TaxTMI 
TaxTMI 
2015 (8) TMI 1602
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....y used for business activates, therefore, disallowance was not called for. The Assessing Officer did not accept these submissions and made disallowance u/s 14A which has been confirmed by Ld. CIT(A). 4. Before us, Ld. Counsel for the assessee referred to page 15 of the paper book and pointed out that all the investments are old and they have been made right from 1962 onwards. The last investment made was 1994. The investments were made out of surplus funds and, therefore, disallowance u/s 14A is not called for. In any case the Assessing Officer has not pointed out how assessee has incurred any expenditure as required u/s 14A and in this regard he relied on the decision of Hon'ble Punjab & Haryana High Court in the case of CIT v Deepak Mittal & Amrit Sagar Mittal 361 ITR 131(P&H). 5. On the other hand Ld. DR submitted that this issue has been dealt in detail by Tribunal in the case of M/s Munjal Sales Corporation, Ludhiana v ACIT in ITA No. 274/Chd/2015. Further, even the decision of Hon'ble Punjab & Haryana High Court in the case of CIT v Deepak Mittal & Amrit Sagar Mittal (supra) has been dealt in detail in that order and, therefore, that order is applicable to the c....
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....if there exist no provision in the tax laws for a particular situation, then, the provisions of partnership law would be the guiding factor for adjudication of that issue. The current judicial thought is leaning towards the concept of separate legal entity of partnership firm than that of its partners for the purposes of IT Act, 1961. "here was a judicial opinion that on distribution or division or allotment of assets to partners by the on dissolution or otherwise there resulted no gain exigible to tax, however, by incorporating - 45(2), 45(3) and 45(4), the legislature has declared its intention in clear terms that partners and the firm are two independent entities not only for the purposes of assessment but also for the purpose of determining the charge of income-tax on the transactions entered into between them. Similarly, from asst. yr. 1993-94 partnership firms have been given a corporate personality in a limited sense by making necessary amendments in the provisions of ss. 10(2A), 28(v), 40(b) and relevant procedural sections which conclusively prove that partnership firm as such is independent from its partners as far as provisions of IT Act, 1961 are concerned. Specif....
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....is required between the investment and the disallowance to be made u/s 14A, we shall first refer to the decision relied on by the ld. counsel of the assessee in case of CIT V. Winsom Textile, 319 ITR 204. In that case following question of law was considered: "Whether, in the facts and circumstances of the case and in law, the Hon'ble Income-tax Appellate Tribunal was justified in holding that the order of the jurisdictional High Court in the case of CIT V. Abhishek Industries Ltd. reported in (2006) 286 ITR 1 (PH); 156 Taxman 257 (PH) are not applicable in this case and the disallowance made by the Assessing Officer u/s 14A of the Income-tax Act is not as per law. " The assessee was engaged in the manufacturing and sale of cotton yarn and had made certain investments. The Assessing Officer disallowed interest on investment in shares u/s 14A because dividend income was exempt. The ld. CIT(A) deleted the disallowance by observing that the assessee had made investment using its own funds and no interest was incurred. The Tribunal confirmed the findings of the ld. CIT(A). Before the Hon'ble High Court the contention was raised that even if the assessee made i....
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....n view of this finding of fact, disallowance u/s 14A was no sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, cannot be accepted. Disallowance under section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. In the present case, finding on this aspect, against the Revenue, is not shown to be perverse. Consequently, disallowance is not permissible. We have taken this view earlier ^so in I. T. A. No. 504 of 2008 in CIT v. Winsome Textile Industries Ltd. 1)09] 319 ITR 204 (P&H), (decided on August 25, 2009), wherein it was observed as under (page 207) : "The contention raised on behalf of the Revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had t....
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....will also like to discuss little later. 23 Hon'ble Bombay High Court considered the issues arising out of Section 14A as well as implications of Rule 8D. Hon'ble High Court reached the following conclusion at para 88 which reads as under: "88 Our conclusion in this judgment are as follows : (i) Dividend income and income from mutual funds falling within the ambit of section 10(33) of the Income-tax Act, 1961, as was applicable for the assessment year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of section 14A(1) ; (ii) The payment by a domestic company under section 115-O(1) of additional income-tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits 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 shareho....
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....be applicable only from Assessment year 2008-09. In this decision the theory of apportionment of expenditure which was confirmed by the Hon'ble Supreme Court in case of CIT V. Walfort Share and Stock Brokers P Ltd (2010) 326 ITR 1 (S.C), was followed. In fact before introduction of Section 14A, the assessee had a right to claim all the expenses if such expenses could not be bifurcated against normal taxable income as well as exempted income in view of the decision of Hon'ble Supreme Court in case of Rajasthan Warehousing Cooperation V CIT, 242 ITR 450. This position got changed after the introduction of Section 14A by Finance Act, 2001. The Memorandum explaining the provisions of Finance Bill reads as under: "Certain income are not includible while computating the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxabl....
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.... that after introduction of Section 14A, it was possible to apportion the expenditure between taxable income and exempted income. 25 As observed earlier, almost similar observations have been made by the Hon'ble Punjab & Haryana High Court in a recent judgment in case of CIT V. Punjab State Industrial Development Cooperation Ltd. in ITA No. 565 of 2006 vide order dated 18.7.2011. "11. Adverting to question No.(ii), learned counsel for the revenue submitted that while determining the quantum of deduction admissible to the assessee under Section 80M of the Act, the expenditure incurred relating to the earning of dividend income has to be excluded there-from. According to the learned counsel, the expenditure which was to be deducted was required to be deducted on proportional basis for incurring of such expenditure. Reliance was placed on Section 14A of the Act which was incorporated by Finance Act 2001 retrospectively .w.e.f. 1.4,1962. Support was gathered from the decision of the Rajasthan High Court in Shekhavati General Traders Ltd. vs. Commissioner of Income Tax (1987) 167 ITR 116 and the judgment of this Court in Income Tax Appeal No. 530 of 2006 (The Punja....
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.... 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 bean in which deduction has been sought In respect of such incomes which in effect would mean that tax incentives to certain incomes was being used 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. Oh the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. T....
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.... 16. In view of the above, the substantial question No.(ii) is answered in favour of the revenue and against the assessee. Income Tax Appeal Nos. 565, 567 and 569 stand disposed of accordingly." 26 Thus theory of apportionment as approved by the Hon'ble Supreme Court in case of CIT V. Walfort Share and Stock Brokers P Ltd (2010) 326 ITR 1 (S.C) followed by Hon'ble Bombay High Court in case of Godrej and Boycee (supra) has also been approved by Hon'ble Punjab & Haryana High Court in case of CIT V. Punjab State Industrial Development Coop Ltd. (supra). 27 Now the question is how such expenditure can be apportioned. There may be a situation whether the expenses or interest cannot be identified against the particular item of income to meet these difficulties rule 8D was introduced which has been held to be constitutionally valid by Hon'ble Bombay High Court in case of Godrej and Boycee (supra). Rule 8D reads as under: " Rule 8D reads as under: "(1) Where the Assessing Officer having regard to the account of the assessee of a previous year, is not satisfied with - (a) the correctness of the claim of expenditure made by the ass....
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.... Rs. In Lakhs Share capital 78.36 Reserves and Surpluses 130.82 Own funds 209.18 Working capital borrowings 1779.62 Current assets 2243.45 Amount invested in excess of loan 463.83 Term loan borrowings 253.31 Fixed Assets 451.82 Amount invested in excess of loan 198.51 Amount invested in Chadha Motors 255.96 Consequently by simply saying that the funds invested in fixed assets and current assets are more than the borrowed funds, would not show that specific funds have been borrowed for specific purpose. For example it can be very easily said that the assessee supported its business with own funds and borrowed loans have been used for making investment in assets as well as in investments which generate exempted income. Once the funds are mixed, there is no way to find out actual usage of the funds. To meet this situation only Rule 8D was inserted to remove the difficulties. In fact this aspect was also examined by Hon'ble Bombay High Court in case of Godrej & Boycee (supra). Many observations were made under the head "parameters of judicial review at para 62 to 72 of the order". Without unnecessarily burdening....
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....ficer or the ld. CIT(A), the assessee has made a specific mention to show which particular funds were borrowed for which particular requirement and in the absence of such specific utilization Rule 8D, would be applicable. Perusal of the assessment order shows that disallowance u/s 14A has been worked out on the basis of Rule 8D which is as observed earlier applicable in case of the assessee. Therefore, we set aside the order of the ld. CIT(A) and restore that of the Assessing Officer. " 9. From the above it emerges that decisions of Hon'ble Punjab & Haryana High Court in the case of CIT vs Hero Cycles Ltd., 323 ITR 518(P&H) and CIT Vs. Winsome Textile Industries Ltd. in 319 ITR 203 (P&H) were found to be distinguishable because these decisions were rendered for assessment year 2004-05 and further there were certain findings of facts which may not be applicable in every situation. Secondly, to solve problem of quantum of interest to be disallowed and expenditure from common pool of interest and expenditure, Rule 8D has been introduced so that reasonable disallowance is made. In the above findings, the theory of proportionate disallowance as confirmed by Hon'ble Punj....
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....eferring to any relevant facts/ factors. The power to determine the quantum of disallowance, inhers the recording of satisfaction based upon relevant facts/factors. A perusal of the impugned order reveals that after holding that Rule Income Tax Appeal No.199 of 2014(O&M) -4- 8D of the Rules is prospective in operation, the Tribunal abruptly or should we say arbitrarily proceeded to reduce the quantum of disallowance recorded by the Assessing Officer from Rs.7,19,513/- to Rs.1,00,000/- and Rs.60,97,429/- to Rs. 5,00,000/- in ITA No.199 of 2014, and Rs.7,55,849 to Rs.1,23,754/-in ITA No.237 of 2014, without reference to any relevant facts or factors. Consequently, we answer the question of law in favour of the revenue, allow the appeal to the limited extent of error in determining the quantum of disallowance and remit the matter to the Assessing Officer for determining the quantum of disallowance, after granting an adequate opportunity to the Assessee to put forth his pleas regarding the quantum of disallowance." Therefore, it is clear that estimation of expenditure, if any, on the reasonable basis has to be made by Assessing Officer and Appellate authorities have n....
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....ne of over Rs. 172 crores was utilized for the purpose of fixed assets in terms of the balance-sheet. It was found that a clear finding of fact was recorded that assessee had interest free funds of its own which had been generated in the year in question, which has been invested for earning exempt income. Similarly, in Hero cycles Ltd. case (supra), again the Revenue was in appeal. The Court has noticed that the Tribunal has held that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of the finding of fact, disallowance under Section 14A of the Act was not found to be sustainable. The Court observed that as to whether any expenditure incurred was to be disallowed is a question of fact. It was held to the following effect: "In view of the finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under Section 14A was not sustainable. Whether, in a given situation, any expenditure w....
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....f April, 2001." Further, Rule 8D of the Act reads as under: - (1) Where the Assessing Officer having regard to the accounts of the assessee of the previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee ; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) ........" 15. The careful reading of the above section as well as Rule 8D would show that what is required under the provision is that Rule 8D can be resorted only when Assessing Officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of disallowance made by the assessee. So, therefore, there is no requirement for recording a satisfaction. However, before resorting to Rule 8D, Assessing Officer is required to somehow or other show that disallowance already made by the assessee is not correct with reference to the accounts of th....
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....xample FDR is made for a period for which funds are not required and can be encashed generally at the end of the term of FDR because if the same is enchased earlier then some interest loss happens. In case of government securities, the same can be sold or purchased in the secondary market. The rate of return would also depend on the period for which investments are made. Further, it to be seen what is the liquidity attached to particular investment. In fact all these functions are highly specialized functions and requires skill of highly specialized persons. It is almost impossible to pin-point how much time is spent by such a team on the investment decisions because these treasury operations are very sophisticated. In a very large company, there may be designated treasury operation team, but in a medium sized company, there may be only 02 -03 Chartered Accountants who are doing the normal duties of account writing and auditing, taxation, funds raising etc. and at the same team may also be doing treasury operations also. To meet this contingency, Rule 8D was incorporated in the Statute. Now it is significant to note that the Assessing Officer is required to have satisfaction having....