TaxTMI 
TaxTMI 
TaxTMI 
2017 (3) TMI 1971
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....exempt from tax u/s.10(34). Accordingly, by applying Rule 8D, AO made disallowance on account of interest and other expenditure. By impugned order CIT(A) deleted the disallowance on account of interest after observing as under:- 5. Ground No.1, 2. & 3 5.1 The' above grounds are taken together as they address a common issue. I find from the balance sheet of the appellant company as at 31.03.2011 that .the share capital (Rs.11,15,51,500/-) and reserve & surplus of (Rs.41,85,79,205/-) totalling to Rs.53,01,30,705/- are more than the investment made of Rs.28,23,07,012/-. In the case of CIT v. HDFC Ltd,(ITA No. 330 of 2012) Order dated 23/07/2014,the Hon'ble Bombay High Court held that in view of the factual position as per the judgement in the case of Cl'F v. Reliance Utilities' and Power Ltd. :(2009) "313 ITR 340 [Bom], it would have to be presumed that the investment made by the assessee would be out of the interest free funds available with, the assessee. In: the relevant years, the assessee churned that no disallowance of interest be made u/s. 14A of the LT. Act, 1961 in view of the fact that the assessee had interest free funds available more th....
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....nses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A; the-expenditure incurred in respect. 'of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption 'of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the' Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain* incomes was being u sed to reduce the tax payable on the .non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income: The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemp....
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....la given therein in a case where the assessee incurs expenditure by way of interest which was not directly attributable to any particular income or receipt. 'The formula essentially apportions the amount of expenditure by way of interest [other than the amount Of interest included in clause (i)]incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not 'form part of the total income to the average of the total assets of the assessee'. * 'The third component is an artificial figure-0.5% of the average value of the investment income from which does not or shall not 'form part of the total income, as appearing in the balance sheets of the assessee; on the first day and the last day of the previous year. * It is the aggregate of these three' components which would constitute the expenditure in relation to exempt income and it Is this amount of expenditure which would be disallowed under section 14A.' It is therefore, clear that in terms' of the said rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. * The dir....
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.... to section'115JB(2) as expenditure 'relatable to', iri more or less the same form. It is manifest, that the amount of dividend is exempted u/ s. 10(33) [not section 10(38)] of the Act. Thus,' any expenditure 'relatable to' the exempt dividend income would fall under clause (f). * The assessee. argued that, unless an amount is specifically debited to. the profit and loss account in respect of an exempt, income, the same cannot 'he brought within the purview of clause (f) of the Explanation 1 to section 115JB(2). He stated that since the disallowance u/s.14A is computed as per rule 8D, the origin of the expenses disallowed cannot be traced to the profit and loss account and hence it cannot be covered within ' the mischief of clause (f) of the, Explanation. * There was no logic in this submission because of the clear 'language of the Explanation 1, which provides in unequivocal terms .that the amount of expenditure 'relatable to' exempt ' income shall be added back " * 'Neither, the language of c1au~e' (f) expressly refers to the amount " specifically debited to the profit and loss account nor can there be a....
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....nk Ltd. (2014) 366 ITR SOS(Bom) wherein it has been held that no disallowance was called upon out of interest paid on borrowings if assessee's own funds and non Interest bearing fund exceeds investment in tax free securities. 9. Learned AR further argued that strategic investment made in subsidiary companies that have controlling interest, no disallowance is warranted u/s.14A. In support of this proposition, reliance was placed on the following judicial pronouncements, which was also placed on record. * Garware Wall Ropes Vs. Addl. CIT (2004)65 SOT 86 (ITAT Mumbai Bench) * JM Financial Ltd., vs. Addl CIT (ITA 4521/Mum/2012) Order dt 26.03.2014. * CIT vs. Oriental Structural Engg. (Pvt.) Ltd., (ITA 605/2012) (Delhi High Court decision dt. 15/01/2013) 10. As per learned AR, investment not yielding tax free income during the assessment year is required to be excluded from investment while computing average investment in rule 8D (2)(iii). For this purpose reliance was placed on the following judicial pronouncements. * Coal India Ltd., vs.Addl.CIT (2015) 172 TTJ 0103 (Kol) * REI Agro Ltd., vs. DCIT (2013) 144 ITD 141 (Kol Bench) 11. On the other hand, learned DR relied ....
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.... Limited ITA No.1503 & 1624/Mds/2012 (Madras ITAT); the strategic investment made in subsidiary companies for having controlling interest should be excluded from the average investment while computing disallowance under Rule 8D (2)(iii). Similarly in the case of Coal India Ltd., 172 TTJ 0103 and REI Agro Ltd., 144 ITD 141, investment not yielding tax free income should be excluded from investment while computing average investment under Rule 8D (2)(iii). 16. In view of these judicial pronouncements we are inclined to agree with Ld. Counsel of assessee that the investments from where income is taxable or the investments which are for business or strategic reasons need to be removed from the working of the average value of investments as contemplated in rule 8D(2)(iii). These propositions have been consistently held in catena of cases by this Tribunal as referred to by ld. Counsel before us. 17. Applying proposition of law discussed in above judicial pronouncements we have to exclude the strategic investment made in the group concerns, which works out to 98% of the investment so made. The other investments are earlier investments and not made during the year. Accordingly, no disall....