TaxTMI 
TaxTMI 
2024 (3) TMI 1402
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....ed of by a common order for the sake of convenience. ITA No. 139/Ahd/2023 (A.Y. 2018-19):- 3. The Grounds of appeal raised by the assessee are as under: "1.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has held to consider the interest on loans raised by erstwhile GEB for the purpose of disallowance under section 14A of the I T Act, 1961. It is submitted that the disallowance is uncalled for and be directed to be deleted. 1.1 The learned Commissioner of Income Tax (Appeals) further erred in law and on facts has held that the event the disallowance under section 14A of the Act computed as per the directions comes out to be lesser than the dividend income, then such dividend income shall be treated as taxable income. 2.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has dismissed the ground relating to the initiation of penalty proceedings under section 270A of the I T Act. 3.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the charging of interest under section 234A, 234B, 234C and 234D of the Income Tax Act, 1961. 4.0 The appel....
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....e Act. 10. In ITA No.1874/Ahd/2010 vide its order dated 20.6.2014 the Tribunal adjudicated the issue relating to disallowance u/s 14A and held as under :- 7. We have heard the rival submissions and perused the orders of lower authorities and materials available on record. The undisputed facts of the case are that the Assessing Officer found that the assessee has earned tax free dividend income of Rs 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(....
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....sp; (Rs. in lacs) Particulars Amount Interest on Term Loans 8981.35 Working Capital 8184.50 Others &n....
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....le expenditure. The assessee was required to give the rates of interest paid to various sources. The assessee vide its reply did not furnish the rates of interest paid. It simply submitted that loans from various banks with varying interest rates were obtained. During the year under consideration, the market rate of interest was 12%. Therefore, interest at the rate of 12% works out to Rs.65725.17 lacs on investments of Rs.547709.74 lacs. However, the assessee has claimed interest expenditure of Rs.19360.59 lacs and has shown interest income of Rs.55.59 lacs and dividend income of Rs.508.18 lacs. Hence, against the interest expenditure of Rs.19360.59 lacs assessee has grown interest and dividend income of Rs.563.77 lacs. Thus, net disallowance is made of Rs.18796.82 lacs." 5. Being aggrieved the matter was carried before the First Appellate Authority who has decided the issue in assessee's favour in the following manner: "Thus, the only test to be applied is that of "commercial expediency". In the instant case, it is seen that no investment was made by the assessee company by using borrowed funds.The entire investment, except minor investment of Rs.11.....
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....ares of subsidiary companies which was an integral part of the demerger arrangement. Therefore, it was nothing but commercial decision. 6.2 According to us, the issue has been mixed up by the Revenue Department. The first step should be to examine the scheme of demerger and thereafter the issue could have been streamlined. As per the definition of "demerger" prescribed u/s.2(19AA) means; the transfer pursuant to a scheme of arrangement by a demerged company of its one or more undertakings to any resulting company in such a manner that all the property of the undertaking/unit being transferred by the demerged company immediately before the demerger, which becomes the property of the resulting company by virtue of the demerger. Therefore, it was necessary for the AO to examine the balance sheet of the demerged company and the position of the accounts of the undertaking which is demerged with the resulting company. The AO has to examine the liabilities related to the said undertaking whether being transferred under the scheme of arrangement which were in existence immediately before the demerger. The AO has to examine the value of the property in the books of accounts immedia....
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....nounced in this regard. 6. As far as the Assessing Officer's action is concerned, the disallowance has been made on the basis of a calculation of the proportionate interest alleged to be attributable to the investment earning exempted dividend income. It is also to be noted that while doing so for the years under consideration the A.O. has not followed the past method of calculation of the disallowance. As per AO it was seen that the working of disallowance was wrong because while calculating the proportionate interest attributable to dividend income the ratio of dividend income and total sales have been taken though there was no direct relation between the two. The Assessing Officer had thus made the calculation after taking into account the proportion of the interest on the ratio between the investment in shares and total assets including investment in shares. Apart from this, there is nothing in the assessment order which can establish the nexus of utilization of borrowed interest-bearing funds diverted towards investment in debentures. But there are other discussions in this very assessment order wherein the provisions of section 36(l)(iii) of the Act have also bee....
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....ct from 11/05/2001 , however Rule 8D was inserted by the Income Tax (Fifth Amendment), Rules, 2008 by publication in the Gazette dated 24/03/2008; reproduced below:- "a) The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallow ability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the present case, no such exercise has been carried out and, therefore, the Tribunal was justified in remanding the matter. b) Section 14A was introduced by the Finance Act 2001 with retrospective effect from 1 April 1962. However, in view of the proviso to that Section, the disallowance thereunder could be effectively made from assessment year 2001-2002 onwards. The fact that the Tribu....
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....fits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis; iii) The provisions of sub sections (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid; iv) The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution;; v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24th March, 2008 shall apply with effect from Assessment Year 2008-09; (vi) Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which ha....
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....er this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.' 2. New Rule 8D : 2.1 In exercise of the powers given in S. 14A(2) C.B.D.T. has issued a Notific....
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....n the first day and the last day of the relevant accounting year. 12. We also observe that ld. Assessing Officer applied the facts and figures of the assessee company into the method provided under Rule 8D of the IT Rules because assessee was having an average investment of Rs.5529.57 crores , interest paid during the year at Rs.131.22 crores and exempt income of Rs.249 crores. Going through these figures ld. Assessing Officer felt appropriate to applying the method of Rule 8D but did not look into the following facts :- (i) As on 1.7.205 when the company was given a balance sheet duly notified by the State Govt., the company had total investment of Rs.5580.20 crores considering all investment in subsidiary companies at Rs.5336.43 crores, investment in other companies at Rs.243.69 crores and balance in petty investment. (ii) Opening balance of investment as on 1.4.2007 stood at Rs.5477.16 crores. (iii) Few investments were made during Financial Year 2005-06 to 2007-08 and in subsidiary companies and funds for the same were partly received from State Government as equity and remaining from net profit earned. (iv) Interest expenditure of R....
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.... discussed above which has been set aside to the file of the AO for fresh adjudication as per the provisions of law by the ITAT as discussed above. Respectfully following the order of this Coordinate Bench in the own case of the assessee, we set aside the issue on hand to the file of the AO for fresh adjudication in terms of the finding of the ITAT in its own case for the Assessment Year 2008-09 (Supra) as well as in accordance to the provisions of law. Hence, the ground of appeal of the assessee and the Revenue are allowed for the statistical purposes. 4.2. Respectfully following the above decision of our Co-ordinate Bench, for this assessment year 2015-16, we set aside the matter back to the file of Assessing Officer for fresh adjudication by examining the facts and figures and calculate the disallowance u/s. 14A of the Act." 8. Respectfully relying upon the order perused by the Coordinate Bench we are disposing of the ground by setting aside the issue to the file of the Ld. AO for de novo adjudication in the light of the observation made by the Co-ordinate Bench as reproduced hereinabove upon giving an opportunity of being heard to the assessee and upon considering t....
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.... case, wherein issue has been discussed and decided in favour of the assessee upon deleting the addition made by the Ld. AO. The relevant portion whereof is as follows: "15. Ground No. 4 namely treatment of interest income of Rs. 62.67 lacs and miscellaneous income of Rs. 270.83 lacs as "business income" instead of "income from other sources". The Ld. Counsel submitted that his issue is also covered against the Revenue's appeal before the High Court of Gujarat in Tax Appeal No. 63 of 2020 wherein it was held as follows: 13 With regard to question No.2[d], the Assessing Officer noticed that as per Schedule 14, the assessee has shown other income consisting of interest on loan and advances, incentives from CPSU, etc. The Assessing Officer was of the view that this income was to be assessed as income from other sources instead of business income shown by the assessee. 14 On appeal, the CIT(A) as well as the Tribunal held that the interest income is required to be treated as business income instead of income from other sources. The Tribunal in its order observed as under: "10 We have heard the rival contentions and perused the material on record on t....
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.... shown from routine business activities of the assessee. The assessee failed to demonstrate that the income which is not revenue from operations as required to be treated in the other heads which includes income from other sources and capital gain. In that view of the matter, the impugned amount of 26.74 lakhs on account of interest income from other loans and advances and miscellaneous income of 186.61 lakhs are rightly been treated as income from other sources. We, therefore, quash the order passed by the Ld. CIT(A) in granting relief to the assessee and confirm the order passed by the Ld. Assessing Officer. Hence, this ground of appeal raised by the Revenue is allowed. 15. This ground of appeal of Revenue is, thus, allowed. 16. Deletion of adjustment made to the Book Profit computed under Section 115JB of the Act on account of disallowance under Section 14A of the Act is under consideration. 17. The brief facts leading to the issue is this that the Ld. AO made addition of Rs. 186,04,63,000/- to the Book Profit under Section 115JB of the Act on account of disallowance under Section 14A of the Income Tax Act. 18. Before the First Appellate Authority the assessee submit....
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....the Ld. AO. The relevant portion whereof is as follows: "16. Ground no. 5 namely adjustment made on account of disallowance u/s. 14A to be added in the computation of book profit u/s. 115JB of the Act. Ld. Counsel submitted that this issue is also held against the Revenue by the High Court of Gujarat in Tax Appeal No. 63 of 2020 as follows: "....4 The question No.2[b] proposed by the Revenue is with regard to deleting the addition under Section 14A of the Act, 1961 while computing book profit under Section 115JB of the Act, 1961. The Assessing Officer while computing taxable income under Section 115JB of the Act, 1961 also added addition made under Section 14A of the Act, 1961 to the book profit. 5. The assessee being aggrieved by the addition made by the Assessing Officer under Section 14A while computing book profit of the assessee under Section 115JB of the Act, 1961 preferred an appeal before the CIT(A). The CIT(A), however, deleted addition made in the book profit on the ground that no addition could have been made in view of the decision of this Court in the case of Alembic Ltd (Tax Appeal No.1249 of 2014) and the provisions of sub - sections (2) an....
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....quired to be made in the book profit could be calculated as per Rule 8D of the Income Tax Rules. The ld. DRP thereafter made reference to decision of Hon'ble Delhi High Court in the case of CIT Vs. Geotze India Ltd., 361 ITR 505. According to the ld. DRP, this decision has been considered by the Special Bench in the case of Vireet Investment P. Ltd. (supra) but placed reliance upon Hon'ble Bombay High Court in the case of Vodafone India Services P. Ltd. ACIT, 361 ITR 0531 (Bom) and held that DRP is not bound by the ratio laid down by the Special Bench. The discussion made by the DRP on this issue in the assessment year 201314 reads as under: "10.3 In the case of Viraj Profiles Ltd. [2015] 64 taxmann.com 52 (Mum Trib), the Hon'ble Bench has elaborately discussed the issue and held that the disallowance is liable to be calculated as per Rule 8 D of the Rules. After discussing the decisions which have also been relied on by the appellant, the Hon'ble Bench has concluded that; "In view of our foregoing discussion, we find no infirmity with the orders of the AO and we hold that the AO has rightly disallowed the expenditure of Rs.73,07,018/by invoking the provisions of Section 1....
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....ich also shows that the view of AO confirmed by the Panel is a plausible view. 19. There were contradictory orders at the end of the Tribunal. Therefore, Special Bench was constituted to consider the following question: "Whether expenditure incurred to earn exempt income computed under section 14A could not be added while computing book profit under section 115JB of the Act." 20. When the Special Bench has considered this question, it was confronted with two decisions of the Hon'ble Delhi High Court diagonally opposite to each other. One referred by the ld. DRP also in the present case, rendered in the case of CIR Vs. Goetze India Ltd. (Supra) and other in the case of Pr. CIT Vs. Bhushan Steel. ITAT, Special Bench has reproduced both these orders in Vireet Investment P. Ltd. (supra) and thereafter it considered as to which decision ought to be followed by a subordinate authority. The department advanced an argument that in the case of Bhushan Steel, Hon'ble Delhi High Court failed to consider subsequent decision of CIT Vs. Goetze India Ltd. (supra). However, the Tribunal after placing reliance upon the decision of Hon'ble Supreme Court in the case of CIT ....
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....e Gujarat High Court has replied this question as under: 7. So far as issue Nos.(iii) and (iv) are concerned, the learned counsel for the assessee has relied on the decision of this court in the case of Commissioner of Income tax-I v. Gujarat State Fertilizers & Chemicals Ltd., reported in (2013) 358 ITR 323 (Gujarat) Where this court has held in paragraph Nos.6 to 6.5 this court has observed as under: 6. So far as the fourth question is concerned, it pertains to addition of Rs.1,14,43,040/under Section 115JB of the Act being the expenditure estimated on earning of dividend income under Section 14A of the Act. 6.1 The Assessing Officer on referring to the said provision of Section 115JB(2) of the Act added the said amount considering that any amount of expenditure relatable to the income exempted under Section 10 of the Act shall need to be added in the profit shown in the 'Profit and Loss Account'. When the matter travelled to the CIT (Appeals), since it deleted the addition of Rs.1,14,43,040/while deciding the question No.1, it consequently deleted such addition under Section 115JB of the Act on the ground that this would not serve any purpose.....
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....ision in the case of Goetze (India) Ltd. Vs. CIT (2009) 32 SOT 101 (Del.), which has been followed by ITAT, Mumbai in the cases referred to in para 5 of the impugned order without appreciating that the above decision in the case of Goetze (India) Ltd. was rendered by the ITAT, Delhi Bench on completely distinguishable set of facts, peculiar to the said case?" ...... 4. So far as question (b) is concerned, the impugned order of the Tribunal followed its decision in M/s. Essar Teleholdings Ltd. Vs. DCIT in ITA No.3850/Mum/2010 to held that an amount disallowed under section 14A of the Act cannot be added to arrive at book profit for purposes of Section 115JB of the Act. The Revenue's Appeal against the order of the Tribunal in M/s. Essar Teleholdings (supra) was dismissed by this Court in Income Tax Appeal No.438 of 2012 rendered on 7th August, 2014. In view of the above, question (b) does not raise any substantial question of law. 24. Respectfully following the above decision, we hold that no addition in the book profit would be made on the basis of calculations worked out under section 14A of the Act. We allow this ground of appeal in both the years and delete the....