TaxTMI 
TaxTMI 
2025 (12) TMI 782
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....facts and circumstances of the case and in Law, the Ld CIT(A) erred in confirming disallowance u/s 14A of the Act in respect of the following: a. Rule 8D(2)(i) i. Interest to TATA Capital Rs. 10,99,16,196 ii. Personnel expenses Rs. 1,75,00,000 iii. Travelling expenses Rs. 1,00,95,661 iv. Business Promotion expenses Rs. 5,94,168 v. Rent Rs. 45,00,000 vi. Repairs & Maintenance Rs. 25,00,000 vii. Depreciation Rs. 50,00,000 b. Rule 8D(2)(ii) Rs. 1,16,79,947 c Rule 8D(2)(iii) Rs. 1,07,39,195 2. In the facts and circumstances of the case and in Law and without prejudice to (1) above the Ld. CIT(A) erred in confirming disallowance of Rs. 10,99,16,196 being interest paid to Tata Capital in respect of funds borrowed for strategic investment in shares of group companys despite the fact of assessing officer holding appellant to be engaged in business of investment. 3. In the facts and circumstances of the case and in Law, Without prejudice to (1) above, the CIT(A) erred in confirming disallowance of expenses under Rule 8D(2)(i) on account of Personnel expenses, Travelling expense....
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....nt provisions of the Income-tax Act, 1961 (hereinafter referred to as "the Act") were issued and duly complied with. Consequent thereto, the assessment was completed under section 143(3) of the Act on 29.03.2015, determining the total income at Rs. 51,19,60,630/-, after making various additions and disallowances as set out in the assessment order. 4. On further appeal, the Ld. CIT(A) dismissed the appeal of the assessee and upheld the finding of the Assessing Officer. 5. The ground Nos. 1 to 5 of the appeal relate to the issue of disallowance u/s 14A of the Act r.w.r. 8D of the Income-tax Rules, 1962 (in short 'the Rules'). Facts in brief qua the issue in dispute are that during the year under consideration, the assessee had earned dividend income amounting to Rs. 33,64,56,570/-. The assessee, on its own accord, made a suo-motu disallowance of Rs. 10,53,55,857/- under section 14A of the Act. The Assessing Officer, however, following the findings recorded by his predecessor in the assessment for assessment year 2011-12, proceeded to compute the disallowance in accordance with Rule 8D of the Rules. 5.1 The Assessing Officer first identified out of the total expenditu....
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....ly earned dividend of Rs. 33,64,56,517/-. Against this income, the Assessee has suo-motto disallowed expenditure of Rs. 10,53,857/- u/s. 14A r.w.r.8D. The same issue was therein A.Y.2011-12. However, disallowable expenditure is to be made according to the Rule 8D. Thus, after applying the Rule 8D, the Assessing Officer has disallowed Rs. 17,25,25,167/- against the claim of the Assessee of Rs. 10,53,55,857/-. Therefore, the balance amount of Rs. 67169310/- has been added to the total income. Against the disallowance of expenditure, it is contended that the Ld. Assessing Officer has wrongly made the disallowance without properly appreciating the genuineness of expenditure suo- motto offered for disallowance. According to the Ld. A.R., company has taken unsecured loans & inter-corporate deposits from Bank & related parties which is utilized for the purpose of the business. The details of interest was already given to the Assessing Officer by letter dated 20.10.2014, such funds have been utilized for making investment in share of Group Companies. The similar argument was also there in A.Y.2011-12 and same has been repeated in this year also. 4.1. I have considered the issue un....
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....f Rs. 90852583/- is correct and disallowance has to be restricted to this amount. Therefore, after going through the written arguments and facts on records, I find no reason to discard the working of disallowable expenditure made by the Assessing Officer. Because of facts of the case, none of the decisions relied upon by the Ld. Authorised Representative is applicable, therefore, in the light of the above discussion, the disallowance of expenditure made by the Assessing Officer of Rs. 15,11,02,307/- is sustained. Since, assessee has suomoto disallowed exp of Rs. 90852583/-, the balance additional disallowance comes to Rs. 6,02,49,724/-. " With a view to maintain judicial consistency, the disallowance so made by the Assessing Officer and is hereby sustained." 6.1 Before us, the Learned Counsel for the assessee submitted that the principal activity of the assessee-company comprises of managing its investments and exploring new investment opportunities. It was further submitted that the assessee also provides management, corporate, and support services to Spicer India Ltd., a concern forming part of the "Anand" Group. The Learned Counsel explained that the assessee purchas....
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....diture relatable to earning exempt income, and such allocation must be made in proportion to the taxable and non-taxable income of the assessee. 6.6 The Learned Counsel for the assessee further submitted that the Assessing Officer has not recorded any dissatisfaction with regard to the correctness of the suo-motu disallowance made by the assessee under section 14A of the Act. In the absence of such satisfaction, the invocation of Rule 8D by the Assessing Officer, it was contended, is void ab-initio. It was submitted that, on this ground alone, the entire computation made by the Assessing Officer under Rule 8D deserves to be deleted, and the suo-motu disallowance offered by the assessee ought to be accepted. 6.7 With respect to the Assessing Officer's action of treating a portion of the expenditure debited to the profit and loss account as directly incurred for earning exempt income and disallowing the same under Rule 8D(2)(i) of the Rules, the Learned Counsel submitted that the Assessing Officer has failed to demonstrate any proximate nexus between such expenditure and the earning of dividend income. It was urged that the expenses in the nature of personnel cost, travelli....
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.... Dytek India Ltd. represented interest on inter-corporate deposits and were not related to any investment yielding exempt income. 6.10 The Learned Counsel accordingly contended that out of the total finance cost of Rs. 12,53,95,654/- debited to the profit and loss account, the interest to Tata Capital having already been disallowed, the balance interest amount of Rs. 1,16,79,947/- stood duly identified as being incurred for specific business purposes and not connected with any investment generating exempt income. Hence, the Assessing Officer was not justified in apportioning the said balance interest expenditure in the ratio of total investments to total assets while computing disallowance under Rule 8D(2)(ii) of the Rules. 6.11 The Learned Counsel further submitted that the Assessing Officer was also not justified in making an additional disallowance of 0.5% of the average value of investments towards administrative expenses under Rule 8D(2)(iii), when disallowance on account of administrative and related expenses had already been made separately. 6.12. The Learned Counsel for the assessee further invited our attention to the order of the Tribunal in the assessee's ow....
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....nts (P) Ltd (2017) 58 ITR(T) 313 (Delhi-Trib)(SB) directed to restrict the disallowance to the average value of investments which had actually yielded exempt income during the year. 7. On the contrary, the Ld. Departmental Representative (DR) relied on the order of the lower authorities. 8. We have carefully considered the rival submissions and perused the material placed on record. The undisputed facts reveal that the assessee has earned dividend income of Rs. 33,64,56,570/-, in addition to other taxable income. The assessee, on its own volition, has made a suo-motu disallowance of Rs. 10,53,55,857/- under section 14A of the Act. The Assessing Officer, however, relying upon the approach adopted by his predecessor in the assessment for assessment year 2011-12, proceeded to compute the disallowance by invoking Rule 8D of the Income-tax Rules, 1962 (hereinafter "the Rules"). 8.1 It is well settled that section 14A of the Act mandates the disallowance of expenditure incurred in relation to earning income which does not form part of the total income. Where common books of account are maintained for taxable as well as exempt activities, the Assessing Officer must examine the co....
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....from a fundamental jurisdictional infirmity and is, therefore, unsustainable in law. We accordingly direct the deletion of the disallowance computed under Rule 8D. The suo-motu disallowance offered by the assessee stands accepted. 9. The learned counsel for the assessee has further advanced, without prejudice, an alternative line of submissions on the merits of the disallowance made under section 14A of the Act. It is noted that while invoking Rule 8D, the Assessing Officer first proceeded to compute the disallowance under Rule 8D(2)(i). He segregated interest expenditure of Rs. 10,99,16,196/- pertaining to loans obtained from Tata Capital Ltd., characterising the same as expenditure directly relatable to the earning of exempt income, and accordingly disallowed it under Rule 8D(2)(i). Thereafter, he examined other expenditure debited to the profit and loss account and, relying solely upon the manner in which disallowance had been made in assessment year 2011-12, held that part of such expenditure was directly connected with the earning of exempt dividend income and again proceeded to disallow a portion thereof under Rule 8D(2)(i). 9.1 The ld counsel for the assessee submitted....
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....the earning of exempt income can be disallowed under section 14A of the Act. 9.4 Thus, applying the principle laid down in Maxopp Investment Ltd. (supra), even if Rule 8D were to be validly invoked, only the expenditure relatable to the earning of exempt income-determined on a rational and proportionate basis-could be subjected to disallowance. The suo-motu disallowance computed by the assessee appears to be consistent with this principle, whereas the disallowance made by the Assessing Officer lacks both statutory foundation and factual justification. 9.5 The Coordinate Bench of the Tribunal, in the assessee's own case for the assessment year 2011-12 in ITA No. 916/Mum/2016, has referred to the aforesaid principle of apportionment as enunciated by the Hon'ble Supreme Court in Maxopp Investment (supra). The relevant finding of the Tribunal (supra), is reproduced below for ready reference: "6.3.1. The question that fell for consideration before Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT(supra) were on two factual background wherein, the question of apportionment of expenditure had arisen and predominant intent of investment in shares....
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.... be treated as 'income' under the head 'profits and gains from business and profession'. What happens is that, in the process, when the shares are held as 'stock-in- trade', certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10(34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers P Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. (40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed....
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....not important criteria, even though the assessee has acquired shares for having controlling interest in the group companies. Accordingly Ground No.2 raised by the assessee stands dismissed." 9.6 Though the Tribunal in AY 2011-12 has rejected the contention that no disallowance is warranted on the ground that the dominant purpose of the investment was strategic, it nevertheless accepted the theory of apportionment. 9.7 We observe that, in the facts before us, the assessee is admittedly engaged in the business of making and managing investments in its subsidiary companies, and that the dividend income has arisen only as an incidental outcome of such business activity. In these circumstances, the disallowance worked out by the Assessing Officer under section 14A of the Act, read with Rule 8D of the Rules, cannot be applied in a mechanical or undifferentiated manner. 9.8 It is incumbent upon the Assessing Officer to undertake a rational apportionment of the expenditure between taxable and non-taxable streams of income arising from the investment activity, and to identify with precision that part of the expenditure which is actually relatable to earning the exempt inco....
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....rning of exempt income. Accordingly, while sustaining the finding that interest on the loan obtained from Tata Capital Ltd. is liable for disallowance under Rule 8D, we direct that the amount be restricted in accordance with the apportionment principles enunciated by the Hon'ble Supreme Court therein. 9.13 We note, at the outset, that for assessment year 2011-12, the Coordinate Bench had rejected the assessee's plea for exclusion of various items of expenditure which were treated by the Assessing Officer as direct expenses for the purpose of disallowance under Rule 8D(2)(i). The Ld. CIT(A), in the year presently under consideration, has merely followed this earlier view. The relevant extract from the Tribunal's order reads as under: "7.6.2. On analysis of the P & L A/c. regarding the personal expenses, it is noted that under the head salaries and bonus in schedule 14 a sum of Rs. 1,59,19,089/- has been incurred. The assessment order details the employees to whom the salary and bonus were paid due to non availability of separate books of accounts. The Ld.AO apportioned 1.5 crores under the head personal expenses as direct expenditure incurred towards the earn....
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....), and not under Rule 8D(2)(i). The assessee has also pointed out that even in the Tribunal's subsequent order in MA No. 103/Mum/2025, the entire personnel cost was not treated as directly relatable to exempt income, and the Assessing Officer was instead directed to apportion it. Accordingly, the assessee argues that in a mixed and indivisible business, no portion of personnel expense could be notionally classified as "direct" expenditure under Rule 8D(2)(i) in the absence of evidence, and the only permissible method of attribution is that prescribed under Rule 8D(2)(iii), being 0.5% of the average value of investments yielding exempt income. 9.16 On a careful consideration of the matter, we find that the assessee's case involves a composite activity from which both taxable and exempt income arise. Under section 14A, only such expenditure as bears a clear and proximate connection with earning exempt income may be disallowed. Expenditure not so connected must be examined under section 37(1) to determine whether it is incurred wholly and exclusively for business purposes; but such expenditure cannot be denied deduction under section 14A merely because the assessee has earn....
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.... assessee by the decision of Hon'ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC). However, the learned Counsel for the assessee stated that the investments on which assessee has not received any exempt income during the year under appeal, the issue is again covered in favour of assessee by the decision of Special Bench of this Tribunal of Delhi Special Bench in the case of ACIT vs. Vireet Investments (P.) Ltd. [2017] 58 ITR(T) 313 (Delhi - Trib.) (SB). The learned Counsel for the assessee stated that the assessee has filed revised computation of disallowance under section 14A read with Rule 8D of the Rules, which is enclosed at page 33, wherein disallowance made amounting to 8,28,13,345/-. The learned Counsel for the assessee stated that the working given by assessee was not considered by the CIT(A) hence, the revised the computation, wherein the assessee has excluded the investment which is not received any exempt income during the year of appeal, is to be excluded. 6. When these facts were confronted to the learned Sr. Departmental Representative, he stated that the matter can be restored back to the file of the AO for re-compu....
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...., leaving only such attribution as is permissible under Rule 8D(2)(iii). Accordingly, the contention of the assessee raised in Grounds No. 2 and 3 of the appeal stands allowed. 9.19 With respect to the disallowance of Rs. 1,16,79,947/- made under Rule 8D(2)(ii), we find that the Assessing Officer has proceeded to apply the proportionate formula mechanically, without first ascertaining the actual utilisation of the borrowings on which the impugned interest was paid. Such an approach, in our considered view, overlooks the foundational requirement of section 14A read with Rule 8D-that only expenditure having a proximate and real nexus with the earning of exempt income may be disallowed. 9.20 The assessee, however, has placed before us detailed material, as noted in the preceding paragraphs, demonstrating that the relevant interest expenditure pertains to specific borrowings which were not deployed for making investments capable of yielding exempt income. For ready reference, the pertinent portion of the assessee's submissions is reproduced below: The Ld. counsel for the assessee submitted that interest amount of Rs. 10,99,16,196 incurred on loan from Tata Capital wa....
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.... binding ratio of the Special Bench decision, we direct the Assessing Officer to re-compute the disallowance under Rule 8D(2)(iii) by taking into account only such investments as have actually generated exempt income during the relevant previous year. Accordingly, Ground No. 5 of the assessee's appeal is allowed for statistical purposes. 9.24 For the sake of clarity, we reiterate that earlier in this order we have already deleted the entire disallowance made under section 14A on the ground that the Assessing Officer failed to record the mandatory satisfaction as required under the said provision. The findings now rendered in relation to Rule 8D are, therefore, purely on a without-prejudice basis. 10. Ground No. 6 of the assessee's appeal pertains to the disallowance of professional fees amounting to Rs. 6 crores paid to Deep C Anand Foundation. 10.1 The brief background of the issue is that the Assessing Officer, relying upon the findings recorded by his predecessor for assessment year 2011-12, observed that the assessee-company had already made payments to Shri Deep C. Anand in his individual capacity. According to the Assessing Officer, a further payment made to ....
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....hat, the group has established around 13 joint ventures and 7 technical collaborations. The assessee submitted that 99% of the investment held by the assessee are in the companies of Anand Group and has been classified as long term investments in its financial statements." 10.5 The assessee has consistently maintained that the services rendered by Deep C Anand Foundation were intrinsically linked to its strategic investment operations and were necessitated by the nature and scale of its business. We find merit in this contention. The assessee's investment portfolio comprises significant stakes in joint ventures with globally reputed automotive component manufacturers, and the need for professional advisory support in such arrangements cannot be doubted. It is a settled principle of law that the Assessing Officer cannot supplant the commercial judgment of a businessman with his own view of business necessity, nor can an expenditure be disallowed merely for want of immediate or measurable business outcome. The only test is whether the expenditure was incurred bona fide and in the ordinary course of business. 10,6 The Tribunal, while adjudicating the same issue in assessment....
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....ce in the United Kingdom. 11.1 The essential facts, briefly stated, are that the assessee maintained a branch office-cum-guest house in London and claimed expenditure of Rs. 52,98,889/- towards its upkeep. The assessee asserted that the premises were utilised by its senior management during overseas business visits undertaken in the normal course of its investment operations. The Assessing Officer, however, rejected this explanation, concluding that the expenditure was incurred not for the assessee's own business but for advancing the business interests of its subsidiary companies. Following the view adopted in assessment year 2011-12, he disallowed the entire expenditure. The Ld. CIT(A), concurring with the Assessing Officer, upheld the disallowance on the premise that the expenditure did not promote the business of the assessee but that of its subsidiaries. 11.2 Before us, the Ld. counsel for the assessee submitted that the lower authorities failed to correctly appreciate the nature of the assessee's business, which is that of making and managing strategic investments in joint ventures. He explained that the investment process necessarily involves identification, ev....
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....within the ambit of Rule 8D(2)(i) and were already subjected to disallowance under Section 14A, the Tribunal did not examine the question of their allowability under Section 37(1). We therefore consider the issue independently in the present year. 11.7 In the totality of facts and circumstances, we find that the expenditure on maintaining the London branch office and guest house was incurred bona fide and in the ordinary course of the assessee's business, and satisfies the statutory requirement of being laid out wholly and exclusively for business purposes. The disallowance sustained by the lower authorities is consequently unsustainable. We, therefore, direct deletion of the disallowance and set aside the order of the Ld. CIT(A) on this issue. The ground No. 7 of the appeal is allowed. 12. Ground No. 8 of the appeal concerns the disallowance of expenditure amounting to Rs. 1,41,19,857/- incurred towards routine repairs and maintenance of the assessee's branch office-cum- transit house at London, which the Assessing Officer treated as capital in nature. 12.1 The material facts, briefly stated, are that the Assessing Officer noticed a substantial increase in the ass....
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.... or revenue in nature for the purposes of Section 37(1) of the Act. 12.3 Out of the total amount, a sum of Rs. 1,52,77,730/- pertains to payments made to Waverly Renovation Ltd. The invoices and the detailed description of work executed include painting, replacement of carpets, repair of kitchen leakages, ceiling and flooring rectification, soundproofing, radiator replacement, electrical work involving downlighters and switches, fitting of shelving units, repair and polishing of existing furniture, replacement of patio doors, and other refurbishment measures. 12.4 On a comprehensive appraisal of the nature of the work performed, we find no material to suggest that any new structure, addition, or expansion of the capital base of the property was undertaken. The expenditure is primarily aimed at preserving the existing structure and maintaining it in a functional and habitable condition. It neither brings into existence a new asset nor confers on the assessee an enduring benefit in the capital sense. In law, the test of "enduring benefit" must be applied pragmatically and not mechanically; expenditure which merely preserves or restores an existing asset to its original conditio....
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....5. Without prejudice to the Ground nos. 1,2,3,& 4, on the facts and in the circumstances of the case and in law the CIT(A) ought to have directed the AO to delete the disallowance made by AO towards interest expenditure of INR 12,41,47,597, Personnel expenses of INR 2,00,00,000, Travelling expense of INR 1,31,33,041, Business promotion expenses of INR 11,58,874, Rent expenses of INR 17,78,696, repairs expenses of INR 89,77,638, and depreciation of INR 61,27,043 by treating the same as directly linked for earning exempt income for the purpose of computing disallowance under section 14A r.w.r. 8D Without prejudice to the above, the CIT(A) ought to have held that the expenses were incurred for the business of the assessee company and not for the business of the group companies. 6. On the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming disallowance made by AO towards UK Branch office expenses of INR 15,23,314 by treating the same as incurred for promoting business of the group companies and were not incurred for the purpose of business of the appellant .. 7. On the facts and in the circumstances of the case and in law, th....