ 15% only. We further observe that ld. CIT(A) has looked into this aspect and has open the way for examining the relates facts towards calculation of correct depreciation in the block of assets relating to computers by way of observing the related facts 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 r....
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....e clause (f) of Explanation 1 to Section 115JB of the Act. 43. However, we note that in the recent judgment of Special Bench of Hon'ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 has held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the book profit u/s 115JB of the Act. The relevant portion of the said order is reproduced below: "In view of above discussion, the computation under clause (f) of Explanation 1 to Section 115JB(2), is to be made without resorting to the computation as contemplated under Section 14A, read with rule 8D of the Income-tax Rules, 1962." 44. The ratio laid down by the Hon'ble Tribunal is squarely applicable to the facts of the case on hand. Thus, it can be concluded that the disallowance made under Section 14A r.w.r. 8D cannot be resorted while determining 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....
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....e independently. Therefore, our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus,in the interest of justice and fair play we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the Clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus, the ground of appeal of the assessee is partly allowed. 47. The issues raised by the assessee in ground No. 6, 7 and 8 either are premature to decide, consequential or general in nature, therefore, we dismiss the same as infructuous. Hence, the grounds of appeal of the assessee are dismissed. 48. In the result, the appeal filed by the assessee is partly allowed for the statistical purposes. Coming to the ITA No. 37/AHD/2013(Revenue's Appeal) (A.Y. 2009-10):- 49. Revenue has raised the following grounds of appeal: "1. On the facts and in the circumstances of the case and in law, the Id.CIT(Appeals) erred 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....
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....essee. 53. At the outset we note that the issue raised by the Revenue has already been adjudicated by us along with the ground of appeal of the assessee in the preceding paragraph bearing No.19 to 22 of this order. Respectfully, following the same, we uphold the finding of the Learned CIT(A). Hence, the ground of appeal of the Revenue is dismissed. 54. The third issue raised by the Revenue is that the Learned CIT(A) erred in deleting the addition made by the AO for Rs. 3550 lakh being 15% of the grant received by the assessee of Rs. 25000 lakhs. 55. The assessee in the year under consideration has received a grant of Rs. 25,000 lakhs from the government of Gujarat which has been shown under reserve and surplus in the balance sheet which was utilized by acquiring the shares of the subsidiary companies. However, the AO was of the view that the grant received from the Government of Gujarat is either towards the revenue account or capital expenditure. But the assessee has not 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 ....
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....d 15% of grant of Rs. 2500 lacs which worked out at Rs. 3750 lacs as income of the assessee. The Id. CIT(A) has deleted the aforesaid addition holding that the assessee has not acquired any fixed assets on which depreciation has been claimed, therefore ,such grants cannot be reduced from cost of fixed asset of the assessee company. With the assistance of Id. authorized representatives, we have gone through the material on record pertaining to the submission of the assessee stating that the assessee has not received any grant during the year and the grants received originally from the Govt. of Gujarat were apportioned against the subsidiary companies on appropriate basis. In F.Y. 2007-08, the State Government vide various GRS decided to convert the grant given during the F.Y. 2005-06 to 2007-08 for implementation of Jyoti Gram Yojna (JGY) into equity share capital. Accordingly, the total grants received during the aforesaid financial years were allocated among the four distribution companies for implementation of 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 aforesa....
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....al in the own case of the assessee involving identical facts and circumstances has decided the issue in favour of the assessee in ITA No. 3358/AHD/2015 for the assessment year 2008 -09. The relevant extract is reproduced as under: "10. We have heard the rival contentions and perused the material on record on this issue. The assessing officer has treated the aforesaid income under the head income from other sources without controverting the submission of the assessee on the basis of which it was claimed that these income were of the nature of business income as elaborated in para seven of this order. The ld. CIT(A) has decided the issue in favour of the assessee stating that this issue was decided in favour of the assessee for assessment year 2009-10. During the course of appellate proceedings, the Revenue has failed to controvert the aforesaid contention and the findings of the ld. CIT(A),therefore after considering the material fact that interest earned on loan and advances from deposit placed with Mega Power Project towards its sharing of power and interest of UL pool account received from M/s. Power Grid Corporation India Ltd were directly related to the busine....