TaxTMI 
TaxTMI 
2025 (6) TMI 389
X X X X Extracts X X X X
X X X X Extracts X X X X
....onal Faceless Appeal Centre/Ld. CIT(A) erred in law and on facts in importing the disallowance made u/s 14A into the scheme of calculation of book profits as per section 115JB of the Act. 4. That the National Faceless Appeal Centre /Ld. CIT(A) has erred in law and on facts while upholding the disallowance of interest expenditure on notional basis amounting to Rs. 8,16,010/- on investments under the provisions of section 36(1) (iii) of The Act. 5. Without pre-judice to ground no.4, the National Faceless Appeal Centre /Ld. CIT(A) has erred in not allowing the above mentioned interest expenditure under section 57 of The Act and setting off the same against income from other sources. 6. That the appellant craves leave to add/alter/amend any ground of appeal on or before the due date of hearing of appeal. 3. Briefly the facts of the case are that Vardhman Special Steels Limited, a public limited company engaged in manufacturing and exporting steel billets, rolled bars, and rods, filed its original income tax return for the A.Y. 2018-19 on 09/10/2018, declaring a total income of "Nil," a long-term capital loss of Rs. 29,69,207/-, and exempt income of Rs. 1,4....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... wasn't clearly shown, the AO disallowed Rs. 8,16,010/- calculated at 12% for one month and also started penalty proceedings under Section 270A. The AO added this disallowance, along with Rs. 1,78,314/- under Section 14A, to the revised returned income of Rs. 14,69,49,564/-, resulting in a total income of Rs. 14,79,43,888/-. However, after setting off earlier year losses of Rs. 87,88,41,731/-, taxable income became nil. For MAT purposes, book profit was revised to Rs. 27,14,69,750/-. The assessment was completed under Section 143(3), and a demand notice was issued. 4. Against the order of the AO the assessee went in appeal before the Ld. CIT(A) who has since dismissed the appeal of the Assessee. 5. Against the order of the Ld. CIT(A) the assessee preferred an appeal before the Tribunal. 6. During the course of hearing the Ld. Counsel for the Assessee submitted brief submissions which read as under: Ground No. 1 - General in nature Ground No. 2 - That the National Faceless Appeal Centre/Ld. CIT(A) erred in law and on facts in upholding the disallowance of Rs. 1,78,870/- (though restricted to Rs .1,78,314/- after allowing credit of suo-moto disallowance....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as amended and made effective from 02.06.2016 are clear and unambiguous in nature. The said provision lays down a mechanism as to how disallowance is to be made against the income should be calculated. There is no other method prescribed under the tax laws." - The Ld. AO in compliance of section 14A(2) of the Act was required to evaluate the assessee's claim and only thereafter based on facts of the case & details reasons could have disallowed the said claim. The relevant extract of section 14A(2) is reproduced as under for your reference; "(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 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." - The assessee's aforesaid method of allocation of expenses was also based on and upheld in various judicial pronouncements either in assessee's own case and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o moto disallowed by the assessee has some scientific basis i.e these have been computed in proportion to the tax-free income to the taxable income. Further, the Assessing Officer has nowhere recorded his satisfaction on the issue that how the disallowance computed by the assessee is wrong. It is true that Rule 8D has been prescribed by the Income Tax Rules for making computation of disallowance under Section 14A of the Act w.e.f assessment year 2008-09 but it can never be envisaged that in compliance to these, provisions can be stretched to such an extent as has been done by the Assessing Officer in the present case....." Copy enclosed herewith (d) Judgment of Hon'ble Jurisdictional ITAT in ITA No. 691/2016 for AY 2012-13 in the case of Devakar Investment & Trading Company P. Ltd (i.e. assessee's another associate company) - "(8) In the light of the above facts wherein the assessee has disallowed 49% of expenses under Section 14A, we are not in agreement with the observation of the Assessing Officer that invoking of Rule 8D is a mandate and has an automatic application as the Assessing Officer's dissatisfaction with the correctness of claim of the assessee in res....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to be construed strictly and only where the Assessing Officer records satisfaction, on the basis of clear and cogent material, shall an order be passed under Section 14A of the Act, disallowing such a claim" 2. Disallowance made under section 14A cannot exceed the exempt income a) Pr. CIT vs. Empire Package Pvt. Ltd., (2016) 286 CTR 457 (Punjab & Haryana High Court) dated 12.01.2016 - Disallowance made under section 14A read with rule 8D cannot exceed the exempt income Copy enclosed herewith b) Joint Investments P. Ltd vs. CIT, (2015) 59 taxmann.com 295 (Delhi High Court) wherein the Court held that, "By no stretch of imagination can s. 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case". Copy enclosed herewith Ground No. 3 - That the National Faceless Appeal Centre/Ld. CIT(A) erred in law and on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....& profit and Loss Account enclosed vide separate paperbook at pages 3 to 28 (relevant page 3). - Recently, similar presumption theory was also accepted by the Hon'ble Supreme Court in the judgment of South Indian Bank Ltd. vs. Commissioner of Income-tax vide its order dated 09.09.2021, wherein, the Hon'ble court has held that, where the assessee has mixed funds (i.e. made up partly of interest free funds and partly of interest- bearing funds) and for making investments, payment is made out of that mixed funds then the investments must be considered to have been made out of the interest free fund only i.e. the presumption in case the assessee had mixed pool of funds, should be that, the assessee had used its own funds for making the investments rather than interest-bearing or borrowed funds. Case Law enclosed at Pages 108 to 115(Relevant page 112, Para 17). Further, assessee also places its reliance on following judgments including judgments in assessee's own cases and in case of assessee associate company:- 1. Vardhman Special Steels Limited vs. ACIT, Ludhiana dated 20.12.2018 ITA No. 1510/2017 for AY 2013-14 (Assessee's own case) - No disallowance u/s 36....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. 8. We have heard the rival contention and perused the material available on the record. 8.1 Ground No. 1 of the Appeal is general in nature therefore no adjudication is required. Hence this ground of appeal is dismissed. 8.2 Regarding Ground No. 2 & 3, the Ld. Counsel for the Assessee brought to our notice that this issue is squarely covered by the Coordinate Bench in favour of the Assesee vide appeal in ITA No. 1510/Chd/2017 for A.Y. 2013-14 dt. 20/12/2018. The relevant portion of the findings of the Coordinate Bench on this issue is as under: 12. We have heard the contentions of both the parties and perused the orders of the authorities below. Undoubtedly as per the provision of Section 14A, the AO can determine the amount of expenditure incurred in accordance with the prescribed method only once he is satisfied with the incorrectness of the claim of the assessee in this regard. The jurisdictional High Court has time and again laid down this proposition in a series of decisions as pointed out by the Id. counsel for the assessee in the case of Deepak Mittal (supra) and Abhishek Industries (supra). The Hon'ble High Court has stated that the provisions of Se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....14-A of the Act was to proceed further to collect such material or evidence to determine expenditure, if any, incurred by the assessee but the Assessing Officer instead relying on Rule 8-D of the Rules applied as a formula, applicable to an assessee who has incurred expenditure by way of interest which is not directly attributable to any particular income or receipt which is not the case of the present assessee, which was clearly a wrong application introduced as a substitute for sub-section 2 of Section 14-A of the Act and thus was not permissible in law. 13. In the facts of the present case, we find that the assessee had suo-motu made a disallowance of expenses incurred in relation to earning of exempt income amounting to Rs. 1,84,871/-. During assessment proceedings, the assessee had explained the basis for making the impugned disallowance submitting a calculation of the same also. The assessee had explained that it had made certain investments directly while others had been made through Portfolio Management Services. In relation to those investments which had been made directly, it had disallowed expenses of Rs. 50,000/- while in relation to those investments made thro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eferred to the findings given by the Coordinate Bench in favor of the assessee in its own case (in ITA No. 1510/Chd/2017 for A.Y. 2013-14, dated 20/12/2018). The relevant portion of the order is as follows: 18. Ground no.3 relates to the disallowance of interest expenses u/s 36(1)(iii) of the Act. The brief facts relating to the issue are that the AO has disallowed interest expenses u/s 36(1)(iii) of the Act on account of investments made by the assessee to the tune of Rs. 99.25 Cr holding the same to be for non business purposes. The AO disallowed the proportionate interest. The Id. CIT(A) deleted the disallowance on finding that the assessee had sufficient own interest free funds for the purpose of making the impugned investments and relied upon the decision of the jurisdictional High Court in the case of Bright Enterprises Pvt. Ltd. Vs CIT, Jalandhar. 19. Before us, Id. DR relied on the order of the AO while the Id. counsel for the assessee relied on the order of the CIT(A). 20. We have heard the rival contentions. We see no reason to interfere with the order of the CIT(A). The finding of fact recorded by the CIT(A) that the assessee had sufficient own....