TaxTMI 
TaxTMI 
TaxTMI 
2014 (8) TMI 1249
X X X X Extracts X X X X
X X X X Extracts X X X X
....pt for ground 2 which is on disallowance under section 14A, he is not pressing the other substantial grounds 3 & 4. Hence ground 3 & 4 are dismissed as not pressed. Ground 1 of the cross objection is general in nature, needing no adjudication, whereas ground 5 is consequential in nature since it relates charge of interest under section 234B, 234C and 234D of the Act. 4. Grounds 2 & 3 of the revenue's appeal and ground 2 of the cross objections of the assessee, being interconnected are taken up together. 5. Assessee engaged in the business of manufacture and sale of aerated water, packaged water and packaged fruit juice, had filed its return for the impugned assessment year showing 'nil' income. During the course of assessment, learned AO noted that assessee's investments of Rs. 18,37,40,084/- which could yield tax free income required a disallowance of expenditure as specified in section 14A of the Act, read along with Rule 8D of the Rules. Assessee had dividend income of Rs. 43008/- as per its audited accounts though exemption claimed was only Rs. 20,955/-. As per the AO there were total indirect interest expenditure of Rs. 20.61,93,983/- and by applying sub-clause(ii) o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on. iv) But for Rs. 9,26,706/- worked out by the AO as disallowance under sub-clause(iii) of Rule 8D(2), no other disallowance was called for under section 14A. 8. Learned CIT(A) after hearing the assessee and verifying the details furnished by him, held that invocation of Sec. 14A could not be faulted, since before applying the said section, assessee was given ample opportunity. However, with regard to the quantification of the interest expenditure considered for disallowance he was of the opinion that there were some merits in the contentions of the assessee. In the first place, as per the learned CIT(A) the total interest paid was Rs. 22,29,88,953/- and not Rs. 20,61,93,983/- considered by the AO and there was a difference of Rs. 1,67,94,970/- which was not considered by the AO nor explained by the assessee. Nevertheless, he accepted the claim of the assessee that out of the total interest of Rs. 22,29,88,953/- a sum of Rs. 7,95,10,129/- was on term loan and Rs. 12,66,53,854/- was on working capital loans. According to the learned CIT(A) both these were directly attributable to the business of the assessee and had to be excluded. In other words, he held that except for the su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....curred by it for earning tax free income of Rs. 20,955/-. What we note is that assessee had not made any disallowance by itself under section 14A of the Act, in its return of income. During the course of assessment through its letter dated 26/7/2011 it did raise a contention on these lines, and relevant part has been reproduced by us at para six above. It had given a break-up of the interest of Rs. 20,61,93,893/- as well, claiming a part thereof to be for its business, leaving a balance of Rs. 5,30,39,669/- on which it was undecided. A reading of the above reply itself would show that assessee was not convinced by its own stand that no expenditure was incurred in relation to the money put in tax free investment. The AO has specifically referred to this letter of the assessee and his observation in this regard read as under; "In this connection, when the opportunity was given to the assessee company, it has reiterated that the stand taken before the Addl. CIT, Range-11, Bangalore. In the light of the above, carefully examining the explanation given and the details filed a sum of Rs. 88,19,819/- is treated as expenditure incurred in relation to earn the exempted income and accord....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. (2) of s. 14A of the said Act. It is only if the AO is not satisfied with the correctness of the claim of the assessee, in both cases, that the AO gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in r. 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the AO would have to indicate cogent reasons for the same. It is clear from the above that an AO has to record cogent reasons before rejecting the claim of expenditure or no-expenditure by the assessee. However, here the assessee had made both claims. In one breath it is saying that no expenditure was incurred and in the second breath it states that interest disallowance should be curtailed to Rs. 5,30,39,669/-. When seen from this angle, we are of the opinion that reason recorded by the AO for disregarding the claim of the assessee was cogent enough. 12. As for the decision of Co-ordinate Bench in the case of Bharatiya....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xpenses were incurred for earning the exempt income, nor has the AO arrived at an objective satisfaction regarding the claim of the assessee that no indirect expenses were incurred to earn the tax-free income is not correct. In the circumstances, we are of the view that it would be just and appropriate that the order of the CIT(A) should be set aside and the issue with regard to disallowance to be made of indirect expenses under Rule 8D(2)(iii) of the Rules should be remanded to the AO for fresh consideration. The assessee should make a claim before the AO specifying the basis on which a claim is made that no indirect expenses were incurred to earn exempt income. The AO should examine such a claim and arrive at an objective satisfaction regarding the correctness or otherwise of the claim made by the assessee. If the AO comes to the conclusion that claim made by the assessee is not correct, it is only thereafter that the AO can proceed to make the disallowance in terms of Rule 8D of the Rules. Even in a case where the AO rejects the claim of the assessee that no expenses were incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescrib....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... interest free own funds alone were used for making tax free investments is oppugnant to the admission before the CIT(A). The often quoted principle viz. "alligus contaria non-est audientus" has to apply. As for the decision of the Hon'ble Mumbai High Court in the case of HDFC Bank (supra) relied on by the learned AR, in the first place it was a Bank and investments were made out of pooled funds. Here on the other hand, by assessee's own admission at least a part of its investment had gone out of the working capital loan, and hence not pooled funds. Hence, in our opinion this contention also has no merits. 14. Finally, coming to its last contention that bifurcation of gross interest is required to be made between those directly attributable to business and those not so attributable, before applying Rule 8D, does in our opinion, needs attention. Rule 8D(2) is reproduced hereunder; "(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income. (ii) in a case where the assessee has incurred exp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lus funds and only for the purpose of business considering the bleak prospects of the soft drink industry. AO was not impressed. According to him, there were huge outflow from its various overdraft/cash credit account, and assessee could not correlate the own funds with loans/advances given. Finding that there was no business purpose behind advances given to directors and group companies, he made a disallowance of Rs. 14,34,45,824/- out of the total interest claim, considering it to be non-project specific. 18. Arguments taken by the assessee before the CIT(A) are summarized hereunder; i) Actual advances to directors and group companies were Rs. 26,17,61,903/- as on 31-03-2008 and Rs. 19,26,50,342/- as on 31-03-2009. Effectively the amount stood reduced by Rs. 19-26 Crores through the year. ii) Amounts were given for acquiring properties for new projects. iii) Interest payments were never disallowed in the scrutiny assessment for any of the earlier years. 19. Learned CIT(A) was appreciative of the amount contentions. According to him, the amount advanced to directors had gone down by Rs. 19.6 Crores during the year. Assessee had substantial income of Rs. 134-10 Crores in th....