TaxTMI 
TaxTMI 
2022 (6) TMI 1428
X X X X Extracts X X X X
X X X X Extracts X X X X
.... For the Respondent in TCA. Nos. 755, 756, 883 to 886, 1263 to 1265 of 2009, 215 of 2011, 118 to 120 of 2012 and 278 & 279 of 2012 : Mr. J. Narayana Swamy Senior Standing Counsel For the Appellant in TCA Nos. 371 & 622 of 2013, 360 & 361, 913 to 916 of 2014 : Mr. J. Narayana Swamy Senior Standing Counsel For the Respondent in TCA Nos. 371 & 622 of 2013, 360 & 361, 913 to 916 of 2014 : Mr. R.V. Eswar, Senior Advocate For Mr. R. Sivaraman For the Appellant in TCA. Nos. 124 to 131, 717 of 2017, 406, 407, 413, 414 & 416 of 2019 : Mr. R.V. Eswar, Senior Advocate For Mr. R. Sivaraman For the Respondent in TCA. Nos. 124 to 131, 717 of 2017, 406, 407, 413, 414 & 416 of 2019 : Mr. J. Narayana Swamy Senior Standing Counsel COMMON JUDGMENT R. MAHADEVAN, J. 1. All these tax case appeals numbering 37, emanate from the different orders of the Income Tax Appellate Tribunal, out of which, 8 appeals are filed by the Revenue and the remaining 29 appeals are filed by the assessees. Inasmuch as the issues involved herein are inter-linked and interconnected, all the appeals were clubbed together and are decided by this common judgment. The details of the cases are tabulated below: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o diversion of income by overriding charge in respect of amount transferred to Statutory Reserve Fund in compliance with the mandatory provisions of Section 45 IC read with Section 45Q of the RBI Act? (ii) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount transferred to Reserve Fund in compliance with the provisions of the Reserve Bank of India Act, 1934, by the appellant from its income, is not an allowable deduction in computing the assessable income under the provisions of the Income Tax Act, 1961?" TCA Nos. 119, 120, 278 and 279 of 2012: (i) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that there has been no diversion of income by overriding charge in respect of amount transferred to Statutory Reserve Fund in compliance with the mandatory provisions of Section 45 IC read with Section 45Q of the RBI Act? (ii) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount transferred to Reserve Fund in compliance with the provisions of the Reserve Bank of India Act, 1934, by the appellant from ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arising out of derivative transactions in foreign exchange is allowable in computing income from non-speculation business of the assessee? (iv) Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was correct in holding that the assessee's claim for deduction of ESOP expenses is an allowable deduction?" T.C.A. No. 913 of 2014: "(i) Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was correct in holding that the payment of royalty is not towards acquisition of intangible asset and is revenue expenditure? (ii) Whether the Income Tax Appellate Tribunal was correct in stating that the method of calculation of the disallowance set forth in Rule 8 D would be applicable only for assessment year 2008-09 and subsequent assessment years? (iii) Whether the Income Tax Appellate Tribunal was right in not holding that the method adopted by the assessing officer to compute the expenditure attributable to income not includable in total income is scientific and therefore, the disallowance under Section 14 A is to be sustained?" T.C.A. No. 914 of 2014: "(i) W....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Tribunal was right in not following its own orders in the earlier years on same issue? (iii) Whether the Appellate Tribunal was right in not allowing the bad debts claimed?" T.C.A. Nos. 124, 126, 128 and 130 of 2017 and 416 of 2019: "(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that there has been no diversion of income by overriding charge in respect of amount transferred to Statutory Reserve Fund in compliance with the mandatory provisions of Section 45 IC read with Section 45Q of the RBI Act? (ii) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount transferred to Reserve Fund in compliance with the provisions of Reserve Bank of India Act, 1934, by the appellant from its income, is not an allowable deduction in computing the assessable income under the provisions of the Income Tax Act, 1961 both in Regular Computation and under Section 115JB? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest charged under Section 234D is not allowable as deduction while comput....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s and circumstances of the case, the Tribunal was right in holding that there has been no diversion of income by overriding charge in respect of amount transferred to Statutory Reserve Fund in compliance with the mandatory provisions of Section 45 IC read with Section 45Q of the RBI Act? (ii) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the amount transferred to Reserve Fund in compliance with the provisions of Reserve Bank of India Act, 1934, by the appellant from its income, is not an allowable deduction in computing the assessable income under the provisions of the Income Tax Act, 1961 both in regular computation and under Section 115JB? (iii) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest charged under Section 234D is not allowable as deduction while computing the business income? (iv) Whether on the facts and circumstances of the case, the Tribunal was right in upholding the disallowance made under Section 14A read with Rule 8D? and (v) Whether, on the facts and circumstances of the case, the Tribunal was right in not directing the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (i) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that there has been no diversion of income by overriding charge in respect of amount transferred to Statutory Reserve Fund in compliance with the mandatory provisions of Section 45 IC read with Section 45Q of the RBI Act? (ii) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount transferred to Reserve Fund in compliance with the provisions of Reserve Bank of India Act, 1934, by the appellant from its income, is not an allowable deduction in computing the assessable income under the provisions of the Income Tax Act, 1961 both in regular computation and under Section 115-JB?" Bad debts (i) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the claim for bad debts is allowable as a deduction in computing the income of the assessee? (ii) Whether on the facts aMnd circumstances of the case, the Income Tax Appellate Tribunal was right in remitting back to the Assessing Officer, the issue of claim of bad debts to verify whether the debt is actually writt....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by the assessing officer to compute the expenditure attributable to income not includable in total income is scientific and therefore, the disallowance under Section 14 A is to be sustained?" (vi) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in remitting back the issue of disallowance under Section 14A r/w Rule 8D to the Assessing Officer to find out whether interest bearing borrowed funds were used to acquire the shares in the companies or making advances to the subsidiary companies? (v)Whether on the facts and circumstances of the case, the Appellate Tribunal ought to have deleted the entire addition u/s.14A r/w Rule 8D, as the appellant was in the business of investment promotion and the appellant have made strategic investments in shares of group companies for acquiring controlling interest?" Interest u/s. 234D Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest charged under Section 234D is not allowable as deduction while computing the business income? Section 40(a)(ia) Whether on the facts and circumstances of the case, th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ounsel, it is an expenditure laid out wholly and exclusively for the purpose of commencement or carrying out the business and the business of the assessees cannot survive without complying with the mandatory provisions of the RBI Act and hence, it is an admissible deduction under section 37 of the Income Tax Act. 5.3. Adding further, the learned senior counsel appearing for the appellants / assessees submitted that the assessees are Non-Banking Financial Companies (NBFC) which fall under Chapter III-B of the RBI Act. As per Section 45-IC of the RBI Act, the assessee companies are mandated to create a reserve fund and transfer certain amount to such reserve. Further, Section 45Q of the RBI Act gives an overriding effect to Chapter III-B in respect of all other laws and therefore, Section 45-IC of the RBI Act creates an overriding charge and it cannot be disallowed under the Income Tax Act. Alternatively, the learned Senior counsel submitted that the NBFCs have no control over the reserve fund created under section 45-IC of the RBI Act and they have to wait for the directives to be issued by the Reserve Bank of India from time to time. Therefore, the learned Senior counsel submitt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any event, such a diversion of funds is a question of fact and not of law. The Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal have dealt with the factual dispute at length, while rejecting the claim of the assessees and hence, the same need not be interfered with by this Court. The learned Senior Standing Counsel also placed reliance on Section 45Q of the RBI Act and submitted that money in reserve fund only goes to the depositors and hence, it will not be allowed to be deducted for the purpose of arriving at taxable income. Adding further, it is submitted that when the income is diverted at source, it does not accrue to the assessees and in that case, it is not really the income of the assessees and it shall be deductible. On the other hand, when the income is required to be applied to discharge an obligation after the income reaches the assessees, it is merely an application of income and thus, liable to be taxed. To substantiate his contentions, the learned senior standing counsel referred to the decisions in (i)Associated Power Co Ltd. V. CIT, [218 ITR 195 (SC)]; (ii)SREI Infra Structure Finance Limited v. CIT [54 Tax Man 254 (Del)] and (iii) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... creation of reserve under the RBI Act is only a prudential effort to safeguard the interest of the shareholders of a NBFC company and it cannot be interpreted as an authorization to create a notional income and hence, the same cannot be claimed as a deduction from the total income computed for the purpose of computing the income tax. After having found that the assessee companies have created statutory reserve for 20% of the profits, by way of appropriation, the assessing officer held that the creation of statutory reserve is nothing but an application of income after the profit has been earned by the assessee companies and not a diversion of income as claimed and hence, such profit needs to be taxed. Referring to the decisions of this court in Tamil Nadu Power Finance and Infrastructure Development Corporation Ltd v. JCIT [280 ITR 491] and the Hon'ble Supreme Court in Southern Technologies Ltd v. JCIT [320 ITR 577], the assessing officer was of the view that the directive of the RBI cannot override the statutory provisions of the Act. Accordingly, the assessing officer held that the amount transferred to the statutory reserve is not an allowable deduction and the same has to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....io from the Hon'ble Apex Court in the case of CIT vs. Sitaldas Tirathdas and Hon'ble Jurisdictional High Court in the case of Seshasayee Paper & Boards Limited is clearly applicable in this case. The Companies Act, 1956 also mandates transfer to reserve fund a certain percentage of the profits before declaration of dividend. The Hon'ble High Court in the case of Seshasayee Paper & Boards Ltd. had held that in such a case, there is no diversion of income by overriding title nor can the amount set apart be claimed as expenditure and it cannot also be stated that it was loss. The ratio from this decision is very much applicable in this case, because as per the Reserve Bank of India Act, the Assessee has to create a Transfer Fund and to transfer therein certain percentage of its profits before any dividend is declared. This transfer to Reserve Fund was to be utilised for such purposes as specified by the Reserve Bank of India from time to time. No such specification of utilisation of that fund had been issued by the Reserve Bank of India. Hence, it cannot be said that there was any diversion of income by overriding title nor can the amount set apart be claimed as expenditur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion of unrealized interest income on Inter Corporate Deposits (ICD) by the assessing officer, when the same had to be declared by the assessee (NBFC) as an NPA as per the directions of the RBI, dealt with section 45Q of the RBI Act and held that the provisions of the RBI Act override the provisions of the Income Tax Act and decided the issue in favour of the assessee. The judgment of the Delhi High Court was affirmed by the Apex Court. However, the said decision is not applicable to the facts of the present case as the interest as held by the High Court and confirmed by the Apex Court was never received by the Assessee therein and held that interest income had not accrued. The present case concerns the amount sought to be deducted by the assessees while computing the taxable income, which is already a part of the total income and transferred to reserve fund and therefore, the said decision may not be helpful to the case of the appellants. 5.12. In Travancore Sugar and Chemicals Ltd case, the issue that arose for consideration was, whether payment of fixed percentage of profits apart from cash consideration, in lieu of takeover of three undertakings of the government is deductib....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uld not arise. Therefore, where income is diverted at source so that when it accrues it is really not his income but is somebody else's income the question as to whether that income falls under sub-section (2) of Section 10 does not arise. Again, income can be said to be diverted only when it is diverted at source so that when it accrues it is really not the income of the assessee but is somebody else's income. It is thus clear that where by the obligation income is diverted before it reaches the assessee, it is deductible. But where the income is required to be applied to discharge an obligation after such income reaches the assessee it is merely a case of application of income to satisfy an obligation of payment and is therefore not deductible." In view of the above, we are of the firm view that when the income by way of profit, as in the present case, is received and then reflected as part of the total income, deduction is not permissible. Therefore, the authorities below were justified in disallowing the deduction claimed by the assessees for the amount transferred to reserve fund in compliance with the mandatory provisions of the RBI Act, which do not call for any i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ates that book profit prepared in accordance with Part II and III of Schedule VI of the Companies Act, 1956 will be increased by the amount carried to any reserve by whatever name called, other than a reserve specified under section 33AC of the Act. The legislature in express, lucid and categorical terms has stipulated that the book profit shall be increased by the amounts carried to any reserve. The word "any", it is obvious, refers to all kinds of reserves and encompasses all types and categories without exception. The legislature did not stop and has thereafter used the expression "reserve by whatever name called". There could not have been more clarity and articulateness in the language of clause (b) to Explanation (1). The intention is unambiguous, i.e, book profit would include all amounts carried to any reserve by whatever name called, except the reserve specified under section 33AC of the Act. The nature and type of reserve or its character would not affect operation of clause (b) to Explanation (1). Only reserves specified in Section 33AC of the Act have to be excluded. Guidance Note on revised Schedule VI to the Companies Act, 1956 by the Institute of Chartered Accountant....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in a similar manner as other reserves." 5.16. In the light of the aforesaid decision of the Delhi High Court, wherein, it was clearly stated that the reserve is the amount of profit which is retained for use in business, when difficulty arises and on the basis of our earlier findings and from the very language of section 45 IC, this court comes to a conclusion that the amount transferred by the assessees herein, to the statutory reserve as mandated under the provisions of the RBI Act, is not an allowable deduction in computing the assessable income under the provisions of the Act under the regular computation and computation of book profits under section 115JB, as the case may be and therefore, the orders of the authorities below, do not call for any interference. Accordingly, the consequential issue is also decided against the assessees. Bad Debts 6.1. The assessees had claimed bad debts that were written off as deduction under section 36(1)(vii) of the Act for the assessment years under consideration. However, the assessing officer disallowed certain amount treating it as mere provision for bad debts, by holding that according to section 36(1)(vii), bad debts that are ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the learned Senior Standing Counsel submitted that the issue involved herein is a question of fact and hence, the matters have to be remanded to the authority concerned to verify whether the bad debts are actually written off and passing orders afresh. 6.4. Per contra, the learned Senior counsel appearing for the assessees would contend that the assessees maintained two sets of books of accounts i.e., one in accordance with the provisions of the Companies Act as mandated by the RBI and another under the provisions of the Income Tax Act. In finalising the corporate accounts, the assessees made a provision in respect of debts advanced by them that were not realisable. For the purpose of income tax, the bad debts were written off in the profit and loss account and claimed as deduction under section 36(1)(vii) of the Act. Accordingly, the assessees had claimed deduction in their returns for the assessment years under consideration. However, the assessing officer disallowed part of the sum claimed as bad debts on the ground that in the books of account maintained under the provisions of the Act, the entire bad debts had been written off, but in the books maintained under the Compan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....challenge in TCA Nos. 125, 127, 129 and 131 of 2017, the Tribunal remanded the matters to the assessing officer for denovo consideration as to whether the debt has in fact been written off, in the accounts of the assessees. For better understanding, the findings of the Tribunal in ITA Nos. 711-717/Mds/2015 dated 29.01.2016, are quoted below: "14. We have heard both sides. The main contention of the assessee is that the issue has already been decided by the Tribunal by order cited (supra) and it has to be followed. However, we observed from the order of the Assessing Officer that he has given a finding that in the account prepared for the purpose of Income Tax, the assessee has claimed Rs. 11659.84 lakhs as bad debt written off and the amount of Rs. 3236.89 lakhs, which was shown as provision in statutory books was taken as written off for the purpose of income tax. From this, it is not clear to us as to whether this amount has been actually written off in the books of accounts maintained and got audited by the assessee under statute by crediting each individual debit account, then, it could be allowed as bad debt as held by the Hon'ble Supreme Court in the case of TRF ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce of two separate sets of books, one for purposes of the companies Act and the other for income-tax, is perfectly in order and there is no embargo against the same. The books maintained for the purposes of the companies Act duly approved by the Board of Directors and placed before the shareholders at the annual general body meeting of the company being contain inter alia the profit and loss account for the relevant previous year prepared in accordance with the provisions of Part II - III of Schedule VI to the Companies Act 1956 will form the basis of an assessment in terms of Chapter XII B Special Provisions relating to certain companies, that provide for an assessment of Minimum Alternate Tax (MAT). The Income Tax Act requires for the assessee to follow a parellely consistent method of accounting in accordance with section 145 thereof. The books maintained for the purposes of the Income tax Act shall comply with the provisions of section 145 and shall form the basis for an assessment thereunder. The error in the order of assessment is the juxtaposition of the two books by the assessing officer. The creation of a provision for bad debts in the corporate accounts thus does not, in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessment year is distinct. The courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position. The reason why the courts have held parties to the opinion expressed in a decision in one assessment year to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of precedent or the precedential value of the earlier pronouncement. Where facts and law in a subsequent assessment year are the same, no authority whether quasi-judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam. However, these are fetters only on a coordinate Bench which, failing the possibility of availing of either of these gateways, may yet differ with the view expressed and refer the matter to a Bench of superior strength or in some cases to a Bench of superior jurisdiction. *** 22. A decision can be set aside in the same lis on a prayer for review or an application for recall or under ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ourt in exercise of its discretionary jurisdiction under Article 136 of the Constitution either because they are considered as individual cases or because they are considered as cases not involving stakes which may adversely affect the interest of the State. Therefore, the circumstance of the non-filing of the appeals by the State in some similar matters or the rejection of some SLPs in limine by this Court in some other similar matters by itself, in our view, cannot be held as a bar against the State in filing an SLP or SLPs in other similar matter(s) where it is considered on behalf of the State that non-filing of such SLP or SLPs and pursuing them is likely to seriously jeopardise the interest of the State or public interest." 6. In Govt. of W.B. v. Tarun K. Roy [(2004) 1 SCC 347 : 2004 SCC (L&S) 225] reference was made to the judgment in Digambar case [(1995) 4 SCC 683] and State of Bihar v. Ramdeo Yadav [(1996) 3 SCC 493 : 1996 SCC (L&S) 756] . It was noted as follows: (Tarun K. Roy case [(2004) 1 SCC 347 : 2004 SCC (L&S) 225] , SCC p. 358, paras 28-29) "28. In the aforementioned situation, the Division Bench of the Calcutta High Court manifestly erred in ref....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion. 10. It will be relevant to note that in Karamchari Union v. Union of India [(2000) 3 SCC 335 : (2000) 243 ITR 143] and Union of India v. Kaumudini Narayan Dalal [(2001) 10 SCC 231 : (2001) 249 ITR 219] this Court observed that without a just cause Revenue cannot file the appeal in one case while deciding not to file appeal in another case. This position was also noted in CIT v. Shivsagar Estate [(2004) 9 SCC 420] . 11. The order of reference would go to show that same was necessary because of certain observations in Berger Paints India Ltd. v. CIT [(2004) 12 SCC 42] . The decision in Union of India v. Kaumudini Narayan Dalal [(2001) 10 SCC 231 : (2001) 249 ITR 219] was explained in Hemalatha Gargya v. CIT [(2003) 9 SCC 510] , at SCC para 14. It has been stated in the said case that the fact that different High Courts have taken different views and some of the High Courts are in favour of the Revenue constituted "just cause" for the Revenue to prefer an appeal. This Court took the view that having not assailed the correctness of the order in one case, it would normally not be permissible to do so in another case on the logic that the Revenue cannot pick and c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ologies Limited v. Joint Commissioner of Income Tax [(2010) 320 ITR 577], has held that "after April 1, 1989, a mere provision for bad debt would not be entitled to deduction under section 36(1)(vii). To understand the above dichotomy, one must understand how to write off. If an assessee debits an amount of doubtful debt to the profit and loss account and credits the asset account like sundry debtor's account, it would constitute a write off of an actual debt. However, if an assessee debits 'provision for doubtful debt' to the profit and loss account and makes a corresponding credit to the 'current liabilities and provisions' on the liabilities side of the balance sheet, then it would constitute a provision for doubtful debt. In the latter case, the assessee would not be entitled to deduction after April 1, 1989". It was further observed that "the issue cannot be decided on the basis of apprehensions / desirability and it is always open to the assessing officer to call for details of individual debtor's account if the Assessing Officer has reasonable grounds to believe that assessee has claimed deduction twice over". 6.11. Such being the settled legal pos....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ujarat High Court in Vithaldas H. DhanjibhaiBardanwala [(1981) 130 ITR 95 (Guj)] was prior to the insertion of the Explanation vide the Finance Act, 2001, with effect from 1-4-1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation to Section 36(1)(vii) with effect from 1-4-1989, a mere debit of the impugned amount of bad debt to the profit and loss account would not amount to actual write-off. According to him, the Explanation makes it very clear that there is a dichotomy between actual write-off on1 the one hand and a provision for bad and doubtful debt on the other. He submitted that a mere debit to the profit and loss account would constitute a provision for bad and doubtful debt, it would not constitute actual write-off and that was the very reason why the Explanation stood inserted. According to him, prior to the Finance Act, 2001, many assessees used to take the benefit of deduction under Section 36(1)(vii) of the 1961 Act by merely debiting the impugned bad debt to the profit and loss account and therefore, Parliament stepped in by way of Explanation to say that mere reduction of profits by debiting the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an apprehension that, if the assessee fails to close each and every individual account of its debtor, it may result in the assessee claiming deduction twice over. 18. Before concluding, we may refer to an argument advanced on behalf of the Department. According to the Department, it is necessary to square off each individual account failing which there is likelihood of escapement of income from assessment. According to the Department, in cases where a borrower's account is written off by debiting profit and loss account and by crediting loans and advances or debtors accounts on the asset side of the balance sheet, then, as and when in the subsequent years if the borrower repays the loan, the assessee will credit the repaid amount to the loans and advances account and not to the profit and loss account which would result in escapement of income from assessment. On the other hand, if bad debt is written off by closing the borrower's account individually, then the repaid amount in subsequent years will be credited to the profit and loss account on which the assessee Bank has to pay tax. 19. Although, prima facie, this argument of the Department appears to be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....13, 371/2013, 360 & 361/2014 and 915 & 916/2014, whereas, the Tribunal in the order dated 29.01.2016, which is impugmed in TCA Nos. 125, 127, 129 and 131 of 2017, instead of remanding the matter, ought to have allowed the appeals by placing reliance on the decision of the CIT(A). Therefore, the order of the Tribunal dated 29.01.2016 is liable to be set aside and is set aside. Accordingly, the issue relating to bad debts is decided in favour of the assessees. Royalty 7.1. The assessee companies claimed royalty paid to the holding company M/s.Shriram Chits and Investments Pvt Ltd as revenue expenses. The assessing officer disallowed the royalty amount and allowed depreciation at 25% by holding that the expenditure incurred is for acquiring intangible asset and would thus amount to capital expenditure. However, the CIT(A) directed the assessing officer to allow the royalty payment in full as revenue expenditure, which was also affirmed by the Tribunal. Feeling aggrieved, the Revenue preferred the appeals viz., TCA Nos. 622/2013, 360 & 361/2014 and 913/2014. Whereas, in the case of Shriram Transport Finance Co. Ltd relating to AY 2014-15, the assessee claimed royalty amount of Rs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es to get immediate market presence and commence their business. Thus, according to the learned Senior Standing Counsel, the expenditure incurred by the assessee companies in this regard, has to be treated as capital expenditure and they are entitled to claim depreciation alone. In other words, the royalty payment being acquiring an intangible asset, the assessee companies are entitled only for depreciation under Section 32 of the Act and the depreciation table expressly provides for 25% depreciation and therefore, the assessee companies cannot claim it to be revenue expenditure and get 100% deduction. It is also submitted that the license to use the trademark is given only to two companies and hence, the claim of the assessee companies that it is not an exclusive use, is liable to be rejected; and the further contention of the assessee companies that the agreement is only for one year, is also liable to be rejected, as the said agreement is being renewed for several years. Placing reliance on the decision of the Apex Court in Honda Siel Cars (India) Limited v. CIT [(2017) 8 SCC 170], the learned senior standing counsel ultimately submitted that without applying the test as to whet....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs. In this regard, reference was made to the decision of the Hon'ble supreme court in CIT v. Ciba of India Ltd. [(1968) 2 SCR 696]. With these averments, the learned senior counsel submitted that the royalty expenditure is revenue in nature and the same cannot be included in taxable income. 7.4. The learned senior counsel for the assessee companies also pointed out certain instances, wherein the department accepted the plea of the assessees and treated the royalty payment as revenue expenditure, viz., (i)in the case of Shriram Chits Tamil Nadu Private Limited for the assessment year 2001-02, the CIT dropped the proceedings under section 263 accepting the objections raised to treat the royalty payment as capital expenditure; and for the assessment years 2004-05 and 2005-06, the CIT(A) accepted the claim of the company by holding the expenditure as revenue in nature, which was also accepted by the department and no further appeal was filed before the ITAT; (ii)in the case of Shriram City Union Finance Limited, for the assessment years 2004-05 & 2005-06, the assessing officer accepted the claim of deduction in respect of royalty expenditure and did not add the same in the resp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nditure. It was further observed that though the royalty is paid for the use of logo for one year, the same is made for acquisition of intangible assset; and the mode, methodology and duration of payment is irrevalent. Accordingly, the claim of the assessee companies under the head 'royalty' was disallowed and depreciation at 25% was allowed. However, following the earlier orders of the Tribunal as well as the decision of the Hon'ble supreme court in CIT v. Wavin (India) Ltd (supra), the CIT(A) allowed the claim of the assessee companies, which was affirmed by the Tribunal as well. Therefore, the appeals viz., TCA Nos. 622/2013, 360 & 361/2014 and 913/2014 at the instance of the Revenue. 7.7. It is an admitted fact that the assessee companies had entered into licence agreement with the parent company viz., M/s.Shriram Chits & Investments Pvt. Ltd., for use of its logo, on payment of royalty based on turnover and the same is renewable. As already stated, it is the claim of the assessee companies that the license agreement confers the right to use the logo with restrictions viz., non-transferable and non-exclusive; there is no acquisition and there is only the right to....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is revenue or capital expenditure. 7.9. At this juncture, it is apposite to refer to the decision of the Hon'ble supreme court in CIT v. Wavin (I) Ltd. (supra) which was referred to by the Tribunal, while passing the orders impugned herein and it was held by the Hon'ble Supreme court as follows: "The expenditures were incurred to obtain benefit of research and development made by the foreign company. The technical information given to the Indian company was "non-exclusive" and "non-transferable". In other words, this is not an out and out sale of technical know-how. The assessee was merely given a nonexclusive and non-transferable right of user of the technical information. Expenditures in these facts cannot be said to be for acquisition of any asset at all." 7.10. Furthermore, in the judgment of the Supreme Court in Honda Siel Cars India Ltd v. CIT (supra), it was held that while deciding, whether royalty payment for technical know-how is capital or revenue expenditure, the enduring benefit test has to be applied; and the conditions to be satisfied for treating the expenditure under technical collaboration, as capital in nature, are (i)there is no existing ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n that case, the technical knowhow was shared pursuant to technical collaboration agreement and not only technical information was transferred, but on field complete assistance was given pursuant to the joint venture agreement. Further, in that case, the very same business was set up by the transferee company. However, in the present case, it is not the case. The grant of licence to use the intellectual property of the parent company for limited purpose, cannot be treated as transfer of ownership or title. Though the licence is renewed periodically, it by itself does not guarantee the renewal. Similarly, the parent company is always at liberty to not only cancel the license, but also grants such rights to any other organization. Further, the findings of the Apex Court in the above judgment that when the intellectual property right is not transferred, but permitted to be utilized for a particular period, would have to be treated as revenue expenditure, on application to the facts of this case, tilts the balance in favour of the assessees. Every expenditure incurred to acquire some right over intangible asset, cannot be ipso facto termed as capital expenditure. The nature of the asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9;ble Supreme Court in Brooke Bond India Ltd. v. CIT [(1997) 10 SCC 362]. Adding further, the learned Senior Standing Counsel referred to Section 37 of the Act and submitted that if the assessees claimed the expenses incurred towards ESOP as revenue expenditure, they must prove that it is not in the nature of capital expenditure or that, it is the personnel expenses of the assessees as provided in sub-section (1) of section 37. It is also submitted that the contention of the assessees that ESOP is treated as perquisite in the hands of the employees, is liable to be rejected, as the nature of expenditure cannot be ascertained from the angle of the recipient. Thus, the learned senior standing counsel prayed that the orders of the Tribunal in allowing the claim of the assessee companies as revenue expenditure, warrant interference by this court. 8.3. Per contra, the learned Senior Counsel appearing for the assessees would contend that ESOP is a compensation given to the employees for rendering their services to the company and is not a bounty / gratuitous expense; it partakes the character of salary / perquisite and is aimed at retaining and encouraging the employees; and thus, ESO....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he incentive of ESOP scheme is to give a stake to the employees in the organisation and it gives enduring benefit to the company by making the employees as stake holders and hence, the benefit of expenditure related to such scheme, can only be capital expenditure. 8.5. However, the CIT(A) accepted the contention of the assessees and deleted the disallowances made by the assessing officer, on the following grounds: ➢ As per the notification No. 323/2001 (F.No. 142/48/2001-TPL) dated 11.10.2001 issued by CBDT, the assessee companies have to follow the SEBI guidelines. ➢ As per the SEBI guidelines 1999, the accounting value of options shall be treated as another form of employees' compensation and in the financial statements, the assessee companies treated the difference between the exercise price of share and the market rates as employees' compensation. ➢ The ESOP expenditure is a compensation paid to the employees for their work and is in the nature of perquisite, which aspect has been recognised in the provisions relating to salary and Fringe Benefit Tax under the Act. ➢ The ESOP scheme is an employee welfar....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... related expenditure. It is further pointed out by the assessees that similar claim of ESOP expenses for deduction raised for the assessment years 2006-07, 2007-08 and 2008-09, was allowed by the assessing officer. However, the same was disallowed by the assessing officer relating to the assessment year 2009-10, by placing reliance on the decision of the Hon'ble supreme court in Brooke Bond India Ltd v. CIT (cited supra), wherein, it was held that "though the increase in capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit making, the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company". Whereas the learned senior counsel appearing for the assessees submitted that the decision in Brooke Bond India Ltd, does not relate to ESOP expenditure and it was a plain case of increase in authorised capital and therefore, the said decision cannot be applicable to the facts of the present case, wherein, the grant of ESOP is a benefit given to the employees a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at as against the aforesaid decision of this Court, SLP (C) No. 9091 of 2014 was filed and it was ultimately, dismissed on 28.03.2014, as a result of which the judgment of this Court thus, attained finality. 8.10. Further, in the decision of the Karnataka High Court in CIT v. Biocon Ltd. [(2020) 121 taxmann.com 351 (Karnataka)], the question as to whether the expenditure towards ESOP is allowable as deduction under section 37(1) of the Act, was considered and was ultimately decided that the same amounted to definite legal liability, which has to be allowed as deduction, after considering the definition of "employees stock option" under section 2(15A) of the Companies Act, 1956. The new provision under section 2(37) of the Companies Act, 2013 also is in similar lines. 8.11. In the light of the aforesaid legal proposition, this court comes to a conclusion that the Tribunal was correct in holding that the ESOP expenditure is revenue in nature and the assessee is entitled for deduction. Accordingly, the orders passed by the Tribunal in deleting the disallowances of ESOP expenses by the assessing officer, do not require any interference in these appeals. Resultantly, this issue st....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uirements of Non Banking Finance Companies and hence, they are stock-in-trade. With respect to the diminution value of investment written off, the learned senior counsel submitted that the said claim is not a fresh one; and what was offered in the previous year, has only been claimed for deduction. The learned senior counsel also placed reliance on the decision of this court in Lakshmi Vilas Bank v. CIT [(2006) 284 ITR 93 (Mad)], wherein, it was held that "the assessee Bank having all along treated the Government securities as its stock-in-trade and the Revenue having accepted this position in the earlier years, fall in market value of the securities was allowable as deduction". Therefore, the loss on sale of investments and diminution in value of investments written off, should be allowed as deduction, treating the investments as stock-in-trade. 9.5. Heard both sides. On a perusal of the orders passed by the authorities below, it could be seen that the assessing officer disallowed the deduction claimed by the assessees and added back the loss on sale of investments and diminution in value of investments written off to the income of the assessees, on the premise that the governm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y for the purpose of his trade, his own method of keeping accounts, and for that purpose, to value stock-in-trade either at cost or market price; (3) A method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation; (4) The concept of real income is certainly applicable in judging whether there has been income or not, but, in every case, it must be applied with care and within recognised limits; (5) Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation; (6) Under section 145 of the Act, in a case where accounts are correct and complete but the method employed is such that in the opinion of the Income-tax Officer, the income cannot be properly deduced therefrom, the computation shall be made in such manner and on such basis as the Income-tax Officer may determine, held that, "... the appellant followed the mercantile system of accounting both for book keeping purpose as well as for tax purposes. The appellant consist....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the Tribunal to take a different view for the subsequent years. In the case of Commissioner of Income-tax Vs. Ramamurthi (L.G.), [1977] 110 ITR 453, it is held as follows: "No Tribunal of fact has any right or jurisdiction to come to a conclusion entirely contrary to the one reached by another Bench of the same Tribunal on the same facts. It may be that the members who constituted the Tribunal and decided on the earlier occasion were different from the members who decided the case on the present occasion. But what is relevant is not the personality of the officers presiding over the Tribunal or participating in the hearing but the Tribunal as an institution. If it is to be conceded that simply because of the change in the personnel of the officers who manned the Tribunal, it is open to the new officers to come to a conclusion totally contradictory to the conclusion which had been reached by the earlier officers manning the same Tribunal on the same set of facts, it will not only shake the confidence of the public in judicial procedure as such, but it will also totally destroy such confidence. The result of this will be conclusions based on arbitrariness and whims and fan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngly, the issue raised by the Revenue qua loss on sale of investments/ diminution in value of investments, stands answered in favour of the assessees. Loss arising out of Derivatives / hedging transactions in foreign exchange 10.1. The Revenue in TCA Nos. 371/2013, 360, 361 and 914 of 2014, raised an issue, whether the Tribunal was right in holding that the loss arising out of derivatives / hedging transactions in foreign exchange, is an allowable deduction in computing the business income of the assessees. 10.2. The learned Senior Standing Counsel appearing for the appellant / Revenue submitted that admittedly, the assessee had entered into the transaction of derivatives / hedging in foreign exchange and incurred loss; and had claimed the same as business loss for the purpose of deduction. Considering the nature of the transaction carried on by the Assessees, the Assessing Officer concluded that it is a speculative loss that could be set off only against speculative gain. However, the Appellate Authority as well as the Tribunal without examining the speculative nature of the transaction, erroneously held that it was a revenue loss as per the accounting standards and there....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hen the transactions will be an adventure in the nature of speculation business. 12. Moreover, as was observed by Lawrence LJ. in the case of Leeming v. Jones [1930] 15 TC 333, 354 (HL), where, in a case of isolated transaction of acquisition and sale of property, there is really no middle course open, it is either an adventure in the nature of trade or else it is simply a case of sale and resale of a capital asset. This view was also approved by the Supreme Court in the case of G. Venkataswami Naidu and Co. v. CIT." 10.3. By referring to section 43(5)(d) of the Act, it is contended by the learned Senior Standing Counsel appearing for the appellant / Revenue that there was no actual physical delivery of the commodity traded and the assessees had not traded in any recognised stock exchange and therefore, the assessees' transaction is to be treated as a speculative transaction leading to speculative loss. Further, the main business of the assessees is money lending and the foreign currency is a commodity and hence, the transaction in foreign currency is to be treated as speculative in nature. It is also submitted that the assessees had entered into series of transacti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... speculative transaction as mentioned in section 43(5). In these circumstances, the swap transaction entered into by the assessees is not a speculative transaction as defined in section 43(5) of the Act and hence, the loss has to be allowed for deduction as business loss. It is also pointed out by the learned senior counsel that in the case of Shriram City Union Finance Limited, for the assessment year 2007-08, the assessing officer did not assess the derivative income from hedging contracts as speculative income. Similarly, in the case of Shriram Transport Finance Company, for the assessment year 2009-10, the CIT(A) remitted back the issue to the assessing officer for verification; and the assessing officer after verification, allowed the loss on hedging transaction and did not treat it as speculative loss. 10.6. Furthermore, it is contended by the learned Senior Counsel appearing for the appellant / Revenue that section 73 of the Act provides for losses in speculation business, which prohibits the assessees from setting off the losses against any profit or gains other than that of speculative business. While these are applicable to 'speculative transactions', the hedging trans....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rivative contracts and foreign exchange swap transactions are hedging transactions against fluctuations in interest rates affecting the business of the assessee companies; the derivative loss worked out on market to market basis, is an ascertained loss of the year according to Accounting Standards; and hence, the same is an allowable deduction as business loss; and the decision of the Hon'ble supreme court in Goetz India Ltd case is not applicable to the facts of the present case, as the assessees claimed the loss in the original return, but withdrew the same in the revised return in the light of instruction No. 3/2010 dated 23.03.2010 by the CBDT, subject to its right to agitate the same in the assessment and appeal proceedings for the year. The CIT(A) followed the earlier orders of the Tribunal in respect of the assessees' own cases relating to the assessment year 2007-08, wherein, the decision of the Delhi High Court in CIT v. Industrial Finance Corporation of India was relied upon, and allowed the derivative loss claimed by the assessees. The said orders of the CIT(A) were also affirmed by the ITAT. Therefore, these appeals by the Revenue. 10.8. Concededly, insofar a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nance Act, 2013 (17 of 2013), shall not be deemed to be a speculative transaction." 10.9. It is to be pointed out here that the expression 'speculative transaction' finds place only at Explanation 2 to section 28 of the Act, which treats it as distinct and separate category and reads thus: "Explanation 2 - Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business." 10.10. It is evident from the orders passed by the authorities below for the assessment year under consideration that the assessing officer having considered the submissions and based on the records, was of the view that since the derivative transactions undertaken by the assessee companies are not eligible transactions as defined under section 43(5) of the Act and are not carried out through any stock exchanges, they do not come under clause (d) of section 43(5), but they fall within the purview of speculative transactions as defined under section 43(5) of the Act. While so, the assessing officer disallowed the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d.[reported in (2003) 261 ITR 256]. In that case, the assessee was not a dealer in foreign exchange, but was an exporter of cotton as in the case before us. The assessee therein booked foreign exchange contracts, which were held to be only incidental to the assessee's regular course of business. While testing the correctness of the order of the Tribunal, which held that the transaction was not a speculative transaction, it was observed as follows : "3. The assessee was not a dealer in foreign exchange. The assessee was a cotton exporter. The assessee was an export house. Therefore, foreign exchange contracts were booked only as incidental to the assessee's regular course of business. The Tribunal has recorded a categorical finding to this effect in its order. The Assessing Officer has not considered these facts. Under section 43(5) of the Income-tax Act, "speculative transaction" has been defined to mean a transaction in which a contract for the purchase or sale of a commodity is settled otherwise than by the actual delivery or transfer of such commodity. However, as stated above, the assessee was not a dealer in foreign exchange. The assessee was an exporter of co....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 14A r/w Rule 8 D 11.1. Heard both sides. On a perusal of the records, it could be seen that the assesses invested in shares of associate and other companies as well as in government securities, received dividend income from such investments and claimed deduction of certain expenditure attributable to earn the exempt income under section 10(34) of the Act. However, the assessing officer disallowed the said claim and added back to the total income of the assessees, stating that disallowance under section 14A is to be made by applying the procedural provisions laid down under Rule 8D as against the adhoc disallowance made by the assessees. On appeals, the CIT(A) following the judgment of the Bombay High Court in Godrej & Boyce Mfg. Ltd. v Deputy Commissioner of Income Tax [(2010) 322 ITR 81 (Bombay)], deleted the disallowances made by the assessing officer relating to the assessment year 2007-08 in respect of the assessees viz., Shriram City Union Finance Ltd and Shriram Transport Finance Co. Ltd. The said orders of the CIT(A) were also affirmed by the Tribunal, by order dated 10.10.2011, which is impugned in TCA Nos. 913 and 914 of 2014 by the Revenue. 11.2. In Godrej & Boyce ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h is not in consonance with the judgments relied on by the AR, more particularly, the case of EIH Hotel Ltd of the Chennai ITAT quoted supra. Further, it is also seen that the AO has taken into account the unquoted investments with subordinated debts of Yes Bank Ltd of Rs. 50 crores as on 1.4.2012. Respectfully following the ratio of the above cited judgment, the AO is directed to exclude the investments made by the appellant in subsidiary companies after proper verification from the appellant's books of accounts, from the calculations as specified in Rule 8D(2) r.w.s. 14 of the Act. Similarly the investment made by the appellant in the unquoted investments with subordinated debts of Yes Bank Ltd of Rs. 50 crores as on 1.4.2012 needs to be also excluded while computing the disallowance under Rule 8D(2) as income from the aforesaid investment is taxable and therefore would not come within the ambit of section 14A itself. The AO is therefore directed accordingly. Accordingly, this ground is partly allowed." The said finding of the CIT(A) was confirmed by the Tribunal, by the order dated 24.08.2016. 11.5. The CIT(A) in respect of the appeal filed by the assessee in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....x [(2021) 130 taxmann.com 178(SC)], it was held by the Hon'ble Supreme Court as follows: "19. In HDFC Bank Ltd. Vs. Dy CIT [(2016) 67 taxmann.com 42 / 383 ITR 529 (Bom.)] the assessee was a Scheduled Bank and the issue therein also pertained to disallowance under Section 14A. In this case, the Bombay High Court even while remanding the case back to Tribunal for adjudicating afresh observed (relying on its own previous judgment in same assessee's case for a different Assessment Year) that, if assessee possesses sufficient interest free funds as against investment in tax free securities then, there is a presumption that investment which has been made in tax free securities, has come out of interest free funds available with assessee. In such situation Section 14A of the Act would not be applicable. Similar views have been expressed by other High Courts in CIT v. Suzlon Energy Ltd. [(2013) 33 taxmann.com 157/ 215 Taxman 272/ 354 ITR 630 (Guj)], CIT v. Microlabs Ltd. [(2017) 79 taxmann.com 365 / (2016) 383 ITR 490 (Kar)] and CIT v. Max India Ltd. [(2016) 75 taxmann.com 268 / 388 ITR 81 (Punj & Har.)]. Mr. S.Ganesh the learned Senior Counsel while citing these cases from th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....will have no application to support the Revenue's contention against the assessee. 23. It would now be appropriate to advert in some detail to Maxopp Investment Ltd. v. CIT [(2018) 91 taxmann. Com 154 / 254 Taxman 325/ 402 ITR 640 (SC)]. This case interestingly is relied by both sides' counsel. Writing for the Bench, Justice Dr. A.K. Sikri noted the objective for incorporation of Section 14A in the Act in the following words: - "3............. The purpose behind Section 14-A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income........" The following was written explaining the scope of Section 14-A(1): "41. In the first instance, it needs to be recognised that as per Section 14-A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee "in relation to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....exempt income is necessary. The relevant portion of Justice Gogoi's judgment reads as follow: "36. ......... what cannot be denied is that the requirement for attracting the provisions of Section 14-A (1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income............." 25. Proceeding now to another aspect, it is seen that the Central Board of Direct Taxes (CBDT) had issued the Circular No. 18 of 2015 dated 02.11.2015, which had analyzed and then explained that all shares and securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in-trade and not investments and income arising out of those is attributable, to business of banking. This Circular came to be issued in the aftermath of CIT Vs. Nawanshahar Central Cooperative Bank Ltd. [(2007) 160 Taxman 48 / 289 ITR 6 (SC)] wherein this Court had held that investments made by a banking concern is part of their banking business. Hence the income earned through such investments would fall under the head Profits & Gains of business. The Punjab and Haryana High Court, in the case of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nly after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure under section 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard. 22. We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assessee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowance expenditure made by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the Assessing Authority, he cannot resort to the computation method under Rule 8D of the Income-tax Rules, 1962." 11.10. In the judgment dated 07.07.2020 rendered by a Co-ordinate Bench of this Court in T.C.A. Nos. 509 & 510 of 2018 in the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect to the expenditure incurred in relation to the income which does not form part of the total income, is correct. Therefore, at the first instance, the Assessing Officer has to determine whether the claim of the assessee in that regard is correct and that the determination must be made having regard to the accounts of the assessee. 17. The satisfaction of the Assessing Officer must be arrived at on an objective basis and it is only when the Assessing Officer is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. 18. Therefore, what we are required to see for the assessment year 2011-12, is whether such procedure was followed by the Assessing Officer. The Assessing Officer on considering the return of the income failed to note that the assessee has received income by way of dividend from Indian companies amounting to Rs. 24,83,08,996, which the assessee claimed to be exempted from tax. 19. Notice dated 27.08.2013 was issued to the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....issued any specific directions to the Assessing Officer as to what has to be done after the assessee files the working sheet. Therefore, to that extent the tribunal has committed an error. Hence, we are of the considered view that the matter should be remanded for fresh consideration of the Assessing Officer in accordance with law. 22. For the above reasons, the Tax Case Appeals are allowed and the Substantial Questions of Law are answered in favour of the revenue and the matters for both the Assessment years viz., 201112 and 2012-13, are remitted to the Assessing Officer for fresh consideration in accordance with law. No Costs." 11.11. Admittedly, the assessees made investments in the subsidiary companies by way of shares and they claimed deduction under section 14A relating to the assessment years under consideration. It cannot be disputed that subsequent to the introduction of Rule 8D by the Income Tax (Fifth Amendment) Rules, 2008 vide notification No. 25/2008 dated 24.03.2008, disallowance is to be made only by following procedure and the same is also mandatory. While making disallowance under section 14A, by applying Rule 8D, the assessing officer has to comply wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that the assessees while arriving at profits from business, had excluded the interest charged under section 234D and the same is not acceptable as the interest charged is penal in nature and is not an allowable deduction. The said orders of the assessing officer were also affirmed by both the appellate authorities. Therefore, the assessees are before this court. 12.2. According to the learned senior counsel for the appellants / assessees, interest under section 234D has been charged while withdrawing the refund already granted under section 143(1) of the Act. Since the assessees had utilised the refund amount for the purpose of business and while withdrawing the refund, interest has been charged, the refund amount takes the character of loan availed by the assessees and hence, interest under section 234D has to be allowed for deduction as business expenditure. However, the Tribunal erred in confirming the disallowance of interest levied under section 234D. 12.3. On the other hand, the learned senior standing counsel appearing for the respondent / Revenue submitted that the interest charged on the excess amount refunded to the assessees, while processing returns under sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reason to interfere with the findings so rendered by the authorities below, as the interest was levied on the amount refunded to the assessees, which they are not legally entitled to and for the period during which they were holding the same and hence, the same is not eligible for deduction. Therefore, this issue relating to disallowance of interest under section 234D, is decided against the assessees. Disallowance made under section 40(a)(ia) 13.1. During the financial year 2011-12, relevant for the assessment year 2012-13, without deducting tax at source, the appellant / assessee in TCA No. 406 of 2019, paid a sum of Rs. 40,62,15,300/- for utilising the services of some of the employees of Shriram Chits Private Limited, Hyderabad, Shriram Chits (Tamil Nadu) Private Limited, Shriram Chits (Karnataka) Private Limited, Shriram Chits (Maharastra) Private Limited, Shriram Sales & Marketing Development Private Limited, Shriram Financial Products Solutions Chennai Private Limited and Shriram Life Insurance Company Limited and claimed the said expenditure for deduction. However, the assessing officer disallowed the same by operation of the provisions of section 40(a)(ia) r/w sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... from its liability of deducting TDS and remitting the same to the Government. In the absence of any evidence to substantiate the contentions raised by the assessee, the reasons and the findings so rendered by the assessing officer were accepted by the CIT(A) by holding that the assessee committed a default in not deducting the tax at source under section 194C of the Act. Accordingly, the CIT(A) dismissed the assessee's appeal by confirming the addition made by the assessing officer under section 40(a)(ia). The Tribunal also affirmed the view of the CIT(A) by observing that it was consistently followed that in case the assessee has deducted the tax at source, but not remitted, or tax was not deducted on the payments which attract TDS, the disallowance under section 40(a)(ia) is attracted; and accordingly, in this case, the assessee has to deduct the tax at source, but failed to deduct the TDS amount, which is required to be deducted under section 194C of the Act. 13.3. Having regard to the admitted position that the assessee did not adduce any evidence to support their claim and also in view of the settled legal position that the liability to deduct tax at source is mandator....
X X X X Extracts X X X X
X X X X Extracts X X X X
....et another alternative attempt, learned counsel for the appellant has argued that by way of Finance (No. 2) Act, 2014, disallowance under Section 40(a)(ia) has been limited to 30% of the sum payable and the said amendment deserves to be held retrospective in operation. This line of argument has been grafted with reference to the decision in CIT v. Calcutta Export Company [(2018) 404 ITR 654] wherein, another amendment of Section 40(a)(ia) by the Finance Act of 2010 was held by this Court to be retrospective in operation. The submission so made is not only baseless but is bereft of any logic. Neither the amendment made by the Finance (No. 2) Act 2014 could be stretched anterior the date of its substitution so as to reach the assessment year 2005-2006 nor the said decision in Calcutta Export Company has any correlation with the case at hand or with the amendment made by the Finance (No. 2) Act of 2014. 19.1. By the amendment brought about in the year 2014, the legislature reduced the extent of disallowance under Section 40(a)(ia) of the Act and limited it to 30% of the sum payable. On the other hand, by the Finance Act of 2010, which was considered in the case of Calcutta Ex....