TMI Blog2014 (10) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... with regard to expenses incurred to earn exempted income, then only he can invoke Rule 8D for working out the disallowance – the matter requires a relook at the level of AO – thus, the matter is remitted back to the AO for fresh adjudication. Administrative and other expenses disallowed – Held that:- Being 0.5% of average value of investment, the assessee’s claim is that average value of investment taken by the Assessing Officer was ₹ 2,50,20,59,294/- instead of ₹ 41,88,44,725/- which is only 16.94% of the average value of investment taken by the Assessing Officer - for this aspect also, the matter is remitted back to the AO for fresh adjudication. TDS deducted disallowed u/s 194J – Amount deposited on or before due date of filing of return – Held that:- Transferring or shifting expenses to a subsequent year, in such cases, will not wipe off the adverse effect and the financial stress - Nevertheless the Section 40(a)(ia) has to be given full play keeping in mind the object and purpose behind the section - At the same time, the provision can be and should be interpreted liberally and equitable so that an assessee should not suffer unintended and deleterious conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1956, engaged in the business of export/import of sugar. The return of income was filed on 29.09.2008 declaring income at ₹ 3,58,38,518/-. 3. The grounds of appeal of revenue read as under :- 1. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the addition of ₹ 98,33,833/- made on account of loss on sale of investment. 2. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in restricting the addition of ₹ 5,11,00,925/- to the extent of ₹ 1,89,70,367/- made u/s 14A read with Rule 8D of the Income Tax Rules, 1962. 3. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the addition of ₹ 10,79,68,722/- made on account of valuation of closing stock. 4. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing. The grounds of appeal of assessee read as under :- l(a) That the learned CIT(A) erred, both on facts and in law in sustaining a disallowance of ₹ 1,89,70,367/- (Rs.64,60,071/- towards interest and ₹ 1,25,10,296/- towards administrative expenditure) u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the computation of the average value of investments, income from which does not form part of the income, was wrongly done. While pleading on behalf of the assessee ld. AR submitted written submissions reproduced as under:- During the year under consideration assessee company has made investments to the tune of ₹ 2,18,16,75,912.68 and received a sum of ₹ 2,16,09,61,251.25 from redemption of investments. Besides, assessee company has also shown income of ₹ 2,37,40,339/- by way of interest on UTI Bonds (Refer PB 273,274) and ₹ 55,23,351/- (Refer PB 273, 275) as dividend income on mutual funds investment which was claimed as exempt u/s 10(35) of the Income Tax Act, 1961. It is respectfully submitted: As regards Interest income of ₹ 64,60,071/- That during the year assessee company has made investments to the tune of ₹ 2,18,16,75,912.68 and received a sum of ₹ 2,16,09,61,251.25 from redemption of investments. That purchase of investments is from proceeds of redemption of existing investments and other cash surplus generated during the year. That it is also not out of place to mention here that the balance of Gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . These funds are to be utilised for purchases etc. for export and cannot be invested in mutual funds and therefore, no part of interest on bank loans is attributable to earning of interest income. Also, enclosed are the Bank Certificates from various banks certifying only interest on packing credit /packing credit in foreign currency for exports has been paid by the assessee company. PB 898 - 907 is detailed submissions filed before Ld. CIT(A) on the above aspect. PB 1042-1206 is submissions dated 13-12-2011 filed before Ld. CIT(A) together with annexures showing details of investment made in mutual funds and tax free bonds for the year ending 31-03-2008 and copy of ICICI Bank statement showing purchase and redemption of investments during the year. PB 913-918 is Investment Summary showing opening balance, investments made during the year, investments redeemed during the year and closing balance together with detailed ledger account of Investments. PB 925-926 is Detailed Statement of Investments made during F.Y. 2007-08 together with source of investments. PB 927 to 963 Copies of bank statement identifying entries of purchase and redemption of Investments made during F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007-08 it has been held that no interest has been incurred for earning of exempt income by the assessee company. vii) Hon ble Delhi High Court in A.Y. 2001-02 has decided this issue in favour of the assessee stating that no interest was incurred towards investment activity. viii) No part of interest was attributable to investments made during the year, therefore, no disallowance can be made on this ground. ix) When no expenditure relating to exempt income which does not form part of total income has ever been made part of income and expenditure account, then no question of disallowance of such expenditure arises. Reliance is placed on following judicial pronouncements (a) The principle of apportionment embedded in section 14A, has application only when it is not possible to determine the actual expenditure in relation to the exempt income. When it is possible to determine the actual expenditure in relation to exempt income or, when no expenditure has been incurred in relation to exempt income the principle of apportionment has no application. -Expenses towards dividend income exempt under s. 10(33)-Expenditure which the AO seeks to disallow under s. 14A should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was held that the burden in on the AO to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance u/s 14A of the Act. In Maruti udyog Vs. DCIT, 92 ITD 119 (Del), it has been held that before making any disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. In Wimco Seedlings Limited Vs. DCIT , 107 ITD 267 (Del) , it has been held that there can be no presumption that the assessee much have incurred expenditure to earn tax free income. Similar are the decisions in: 1. Punjab National Bank Vs. DCIT 103 TTJ 908 (Del); 2. Vidyut Investment Ltd., 10 SOT 284 (Del); and 3. D.J. Mehta Vs. ITO 290 ITR 238 (Mum.)(AT) CCI Ltd. vs. JCIT 206 Taxman 563 (Kar.) High Court Disallowance on notional basis is invalid. When no expenditure is incurred by the assessee in earning dividend income, notional expenditure cannot be disallowed u/s 14A. CIT vs. Metalman Auto P. Ltd., 336 ITR 434 (P H) It has been held that disallowance under section 14A of presumptive expenditure in absence of actual expenditure could not be taken into account. Ld.AO has mentioned in para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance to ₹ 26 lakh. On cross appeals, HELD by the Tribunal: (i) When the AO does not accept the assessee s claim regarding the non-applicability/ quantum of disallowance u/s 14A, he has to record satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It has is to be done with regard to the accounts of the assessee. On facts, as there is no satisfaction by the AO, no disallowance u/s 14A can be made (Balarampur Chini Mills 140 TTJ (Kol) 73 followed) Relaxo Footwears Ltd vs. Addl. CIT (2012) 50 SOT 102 (Del.) Satisfaction of the AO is a pre requisite to invoke the provision of Rule 8D. AO has to record his satisfaction about correctness or otherwise of computation made by the AO, which mutatis mutandis means that if the contention is that no expenditure has been incurred, it has to be rebutted. JK Investors (Bombay) Ltd vs. ACIT in ITA No.7858/Mum/2011 ITA No.7851/Mum/2011 dated 13-03-2013 of ITAT, Mumbai Bench The condition precedent for the AO to invoke Rule 8D is that he first must examine the accounts of assessee and then record by giving cogent reasons why he is not satisfied with the correctness of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 10 at page15-16 of the appellate order that the investment worth ₹ 35 crores were made through mixed funds (Refer PB 15 of CIT(A) order) out of total worth investment of ₹ 2,09,00,03,543/- during the year, which comes to 16.94% of total investments made during the year (35,00,00,000/2,09,00,03,543 X 100)(Refer PB 16 of CIT(A) order). Hence, for the purpose of disallowance of interest under Rule 8D, same percentage is taken, calculation of which is mentioned at page 16 of his order. In reply it is respectfully submitted that it is not disputed that mixed funds were used for investment worth ₹ 35 crores. But, if there are substantial reserves in addition to other reserves in the books of the assessee company and it can be proved that the investments were out of own funds, no disallowance on account of interest u/s 14A could be made. Reliance is placed in the case of Harrisons Malayalam Ltd vs. ACIT (2008) 19 SOT 363 Cochin. Also, a date wise chart of proceeds from redemption received in the bank accounts of the assessee company and the dates on which the investments were made was filed before Ld. CIT(A), showing the source of investments made. The same has been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fund was made. This shows that the source of funds of ₹ 14 crores was made out of export proceeds. IN EEFC a/c company can keep certain percentage of export realisations. Even otherwise also, if we see redemption out of investments up to the date of investment in various banks, then, the total redemption proceeds received were ₹ 41crores (Rs.14.89crores+Rs.18.78Crores+Rs.8.38Crores), whereas investments made were ₹ 27.25crores (Rs.10crores +Rs.9crores+Rs.8.25crores). Hence, investments proceeds utilised for sugar payments was about ₹ 14crores. In any case, if we see immediate redemption and immediate investments then also ₹ 10.69 Crores was from interest free funds (sugar sale proceeds) Pls see excel sheet (b) As regards JM Mutual Fund amounting to ₹ 14 Crores , Investment dated 12 -07-2007 PB 925 is Detailed Statement of Investments made in mutual fund and tax free bonds during F.Y. 2007-08 together with source of investments wherein serial no. 11 shows that investment in JM Mutual Fund has been made from Standard Chartered Bank Current A/c. PB 1022 1023 (second half portion) is the copy of email dated 12-07-2007 from Shri JP Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above mentioned evidences prove that assessee company had sufficient funds to invest in mutual funds from its own sources. (d) As regards Optimix Mutual Fund amounting to ₹ 3 Crores ( out of ₹ 6.25 crores invested), Investment dated 31 -07-2007 PB 938 is ICICI Bank current account statement showing that on 30.7.2007 ₹ 6.25 Crores received from redemption of Birla MF as mentioned in bank narration itself. PB 938 is ICICI Bank current account statement showing that on 31.7.2007 ₹ 6.25 Crores were invested in Optimix Dynamic Multi Multiplier by the assessee company. Thus, the entire investments were funded out of the proceeds from redemption of Birla Sun Mutual Fund. Also, it can be seen from the order of Ld. CIT(A), he itself has mentioned in his order at page 15 ₹ 3Crores (which is rather ₹ 30 lacs, misinterpreted as ₹ 3crores by Ld. CIT(A)) invested out of ₹ 6.25 crores. This investment has been made out of refund from Birla Mutual Fund (Rs.14 - ₹ 7.75 = ₹ 6.25). Remaining is from the left over proceeds from Tata Mutual Fund and Income Tax Refund. Even otherwise, on 30.7.2007 and 31.7.2007, total withdr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was taken by the Corporation (ISEC) for the above named persons vide minutes dated 30-10-2007. This receipt was offered for taxation also during the impugned year by the assessee company. PB .. is copy of minutes of Steering Committee Meeting held on 30-10-2007 of assessee company acknowledging that Keyman Unit Link Endowment Insurance shall be endorsed to Shri Vinay Kumar and Shri Shanti Lal Jain on the receipt of payment of ₹ 1crore each from them. PB .. is cheque no. 395253 received from Shri Vinay Kumar for Keyman Insurance Policy transferred, deposited in bank on 19-12-2007. PB .. is cheque no. 263453 dated 18-12-2007 received from Shri Shanti Lal Jain for Keyman Insurance Policy transferred deposited in bank on 19-12-2007. Even otherwise also, it is submitted that total redemption of investments upto 19-12-2007 amounted to ₹ 135 Crores (Rs. 107 crores from redemption of investments + introduction of ₹ 28 Crores from EEFC for purchase of investments) and total investments made upto 19-12-2007 amounted to ₹ 118 Crores. Therefore, it can be seen that the net proceeds were put into mixed funds. Also, in the subsequent year i.e. A.Y. 2009- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... majority of the investment in the tax-free security was made before the borrowing. The assessee had demonstrated that it had other sources of investment and that no part of the borrowed fund could be stated to have been diverted to earn tax free income. As borrowed funds were not used for earning tax-free income, applying s. 14A was not justified. ACIT vs. SIL Investment Ltd. [ITA No. 2431/Del/2010] S. 14A: Onus is on AO to show expenditure is incurred to earn tax-free income. The contention of the Revenue that some expenditure, directly or indirectly, is always incurred for earning taxfree income cannot be accepted. The burden is on the AO to establish the nexus of the expenditure incurred with the earning of exempt income before making any disallowance u/s 14A. CIT vs. Walfort Share Stock Brokers Pvt. Ltd. [326 ITR 1 (SC)] For attracting s. 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Godrej Boyce Mfg. Co. Ltd. vs. DCIT ANR. [(2010) 328 ITR 81] S. 14A supersedes the principle of law that in the case of a composite business expenditure incurred towards taxfree income could not be di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est amounting to ₹ 64,60,071/- deserves to be deleted. 6. On the other hand, ld. DR relied on the order of the Assessing Officer and also pleaded that the relief granted by the CIT (A) was not justified. He also submitted that if the issue is restored back to the file of the Assessing Officer then it should be restored in toto. 7. We have heard both the sides on the issue. For the year under consideration, the assessee has made investment to the tune of ₹ 2,18,16,75,912/-. It is claimed that ₹ 2,16,09,61,251/- was received from redemption of investments. The assessee s claim that investments were from the proceeds of redemption of old investments and cash surplus generated by way of interest income on UTI Bonds and dividend income on mutual funds investment. It was also claimed that the interest expenditure debited in the profit loss account was with respect to export and import of sugar alone and it was not at all related to any investment activity and it was claimed that no interest was incurred towards the investment activity. The assessee has also relied on the decision of Hon'ble Delhi High Court in the case of assessee s own case for Assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should not make borrowings for working capital purposes. Therefore expenses attributable to earning of exempt income are worked out as under :- I. Expenditure directly relating to Income which does not form part of total Income NIL II. In case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt an amount computed in accordance with the formula, A: Amount of Interest Expenditure other than included In clause (I) B: Average Value of Investment , Income from which does not or shall not form part of the total Income as appearing in the Balance Sheet of the assessee on first and last date of the assessment year. C: Average Total Assets as appearing in the balance sheet of the assessee on A = Interest ₹ 7,68,45,729 B = Average Investments = 31.3.2007 : 249,17,01,962 31.3.2008 : 251,24,16,625 B = Average Investments = 250,20,59,294 C = Average Total Assets = 31.3.2007 total assets 322,43,39,582 31.3.2008 total assets 674,03,88,872 Average Total Assets = 498,23,64,227 A X B C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 16.06.2008 and 31.05.2008 respectively. After hearing both the sides, we hold that this issue has been settled by various decisions of High Courts. The Hon'ble Calcutta High Court in the case of CIT vs. Virgin Creations in ITA No.302 of 2011 has held that the proviso to section 40(a)(ia) should be deemed to have come into force from the retrospective operation from 1.4.2005. The reliance was also placed by ld. AR on the decision of Hon'ble Delhi High Court in the case of CIT vs. Talbros (P) Ltd. in ITA No.218/2013 dated 06.09.2013 wherein the issue has been decided in favour of the assessee. The relevant para which states the facts of the case are in para 2 and the same is reproduced below :- 2. The contention of the Revenue is that the Income Tax Appellate Tribunal (Tribunal, for short) in their impugned orders dated 21st May, 2012 (in the case of Naresh Kumar) and 8th October, 2012 (in the case of Talbros (P) Ltd.), has erred in holding that the amendments made to Section 40(a)(ia) of the Act by Finance Act, 2010 should be given retrospective effect. The contention of the Revenue is that these amendments are w.e.f. 1st April, 2010 and are not retrospective and, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Ground of Appeal No.3 relates to addition of ₹ 98,33,833 on account of loss on sale of investment. The appellant has submitted that it has shown in the Profit on Sale of Investment (Net) ₹ 9,31,58,877 in its profit and loss account. The appellant has submitted that the above amount is net of Loss on Sale of Investment of ₹ 98,33,833 has been disallowed without confronting the appellant. I have carefully gone through the submissions of the appellant and found that its contention that loss on sale of investment has already been considered as it has shown Net Profit on Sale of Investment is correct. In the Computation of Income, the appellant while computing the business income has excluded Net Profit on Sale of Investment and has also considered the same under the head Capital Gains. No separate disallowance of ₹ 98,33,833 is required to be made. Hence, disallowance of ₹ 98,33,833 is hereby deleted. After hearing both the sides, we find that the revenue has not controverted the findings of the CIT (A) that the loss on the sale of investment has been excluded in computation of business income and the same has been considered under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Realizable Value. This is a different aspect and relates to computation of Net Realizable Value. We have quoted the reasoning given by the Assessing Officer in the assessment order in the assessment year 1993-94. He has stated that the international price of sugar was lower than the domestic price and therefore when the respondent/assessee had incurred losses on exports. The Assessing Officer has not disputed or stated that the international price cannot be the criteria to compute or calculate the market value. International price is not disputed. This is not the contention of the Revenue. The Assessing Officer in his reasoning has mentioned that the respondent assessee was receiving reimbursement of the loss on export from the sugar manufacturers and losses were reimbursed. Therefore, the respondent/assessee should compute the closing stock on cost basis i.e. Net realizable Value plus reimbursement, which is nothing but the cost price. 20. We have considered the said contention of the Revenue but are unable to agree with them for several reasons. The CIT (A) has granted the relief by relying on the decision of ITAT which has been confirmed by Hon'ble High Court. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
