TaxTMI 
TaxTMI 
2023 (11) TMI 1375
X X X X Extracts X X X X
X X X X Extracts X X X X
....ring funds, 2. erred in not following the judicial discipline by not following the directions of Hon'ble ITAT in Appellant's own case for AY 2009-10 wherein the Hon'ble Tribunal has allowed deduction of interest on loan given to subsidiary under Section 36(1)(ii) of the Act and the same loan continued in the present year. Sufficient own funds available 3. erred in confirming action of the Ld. AO in disallowing notional interest of Rs. 48,84,000/- under section 36(1)(ii) of the Act on the ground that interest bearing funds were advanced to subsidiary company (i.e. SICOM Realty Pvt. Ltd) without charging any interest without appreciating that appellant had sufficient own funds, Commercial expediency for giving interest free advance 4. erred in not appreciating the fact that the appellant is in the business of project financing and advances were given to subsidiary which was wholly and exclusively for the purpose of business, thereby notional interest cannot be disallowed on such advances, II. Disallowance under section 14A of the Act in respect of dividend income exempt under section 10(34) of the Act 5. erred....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ss objections without prejudice to each other and craves, leave to add, alter, delete or modify all or any of the above grounds of cross objections. 2(a). The assessee has raised the Additional Grounds Of Appeal as under: On the facts and in the circumstances of the case, the Appellant wishes to raise the following additional ground of appeal which is independent of the other grounds of appeal Only those Investments from which exempt income earned should be considered for computing disallowance under section 14A 14. erred in considering the total investments instead of only those investments from which exempt income is eared during the year while computing disallowance under Section 14A of the Act read with Rule 8D(iii) of the Income Tax Rules, 1962, Disallowance under section 14A cannot exceed exempt income 15. Without prejudice to the grounds raised in original appeal and above grounds, the disallowance, if any upheld under Section 14A of the Act should be restricted to the amount of the exempt income earned by the Appellant during the year; Disallowance under section 14A should be restricted to 1% of administrative e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or AY:2008-09 has dismissed the appeal of the revenue on the ground of disallowance of proportionate interest. Whereas the AO found that the revenue has not accepted the ITAT decision and filed appeal before the Honble High court. The A.O has invoked the provisions and computed disallowance U/sec 14A r.w.r 8D(2)(ii)&(iii) of the IT Rules of Rs. 1594,82,826/- and after setoff of suo moto disallowance of Rs. 87,18,148/-, the balance amount of Rs. 1507,64,678/- was added to the income. Similarly, AO has made addition of disallowance U/sec 14A r.w.r 8D(2)(ii) & (iii) of the IT Rules in computing book profits u/sec 115 JB of the Act. (iii) the A.O found that the assessee has obtained interest bearing loans and interest expenditure was claimed in the profit and loss account. Whereas the assessee has disclosed interest free advance/loan of Rs,407,00,000/- in the financial statements to a in the name of subsidiary M/s. Sicom Reality Pvt Ltd. The A.O. is of view that the assessee on one hand has taken interest bearing loans and claiming interest expenditure and on the other hand has utilized the funds providing interest free advances/loans to its subsidiary and the A.O has issued show cause....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ieved by the order, the assessee has filed an appeal before the CIT(A). In the Appellate Proceedings, the CIT(A) has considered the grounds of appeal, statement of facts, findings of the A.O and submissions of the assessee. The CIT(A) on the disputed issue of provision for diminution in the value of stock in trade of Rs. 200.33 lacs claimed by the assessee has granted relief relying on the assessee own case at Page 8 Para 6 & 7 of the order as under: "6. The above detailed submission has been examined. Regarding the issue of claim of diminution in the value of stock in trade, there is a recent decision in the case of Ashok Leyland Finance Ltd versus DCIT 146 taxmann.com 340 (Madras High Court) (2023). In this case, there was a claim of deduction by this NBFC, of the diminution in the value of investment made in shares of two unlisted companies, which did not have a market value as they were not traded in stock market- were merely investments- and not in stock-in-trade, the same was disallowed - Held in favour of Revenue. Further, in this case of Ashok Leyland, it was also observed that government securities could not be easily encashed and can be utilized only whe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther amended this section to provide that in the cases where the Assessing Officer is not satisfied with the correctness of the disallowance claim made by the assessee, the amount of disallowance shall be computed in accordance with the prescribed methodology. For this purpose, CBDT has prescribed Rule 8D in the Income-tax Rules, 1962 to prescribe the methodology for computing the disallowance under section 14A. 10. Now, further latest amendments have been brought vide Finance Act, 2022 in Section 14A: 1st Amendment: In sub-section (1) of the said section to provide that notwithstanding anything to the contrary contained in this Act, for the purpose of computing the total income, no deduction shall be allowable in respect of expenditure incurred in relation to income which does not form part of the total income. The first amendment is with regard to insertion of non-obstante clause to Section 14A(1). Due to which, this sub- section would have overriding effect over any other provision containing contrary view as against this provision. 2nd Amendment: Inserted the Explanation to the said section to clarify that notwithstanding an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pellant, the AO has detailed in the assessment order, why he arrived at the conclusion for invoking Rule 8D r.w.s 14A. 11. Hence, in view of above position, the disallowance of Rs 15,07,64,678 (net amount) made by the AO is sustained and this ground of appeal is dismissed." 7. Further, the CIT(A) on the proportionate disallowance by the A.O applying the market rate of interest @12% on Rs. 407,00,000/-and worked out the disallowance of Rs. 48,84,000/-. The CIT(A) has considered the detailed submissions of the assessee dealt at Page 21 to 28, Para 12 of the order. Whereas the CIT(A) was not satisfied with the explanations and information and confirmed the disallowance observing at Page 28 Para 13 &14 of the order as under: "13. The AO had been very reasonable, that despite appellant having failed to justify the interest free advances made to its sister concern, SICOM Realty Pvt Ltd (SRPL) engaged in the reality business, of Rs. 4.07 crore as against availing interest bearing loan from another sister concern, engaged in investment related business@ 14.50% per annum, he restricted the disallowance @ 12% only. The appellant contended that it gave loan to SR....
X X X X Extracts X X X X
X X X X Extracts X X X X
....T) (2021) Provision for diminution in value of investment, having been written off, could not be added to book profit under section 115JB. Similarly, held in the case of PCIT vs Torrent (P) Ltd 108 taxmann.com 375 (Guj. HC) 2019. In view of above position, this ground of appeal is allowed". 9. The CIT(A) dealt on addition of disallowance U/sec 14A r.w.r 8D(2)(ii) & (iii) of the IT Rules in computing book profits u/sec 115 JB of the Act and the submissions of the assessee . Further the CIT(A) has relied on the judicial decisions and granted relief observing at Page 36 & 37 Para 20 & 21 of the order as under: "20 Ground 23: Addition to book profit under section 115JB of the Act on account of 14A of the Act of Rs. 15,07,64,678/- In this regard, the appellant submitted that; 1 "The learned AO has added back the disallowance under section 14A read with rule 8D, expenses of Rs. 15,07,64,678/- while computing the Book Profit u/s. 115JB of the Act. 2. In this regard, the Appellant submits that adjustment cannot be made in the book profit under section 115JB of the Act for the items which are not mentioned specifically in the explanation to section 115....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... from surplus funds/own funds available on commercial expediency and interest bearing funds are not utilized for providing advance and further in the assessee own case for the earlier year, the claim was allowed . The Ld.AR submitted that the CIT(A) has erred in sustaining the disallowance U/sec 14A r.w.r 8D(2)(ii) & (iii) of the IT Rules of Rs. of Rs. 1507,64,678/-, though the A.O has not recorded satisfaction on the incorrectness of claim and Further the Ld.AR relied on the additional ground of appeal, that only investments which yield exempt income should be considered in computing disallowance U/sec 14A r.w.r 8D(2)(ii) & (iii) of the IT rules .The Ld.AR substantiated the submissions with synopsis, factual paper book and judicial decisions and prayed for allowing the appeal. Per contra, the Ld.DR supported the order of the Ld.CIT(A) on the disputed issues and submitted that the revenue has filed the cross appeal. 12. We have heard the rival submissions and perused the material on record. The Ld.AR submitted that the CIT(A) has erred in confirming the addition of notional interest overlooking the facts and submissions in the proceedings. Whereas the AO has estimated the deemed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....R 1) (SC) • PCIT vs V.S. Dempo Holding Pvt Ltd (2021) (130 taxmann.com456) • (Bombay HC) • Macrotech Developers Ltd vs DCIT (ITA No.5021, 5022/Mum/2019) dated 23 May 2022 • Deepak Shah vs ACIT (ITA No. 7032/Mum/2019) dated 22 December 2021. 13. We find the Honble Tribunal in the assessee own case in ITA. No.42/Mum/2020 for A.Y.2009-10 dated 27-08-2021 has dealt on the similar addition of notional interest sustained by the CIT(A) and deleted the addition observing at Page 4 Para 6 to 9 of the order read as under: 6. We have heard the ld. Authorized Representative for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the ld. A. R to drive home his aforesaid contention. As is discernible from the orders of the lower authorities, the assessee company which is a NonBanking Finance Company (NBFC) engaged in the business of finance such as project finance, leasing, merchant banking, investments and trading in shares, financial services and advisory business, had during the year under consi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... amount of Rs. 70.92 crores which was more than sufficient for sourcing the interest-free advance of Rs. 6.57 crore that was given to its sister concern, viz. SRPL. 8. Admittedly, the fact that the assessee had sufficient owned funds to source the interest-free advance of Rs. 6.57 crore that was given to its subsidiary company is not in dispute. The controversy involved in the present appeal hinges around the aspect, that as per the department if an assessee had borrowed certain funds on which liability to pay interest is being incurred; and on the other hand had advanced certain amounts to its sister concern or other third parties without charging any interest and without any business purpose, then, the proportionate interest correlating to the amount so advanced without charging any interest was liable to be disallowed u/s 36(1)(iii) of the Act. We are of a strong conviction that the aforesaid view taken by the lower authorities is absolutely misconceived and in fact misplaced. In our considered view, if there be interest-free funds available with an assessee which are sufficient to meet its interest free investments; and at the same time the assessee had raised interest....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nts would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments, in this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal." Also, the Hon'ble High Court of Bombay in the case of CIT-2, Mumbai, Vs. HDFC Bank Limited (2014) 366 ITR 503 (Bom), had observed, that where the assessee's funds and other non- interest bearing funds were more than the investments made in tax free securities, then, it would have to be presumed that the investments so made by the assessee were out of the interest- free funds available with it. Accordingly, in the backdrop of the aforesaid settled position of law, we are unable to persuade ourselves to subscribe to the view taken by the lower authorities who had disallowed the assessee's claim for deduction of the interest expenditure under Section 36(1)(iii) of the Act, for the reason, that as the assessee was in receipt of interest bearing funds, therefore, it was to be presumed that the interest-free funds given by it to its subsidiary company, viz. SRPL were out of such interest bearing funds. We, thus, not finding favor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ltd (2020) (423 ITR 220) (Bombay HC) affirmed by Hon'ble Supreme Court in (2022) (141 taxmann.com 509)(SC) • CIT vs Reliance Utilities and Power Limited (2009) (313 ITR 340)(Bombay HC) • South India Bank (130 Taxmann.com 178) (SC) • ACIT vs NIIT Technologies Ltd (2021) (123 taxmann.com 135) (Delhi ITAT) • DCIT vs Hira Ferro Alloys Ltd (2018) (90 taxmann.com 430) (Raipur ITAT) (b) Disallowance under section 14A read with rule 8D cannot exceed 1 percent of exempt income. • • Mahindra Homes Pvt. Ltd. (ITA No. 2179 & 1008/Mum/2021) dated 30 September 2022 • The Hongkong & Shanghai Banking (ITA No. 3857/Mum/2006 and ITA No. 4565/Mum/2009) dated 27 November 2019 (c) Only investments from which exempt income is earned should be considered for computing disallowance under section 14A of the Act. • • Hon'ble Tribunal in Appellant's own case for AY 2009-10 in (ITA No. 740/Mum/2013) dated 4 July 2019 • ACB India Ltd (ITA 615/2014) dated 24 March 2015 (Delhi HC) • Vireet Industries Pvt. Ltd. (188 TTJ 1) (Delhi ITAT SB) affi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....8-2015 has dealt on the sustainment of the disallowance U/sec 14A by the CIT(A) and restoreed the issue to the file of the Assessing Officer observing at Page 8 Para 8 to 12 of the order read as under: "8. In addition to the above case laws, the learned Counsel also relied on the assessment orders of the subsequent years, i.e., A.YS 2009-10, 2010-11 and 2011-12 in the assessee's own case, wherein, no disallowance has been made by the Assessing Officer. It is also seen that in the assessment order passed under section 143(3), for the assessment year 2009-10, the Assessing Officer has passed a speaking order, accepting the claim of the assessee that no borrowed funds were used for these shares and, therefore, no disallowance was called for. The relevant portion of the assessment order for the year 2009-10 is reproduced herein below, for the sake of ready reference:- "The interest expenses of the assessee are majority on account of secured loan and from adjustment loans from Government of Maharashtra and on Bonds. These details are available in Schedule 14 of the Profit & Loss account, On an examination of bank cash flow, it is seen that no borrowed funds is dive....
X X X X Extracts X X X X
X X X X Extracts X X X X
....section 14A, can be made with respect to the shares held as stock-in-trade. In support of this proposition, the learned Counsel relied on the following case laws:- 1. Excel Industries Ltd. Vs. DCIT (ITA no. 1067/Mum/2012 dated 02 January 2015) (Mumbai Tribunal) 2. M/s JM Financial Limited (ITA NO. 4521/Mum/2012 dated 26 March 2014) (Mumbai Tribunal) (Page No.231-241) 3. EIH Associated Hotels Ltd (ITA No 1503/Mds/2012) dated 17 July 2013 (Chennai Tribunal) (Page No.243-260) 4. HSBC securities & Capital Markets (ITA No.3186/M/2008) dated 18 March 2011 (Page No. 261-264) 5. Zensar Technologies (ITA No. 4538/M/2005) dated 15 December 2010 (Page No. 265-275) 6. Balchandra S Sule (ITA No, 3684/M/2005) dated 29 October 2010 (Page No.277-279) 7. Garware Wall Ropes Limited (ITA No.5408/Mum/2012) dated 15 January 2014 (Page No. 281-288) 2) Disallowance under section 14A not apply to shares held as stock in trade: DCIT Vs. India Advantage Securities Ltd (ITA NO. 6711/Mum/2011 dated 14 September 2012) (Mumbai Tribunal) (Bombay HC Dismissed the department appeal vide its order no. ITA 1131 of 2013 dated 17 March 20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me and made a suo-moto disallowance of Rs. 52,934/- being the expenditure incurred for earning exempt income. However, in the assessment proceedings the Assessing Officer held that the subject Assessment Year 2008- 09 the disallowance of expenditure to earn exempt income has to be made under Section 14-A of the Act r/w Section 8D(2)(ii) of the said Rules. Thus, making disallowance of expenditure to the extent of Rs. 8.39 crores in the aggregate inter-alia consisting of proportionate disallowance of interest paid to the extent of Rs. 7.87 crores in the Assessment Order dated 26th November, 2010. 4. Being aggrieved with the Assessment Order dated 26 November, 2010 to the extent of disallowance of proportionate interest paid of Rs. 7.87 crores, the respondent preferred an appeal to the Commissioner of Income Tax (Appeals) (CIT(A). By an order dated 20th December, 2011 the CIT(A) deleted the disallowance made under Section 14A of the Act on account of the proportionate interest paid on borrowed funds to the extent of Rs. 7.87 crores. 5. Being aggrieved with the order of the CIT (A) on the above account, the revenue filed an appeal before the Tribunal. The impugned ord....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al portion of dividend income pertains to shares held as stock-in-trade by the appellant sale whereof gives rise to taxable business income in hands of the appellant. Further, it is stated that (i) the AO cannot invoke Rule 8D of the Rules, without recording the satisfaction on the correctness of the expenditure suo motu disallowed by the assessee, (ii) only investment from which exempt income earned should be considered for computing disallowance u/s 14A, (iii) no disallowance u/s 14A can be made on strategic investment made in subsidiaries, (iv) disallowance u/s 14A does not apply to shares held as stock-in-trade, (v) disallowance u/s 14A cannot exceed exempt income and (vi) as the assessee is assessed under normal provisions of the Act, no disallowance u/s 14A should have been made while computing book profit u/s 115JB of the Act. In support of the above propositions, the Ld. counsel relied on the decision in H.T. Media Ltd. (ITA No. 548/2015) (Del HC), Smartchem Technologies (ITA No. 7014/M/2013) dated 23 June 2017, Ashish Jhunjhunwala (88 CCH 470) (Cal HC) dated 8 January 2014, Cheminvest Ltd. (ITA No. 749/2014) dated 2 September 2015 (Del HC), Sarabhui Holdi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... purpose for which investment into shares is made by assessee may not be relevant as section 14A applies irrespective of whether shares are held to gain control or as stock-in-trade. In view of the above decisions which are relevant to the instant case, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to recomputed the disallowance u/s 14A r.w. Rule 8D for the normal computation by following the decision in Vireet Investment Pvt. Ltd. (supra) and Maxopp. Investment Ltd. (supra). We direct the assessee to file the relevant documents/evidence before the AO. 19. We find the facts in the present case, are similar and identical as discussed in the above judicial decisions. Accordingly, we fallow the judicial precedence and set- aside the order of the CIT(A) on this disputed issue and restore the entire disputed issues to the file of the Assessing officer on the similar directions to adjudicate afresh on merits and the assessee should be provided adequate opportunity of hearing and shall cooperate in submitting the information. Accordingly, allow the grounds of appeal of the assessee for statistical purposes. 20. In the result, the appe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the case of PCIT vs. Atria Power Corporation Ltd 142 taxmann.com 413 (SC) (2022) & ACIT vs Geometric Software Solution Co Ltd 140 taxmann.com 647 (Mum ITAT) (2022). Hence, it is accepted that no addition u/s 115JB of the Act is warranted for amount disallowed u/s 14A of the Act. This disallowance u/s 14A rwr 8D has been sustained under the regular provisions in this order (supra). Hence, this ground of appeal is allowed." The Ld.AR relied on the submissions made before the CIT(A) and Judicial decisions in support of relief granted to the assessee. • • Vireet Industries Pvt. Ltd (188 TTJ 1) (Delhi ITAT SB) affirmed by Hon'ble Delhi High Court in (ITA No. 243 & 247/2018) (CM Appl No.7362 & 7365/2018) • CIT vs JSW Energy Ltd (2015) (60 taxmann.com 303) (Bombay HC) SLP Dismissed/Rejected in (2016) (68 taxmann.com 244)(SC) • ACIT vs Geometric Software Solutions Co Ltd (2022) (140 taxmann.com 647) (Mumbai ITAT) • ITO vs Archway Investment Company Ltd (ITA. No. 3822/Mum/2018, ITA No. 6654/Mum/2017) dated 8 April 2021 • Mahindra Homes Pvt. Ltd. (ITA No. 2179 & 1008/Mum/2021) dated 30 September 2....