AI Drafter 
TaxTMI 
TaxTMI 
2022 (7) TMI 1624
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....of appeal, the appellant contended against the disallowance of Rs 10,83,615/- u/s 14A of the Act by applying amended Rule 8D being expenditure incurred for earning exempt income while computing taxable income. 5.1 OBSERVATION OF THE A.O.;- On this issue, the AO has made the following observations in the assessment order: 05. Disallowance under section 14A r, w. Rule 8D : On verification of the Balance Sheet for the year under consideration, it is found that assessee company has made investment in equity shares from which the assessee has earned exempt income. As per provision of section 14A of the Act for the purposes of computing the total income under this Chapter, i.e. "Chapter IV -Computation of total income" no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. 5.1 On examination of facts of the case, investment made and expenditures incurred the undersigned is not satisfied with the correctness of the claim of the assessee. Hence the assessee was requested to justify why the section 14A of the Act should not be applied in its case. ....
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....ect to expenses relating to earning of exempt income. This was passed after the Supreme Court decision in the case of Rajasthan Warehousing Corporation [242 ITR 450 (2000)], where it was held that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of the said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the 'exempt' income or income not eligible to tax, was not allowable as a deduction. Sectionl4A reads as under: "Expenditure incurred in relation to income not includible in total income. 14A. [(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relat....
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....e / telegram expenses, travelling and conveyance expenses, rent etc are common expenses which are related to both earning of exempt income and normal / regular business activity of the assessee company. The assessee has incurred various kinds of expenses in its profit and loss account. It is not possible that assessee has not incurred any expenditure in connection with investments and earning of exempt income. 5.7 In the case of Godrej & Boyce Manufacturing Company Ltd, the Hon'ble Bombay High Court has held that section 14A supersedes the principles of law that in the case of a composite business, expenditure incurred towards tax-free income could not be disallowed and incorporates an implicit theory of apportionment of expenditure between taxable and non taxable income. Once a proximate cause for disallowance is established which in the relation of expenditure with income which does not form part of total income, a disallowance under section 14A has to be effected. Further court held that disallowance u/s 14A read with Rule 8D requires to be made even if investment pertains to earlier years. In the assessee's case there is proximate cause for disallowance and section 14A....
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.... applicable for cases under scrutiny for the AY 2016-17. For e.g. principle given by the Hon'ble High Court: 1. In determining as to whether an amendment is to take effect prospectively or with a retrospective effect, the date from which the amendment is made operative does not conclusively decide the question. The Court has to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether an amendment is clarificatory or substantive; In this principle, the Hon'ble Court has held that the date from which the amendment takes place is not a conclusive proof with regard to applicability of amendment a prospective or retrospective. The scheme of the statute prior to and subsequent to the amendment helps in determining whether it is clarificatory or substantive. Since Rule 8D merely states the method of quantifying the disallowance, the amendment to the same is just clarificatory in nature. Further, as on the date of applicability of the amendment i.e. 02.06.2016, the ITR was not filed by the assessee. Therefore, the assessee was aware of the amendments which it chose to ignore making it liable for furnishing of inaccu....
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....of the "ii) opening and closing balances of the value of investment, income from which does not or shall not form part of total income" Thus investments from which exempt income will be earned in future also need to be considered. This position is clarified by the Central Board of Direct Taxes vide Circular No 5/2014/[F. No. 225/18/2013-ITA. II] dated 11/02/2014. The Circular clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where in a particular year the assessee has not earned any exempt income. Thus all the investments from which exempt income is earned or will be earned need to considered for the calculation under Rule 8D. As seen from the show cause given to the assessee which is reproduced above the amount of disallowance under Rule 8D is Rs. 21,90,490/-. The assessee has already added Rs.11,06,875/- to its income u/s 14A, therefore the difference amount of Rs. 10,83,615/- is added to the total income of the assessee u/s 14A of the Act. 5.2 SUBMISSION OF THE A.R.:- During appellate proceedings the Ld AR of the appellant has given following written submission vide letter dated 11.06.2019: ....
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....ainly on investment theory rather than income theory. The investment theory taken as base by rule 8D for working disallowance U/S.14A is not correct. Investments are mainly held for appreciation & dividend is just incidental benefit earned without incurring any expenses. Hence, rule 8D should not be strictly applied while working disallowance U/S. 14A. Rule 8D is not automatic in each and every case and the same is applied only if the disallowance made by the assessee is not reasonable based on facts of the case and nature of the business. Further relevant part of the submission is reproduced as below; "As Rule 8D was amended w.e.f. 02.06.2016, we are of the opinion that it will be applicable from Assessment Year 2017-18. We rely on the decision of the Bombay High Court in case of Godrej & Boyce Mfg. Co. Ltd. Vs Dy. Commissioner of Income Tax Range 10(2), [2010] 328 ITR 81 (Bombay) pronounced on 12.08.2010. Relevant portion of the para No 67 is reproduced below for your ready reference: .... The Rules were notified to come into force on 24-03-2008. It is a trite principle of that the law which would apply to an assessment year is the law prevaili....
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....ecision (reproduced herein before), it is clear that any rule which is in existence on first day of April is applicable to that Assessment year. Whether period for filing ITR is elapsed or not is immaterial. In the present case, the amended Rule 8D was not in existence on 01 April 2016 and hence, the erstwhile rule was applicable to AY 2016-17. From the above, it is crystal clear that, amended Rule 8D is not at all applicable to Assessment Year 2016-17. Since, amended Rule 8D is not applicable to Assessment Year 2016-17, any addition made by applying this Rule needs to be deleted." 5.3. DECISION The observations of the AO, submissions of the appellant and the material on record have been considered. The AO disallowed the following amounts u/s 14A of the Act: 5.4 The AO disallowed the following amount u/s 14A of the Act: i) Expenses directly related to exempt income Rs. 1,0,7971/- ii) Out of interest paid based upon average investment and total investment Rs. 7,85,950/- iii) 1% of average investment Rs. 12,96,569/- Total Rs. 21,90,490/- The AO also observed that the appellant has itself disallowed an amou....
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....calls, use computers for emails and has to do many more activities to keep his investment in Mutual Funds & Bonds safe and to got maximum return as per his ability. The appellant has not show that no resources were used for such activities. Further, such use cannot be ruled out as no one works in such water tight compartments. Under such circumstances, disallowance has to be made as per Rule 8D(2)(iii). 5.6 The appellant has also argued that the AO has disallowed 1% of average investment in place of 0.5% whereas the same would applicable from Assessment Year 2017-18 as the Rule 8D was amended w.e.f. 02.06.2016. However, as the Rule was amended w.e.f 02.06.2016, it would be applicable for the AY 2016-17 relevant for the AY 2016-17. Therefore, the submission of the appellant is rejected. Accordingly, Grounds No 1, 2 & 3 of the appellant are DISMISSED." 3. Suffice to say, learned counsel is fair enough in not challenging correctness of direct expenditure of Rs.1,07,971/-. The same stands upheld therefore. 4. Next comes proportionate interest expenditure disallowance component amount of Rs.7,85,950/- wherein the assessee appears to have been having non-interest bearing f....
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....rd series of decisions of the Tribunal winch have considered the ratio of both the judgements of the High Courts and have come to the conclusion that an assessee is entitled to carry forward/set off loss arising out of a transaction on winch STT has been paid. 6. At the outset, it is submitted that carry forward of losses arising under the head Capital gains is dealt with by section 74 of the Act, which states that where the net result of the computation under the head 'Capital gains' is a loss to the assessee, the whole loss shall, subject to the other provisions of the section, be carried forward to the following assessment year and set off in accordance with the provisions of the section. It is submitted that there is nothing in section 74, which disentitles an assessee from carrying forward losses arising on the sale of shares on which STT has been paid. Had the intention of the Legislature been to not permit carry forward/ set off of such losses, the same could have been provided for in this section. Similarly, it was open to the Legislature to carve out an exception in the definition of the term 'capital asset' in section 2(14) to provide that those equity shares, th....
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....ock exchange from the purchaser of such securities and paid to the exchequer. The provisions relating to the proposed tax are contained in Chapter VII of the Finance (No.2) Bill, 2004, and shall take effect from the date this Chapter comes into force. Further, it is proposed to insert clause (28) in section 10 of the Income-tax Act, so as to provide exemption from long-term capital gains arising out of securities sold on the stock exchange. It is also proposed to insert a new section 111A and amend section 115AD of the Income-tax Act, so as to provide that short-term capital gains arising from sale of such securities to an investor including FIIs shall be charged at the rate often per cent." 8. It is apparent from the above that the simultaneous levy of STT and exemption of gains under section 10(38) was to simplify the collection of tax by the stock exchange instead of each seller having to pay capital gains tax at the time of sale. The Legislature in its wisdom provided that once STT was paid, an assessee should not be burdened with tax on capital gains once again. If the AO's argument is accepted and carry forward of losses is denied, it would not only be in vi....
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....l business. The question w7as whether in ascertaining the business profits of the assessee for the purpose of the Business Profits Tax Act, 1947, the losses incurred outside British India w7 ere to be reduced. The Supreme Court held that the third proviso to section 5 of the Business Profits Tax Act took out of the ambit of the Act merely 'income, profits or gains' of a business in an Indian State and did not exclude the business itself. Accordingly, the Supreme Court held that the loss suffered by the assessee in the pharmaceutical business carried on outside British India had to be deducted in computing the business income of the assessee for the purpose of the business profits tax. 12. The High Court also considered the department's reliance on the judgement of the Supreme Court in the case of CIT vs. Harprasad & Co. (1975) (99 ITR118) and held that the Supreme Court had in fact held that "if the loss was from a source or head of income not liable to tax or congenitally exempt from income-tax, neither the assessee was required to show the same in the return, nor was the ITO under any obligation to compute or assess it much less for the purpose of 'carry forw....
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....context of section 10A, which also forms part of Chapter III, wherein the Board had held as under- If after aggregation of income in accordance with the provisions of sections 70 and 71 of the Act, the resultant amount is a loss (pertaining to assessment year 2001-02 and any subsequent year) from eligible unit it shall be eligible for carry forward and set o ff in accordance with the provisions of section 72 of the Act..." 17. The Tribunal, therefore, held that the Board has itself accepted the position that where an eligible business, the profits wherefrom would have been exempted under section 10A, incurs a loss, such a loss is eligible to be carried forward and set off. It is submitted that it is a settled position in law that the Circulars issued by the Board are binding on all its officers and such officers do not have the authority to argue contrary to the same. [KP Varghese vs. ITO (1981) (131 ITR 597) (SC), Ellerman Lines Ltd. vs. CIT (197D (82 ITR 913) (SC)]. 18. Furthermore, in the case of Nomura (supra), the Tribunal has also noted the fact that the Department's appeal before the Bombay High Court in the case of Raptakos (supra) was dismissed o....
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....reconcilable decisions of the Supreme Court are cited at the Bar. We think that the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam." 20. In any event, the jurisdictional High Court in the case of ITO vs. Siemens Ltd. (1985) (156 ITR 11) (Bom) has held that where there are conflicting views by two non-jurisdictional High Courts, then the lower courts must adopt that view which is favourable to the assessee. The relevant portion of the judgement is extracted below- "Where there is a conflict between different High Courts, he must follow the decision of the High Court within whose jurisdiction he is, but if the conflict is between decisions of other High Courts, he must take the view which is in favour of the assessee and not against him." 21. In view of the aforesaid legal position, it is submitted that the assessee ought to be held to be eligible to carry forward losses of Rs. 3,20,75,607. Having submitted so, it may be pointed out that the Delhi Tribunal in the case of Nikhil Sawhney vs. CIT (119 taxmann.com 372) has, contrary to the aforesaid five decisions of the Tribunal followed the ....
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....;law' applies to the principle of a case, its ratio decidendi. The only thing in a Judge's decision binding as an authority upon a subsequent Judge is the principle upon which the case was decided." ● Krishena Kumar and others vs. UOI (1990) (AIR SC 1782) 26. In other words, the enunciation of the reason or principle upon which a question before a court has been decided is alone binding as a precedent. The ratio decidendi is the underlying principle, namely, the general reasons or the general grounds upon which the decision is based on the test or abstract from the specific peculiarities of the particular case which gives rise to the decision. ● Mohd. Farhan A Shaikh vs. DCIT (2021) (434ITR1) (Bom) (Full Bench) "What is the Precedent? 124. Salmond defines a precedent as a judicial decision, "which contains in itself a principle. The underlying principle, which thus forms its authoritative element, is often termed the ratio decidendi." 23. Without prejudice to any of the above, it is submitted that the conflict between the ratio of the judgement in the case of Royal Calcutta (supra) and in the case of Kishoreb....
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.... is but natural and reasonable and indeed efficacious that the case is referred to larger Bench. This is what was done by the Bench of two members who, in their reasoned order, pointed out what they perceived to be an error of law in the earlier decision and stated the points for the President to make reference to a larger Bench." ● Sundarjas Kanyalal Bhatija v. Collector, Thane [1990] 183 ITR 130 (SC) "In a multi-Judge court, the Judges are bound by precedents procedure. They could use their discretion only when there is no declared principle to be found, no rule and no authority. Judicial decorum and legal propriety demand that where a Single Judge or a Division Bench does not agree with the decision of a Bench of coordinate jurisdiction, the matter may be referred to a larger Bench. It would be subversion of judicial process not to follow this procedure." 7. The Revenue has placed strong reliance on the CIT(A)'s detailed discussion affirming the impugned disallowance as follows: "6.3 DECISION The observations of the AO, submissions of the appellant and the material on record have been considered 6.4 On this issue, it is seen that the ....
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....oss", cannot be accepted and rightly rejected by the Tribunal. If this is the conclusion, it can immediately be seen that any loss in respect of any such capital asset would not be available for set off The Tribunal rightly relied on the decision in the case of Harprasad & Co. (P.) Ltd. (supra) to come to a conclusion that the term "income" under section 10(38) of the Act would also include the loss. In the said decision, the apex court observed that the concept of carry forward of loss does not stand in vacuo. It involves the notion of set off It postulates permissibility and possibility of the carried forward loss being absorbed or set off against the profits and gains of the subsequent year. Set off implies that the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax demand. It was held that if such set off is not permissible or possible owing to the income or profits of the subsequent year being from a mm-taxuble source, there would be no point in allowing loss to be "carried forward". Conversely, if the loss arising in the previous year was under a head not chargeable to tux, it could not be allowed m be carried forward and absorbed again....