TMI Blog2012 (6) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... Department’s responsibility to justify any such disallowance by bringing material on record to show that any expenditure was incurred for earning the exempt income. In the absence of such evidence, it was wrong on the part of the AO to proceed to compute disallowance of the expenses u/s 14A of the Act by merely applying Rule 8D(2)(iii) of the Rules. Deduction u/s 80IA/80IB - denial of deduction u/s 80 IA/80 IB for pre-demerger period to assessee company or resulting company regarding the assessee’s three units which stood demerged pursuant to the Demerger Scheme - denial also on ground that same has not been claimed in Return - Held that:- Circular No. 15/5/63 – IT(A-I) dated 13.12.63 relates that the Board agreed that the benefit of section 84 attached to the undertaking and not to the owner thereof and that the successor would be entitled to the benefit of the unexpired period of 5 years, provided the undertaking was taken over as a running concern. It is on record that audit report in form No. 10 CCB, has been filed, in which deductions u/s 80 IA(12)/80 IB(12) were duly certified to have been claimed by the assessee. It is undisputed that the claim was made by way of a Not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t holding that disallowance under section 14A of the Act, could not have been worked out as per the method provided in Rule 8D of the Income-tax Rules, 1962 ( the Rules ) since the same was prospective in operation and was not applicable to the year under consideration. 2. That the CIT(A) erred on facts and in law in not directing the assessing officer to allow deduction under section 801A/80IB of the Act in respect of the three units of the appellant. 2.1 That the CIT(A) erred on facts and in law in not appreciating that deduction under section 80IA/80IB of the Act was not allowed in respect of the profits of the three units for the period 01.04.2005 to 30.06.2005 to the appellant as well as the resulting company. 3. Apropos ground No.1 of the Department s Appeal Cross Objection No.1 of the assessee, as per the assessment order, the AO noticed that the assessee had earned dividend income of ₹ 17,32,701/- and long term capital gain of ₹ 12,15,93,111/-, against which, no expenses had been claimed to have been incurred. The AO asked the assessee to explain as to why disallowance u/s 14A of the I.T. Act be not made in respect of expenses attributable to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f demerger, were relatable to the demerged Textile Division and were transferred to the resulting company, i.e., STIL, as part of the demerger. The assessee supported such contention with documentary evidence, i.e., Schedule of assets and liabilities in respect of the residual undertaking forming part of the Scheme of demerger, the Profit and Loss Account of the Company for the period from 1.7.2005 to 31.3.2006, wherein nil interest expenses had been debited and comparative Profit and Loss Account for the demerger period and for the complete year, showing that the entire interest expenditure related to the pre-demerger period from 1.4.2005 to 30.6.2005. The assessee thus contended that there was no interest expenditure actually related to the investment activity and so, no part of interest expenditure was disallowable u/s 14A of the Act. It was submitted that during the post demerger period, the assessee only had investment activity; that expenses of only ₹ 9,26,788/- had been claimed as deduction towards remuneration to Director, Audit Fee, etc., which also could not be said to be related to the earning of exempt income; that during the prehttp:// demerger period, disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the disallowance of ₹ 47,33,000/-, as made by the AO u/s 14A of the Act read with Rule 8D of the Rules could not be sustained, since such disallowance had to be restricted to the actual expenditure incurred. The ld. CIT(A) further observed that, on the other hand, the contention of the assessee that no part of the expenditure of ₹ 22,26,000/- was disallowable, was also not acceptable; and that the assessee had actually earned exempt dividend income, due to which, the expenditure incurred in relation to such income needed to be disallowed in terms of section 14A of the Act. Observing that the expenditure of ₹ 5,71,794/- related to Haridwar Holiday Home and Dehradun Holiday Home, which also stood demerged as part of the Textile Division, the ld. CIT(A) reduced this amount from the amount of ₹ 22,26,000/- and held the entire balance expenditure of ₹ 16,54,531/- to be relating to the investment activity of the assessee company. It is this amount of ₹ 16,54,531/-, to which the disallowance of ₹ 2,08,83,181/-, as determined by the AO, was restricted by the ld. CIT(A). 9. The Department has raised ground No.1 of its appeal against this acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jindal Photo Ltd. , authored by one of us, the J.M., on 22.12.10, in ITA No. 4539(Del)2010 (copy at CLPB 39 to 45); 4. Maruti Udyog Ltd. v. DCIT , 92 ITD 119(Del); 5. ACIT v. Eicher Ltd. , 101 TTJ 369(Del); and 6. DCIT v. Maharashtra Seamless Ltd. , 138 TTJ 244(Del). 11. Apropos the administrative expenditure, it has been contended on behalf of the assessee that firstly, no part of the administrative expenditure related to the investment division; that the AO did not bring anything on record to show that expenditure to have been incurred for earning exempt income; that the disallowance u/s 14A of the Act was made on an entirely adhoc basis, without discharging the onus of justifying the disallowance of such expenditure; and that this is impermissible in law, as laid down in - 1. Chemical and Metallurgical Design Co. Ltd. , ITA No. 803/2008 ..? 2. PTC India Ltd. v. DCIT , ITA Nos. 580 581(Del)09(Del) ? 3. Wimco Seedlings Ltd. v. DCIT , 107 ITD 267(Del)(TM); and 4. CIT v. Ms. Sushma Kapur , 319 ITR 299(Del). 12. It has been further contended that even otherwise, the provisions of sections 14A(2) and (3) of the Act and Rule 8D of the Rules are pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards remuneration of Director and Audit Fees, which expenditure had to be incurred, irrespective of exempt income being received or not and these expenses also could not be held to be related to the earning of exempt income. 14. The learned DR, on the other hand, has contended that the ld. CIT(A) has erred in restricting the disallowance of ₹ 2,08,83,181/- made by the AO u/s 14A of the Act to ₹ 16,54,531/-; that while doing so, the ld. CIT(A) has failed to take into consideration that the assessee had an opening balance of investment of ₹ 88,85,47,596/- and a closing balance of ₹ 1,00,47,31,991/-; that it was therefrom that the assessee had earned exempt income; that during the year, the assessee had incurred interest cost of ₹ 3,22,99,963/-, as available from the Profit and Loss Account; that the assessee had earned exempt income at the costs debited to the Profit and Loss Account; that undisputedly, a loan had been taken, on which, interest was being paid; that as such, the AO was right in holding 50% of the interest expenditure to be directly relatable to the earning of exempt income; that as such, the AO was correct in making the disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and liabilities in respect of the residual undertaking forming part of the scheme of demerger, the relevant portion whereof is at APB 62 to 64, after the demerger, the books of the assessee do not show any outstanding loans, signifying that all the loans pertaining to the demerged Textile Division stood transferred. APB 64, states, inter alia, :- Secured loans - Nil Unsecured loans - Nil APB 62 to 64 constitute the statement of assets and liabilities in respect of the residual undertaking of SIL (the assessee) as on the date immediately preceding the appointed date. Further, the details of Profit and Loss Account of SIL (the assessee), from July, 2005 to March, 2006 (APB 78) gives the details of the expenditure, as per which, the total expenditure was of ₹ 21,06,266/-. The comparative Profit and Loss Account for the segregated period, i.e., from 1.4.05 to 30.6.05, of the consolidated company, and for the year ending 31.3.06, are at APB 79 to 80. Therein, no interest expenditure stands shown as relating to the period from 1.7.05 to 31.3.06, i.e., the period during which the assessee company was only an investment company. It was only to the three months period prior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee s total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e. under Rule 8D of the I.T. Rules. However, in the present case the assessment order does not evince any such satisfaction of the AO regarding the correctness of the claim of the assessee. As such, Rule 8D of the Rules was not appropriately applied by the AO as correctly held by the CIT (A). It has not been done by the AO that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an ad hoc disallowance was made. The onus was on the AO to establish any such expenditure. This onus has not been discharged. In CIT vs. Hero Cycles: (P H) 323 ITR 518, under similar circumstances, it was held that the disallowance u/s 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions. In ACIT vs. Eicher Ltd. , 101 TTJ (Del.) 369, that it was held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earning of the exempt income, the expenditure as worked out as per the Rules, could not be disallowed. The ld. CIT(A) was of the view that the disallowance was to be restricted to the total expenditure of ₹ 22,26,325/- (rounded off to the figure of ₹ 22,26,000/-), lest the disallowance exceeded even the actual expenditure incurred. However, the assessee s stand that no part of the expenditure determined at ₹ 22,26,000/- was disallowable, was not accepted by the ld. CIT(A), observing that the assessee had actually earned exempt income by way of dividend and in terms of section 14A of the Act, the expenditure incurred in relation to that income was required to be disallowed. As such, out of the expenditure determined at ₹ 22,26,000/-, the ld. CIT(A) subtracted the amount of ₹ 5,71,794/- representing expenditure relating to Haridwar Holiday Home and Dehradun Holiday Home, which were found to be demerged under the Demerger Scheme, and arrived at the figure of ₹ 16,54,531/-. The ld. CIT(A) held this amount to relate to the investment activity of the assessee company and disallowed it as against the disallowance of ₹ 47,33,200/- made by the AO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasonable basis, rather, the first reasonable basis for such determination can be none else than the nexus between the expenditure incurred and the exempt income earned. Now, evidently, the AO did not establish any such nexus between the expenditure incurred and the exempt income earned by the assessee Company. 29. Even the ld. CIT(A), though he restricted the disallowance from ₹ 47,33,200/- to ₹ 16,54,531/-, did not establish any such nexus and it was merely observed that this amount related to the investment activity of the assessee Company, without clarifying as to how it was found to be so. 30. We find that apropos the pre-demerger expenditure incurred during the period from 1.4.05 to 30.6.06, the total expenditure relating to the activities other than those of the Textile Division of the assessee Company, as available from the consolidated Profit and Loss Account for the year ended 31.3.06 of STIL (copy at APB 83 to 87), was ₹ 12,99,537/-, as follows:- Rs. 1. Salary, wages, bonus etc. 61,353/- 2. Employees contribution to PF 2,792/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 Depository Fees 44080 44080 0 Demat Expenses 46653 0 46653 Dehradun Holiday Home Exp. 400563 400563 0 Motor Car Exp. 80910 80910 0 Press Conference Exp. 16500 16500 0 2087666 1176501 911165 31. As noted above, an amount of ₹ 5,71,794/- was expenditure related to Haridwar Holiday Home (Rs. 1,71,231/-) and Dehradun Holiday Home (Rs. 4,00,563/-). These properties, pertinently, were shown in the Schedule forming part of the Balance Sheet as on 31.3.06 (copy at APB 199), as fixed assets of the company. Both these Holiday Homes, undeniably, were demerged under the Demerger Scheme and so, the ld. CIT(A) rightly did not disallow the expenditure on these Holiday Homes. 32. So, what remained as balance under the head of misc.expenditure incurred dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent that the assessee had claimed expenditure only of ₹ 16,54,531/-. The ld. CIT(A) has duly taken this into consideration. No doubt, the disallowance, if any, could have been made out of this amount only. However, in order to validate such a disallowance, as discussed hereinabove, what was required to be established was the nexus of the expenditure with the earning of the exempt income. The ld. CIT(A), in this regard, has merely observed that the entire balance expenditure of ₹ 16,54,531/- relates to the investment activity of the assessee Company. There is, however, nothing in the impugned order as to how this finding has been arrived at by the ld. CIT(A). It cannot be gain-said that the onus to prove the nexus between the expenditure incurred and the earning of income not forming part of the total income is squarely on the Department. In the absence of discharging this onus, no disallowance in this regard can be made, much less sustained, as has been done by the ld. CIT(A). There is absolutely nothing on record to show that any part of the expenditure was incurred to earn the exempt income. And not only this, as rightly canvassed, this expenditure of ₹ 16,54,53 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the assessee that 50% additional depreciation was claimed and allowed in the immediately preceding year, i.e., in the assessment year 2005-06 and to verify the claim of the assessee and to allow credit of TDS. 38. In this regard, it is seen that the AO refused to allow additional depreciation @ 7.5% in respect of addition of plant and machinery during the immediately preceding assessment year, i.e., assessment year 2005-06. Before the ld. CIT(A), the assessee contended that in the assessment year 2005-06, the assessee had claimed additional depreciation @ 7.5%, being 50% of additional depreciation of 15%, amounting to ₹ 5,32,65,467/-, in respect of new plant and machinery, installed at the new eligible industrial undertaking of the Company, i.e., Unit No.8, Kathua, u/s 32 (iia) of the Act, since the machinery had been put to use for a period of less than 180 days in that previous year; that the depreciation claimed in the return of income for the assessment year 2005-06 was allowed; that in the return of income for the year under consideration, the assessee had claimed the balance 50% of additional depreciation of 15% of the value of the plant and machinery installe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ursuant to the Demerger Scheme approved by the Hon ble Rajasthan High Court. This demerger came about 1.7.05, as noted hereinabove. The disallowance was ordered by the AO as per the provisions of section 80 IA(12) read with section 80 IB of the Act. 43. Before the ld. CIT(A), the main contention on behalf of the assessee Company was that deduction u/s 80 IB of the Act had not been allowed for the pre-demerger period from 1.4.05 to 30.6.05, either to the assessee Company or to the resulting Company after the demerger. 44. The ld. CIT(A) held the action of the AO to be correct in view of the provisions of section 80 IA(12), as per which, where the eligible undertaking stands transferred in a Scheme of Amalgamation or Demerger, the deduction is allowable only to the resulting Company. 45. Before us, it has been contended on behalf of the assessee that undisputedly, the deduction under sections 80 IA/80 IB of the Act had been claimed with respect to the profit of certain eligible units of the assessee Company; that these units had been part of the assessee company during the pre-demerger period from 1.4.05 to 30.5.05; that these units had been transferred under the Demerger Sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled in Bajaj Tempo v. CIT , 194 ITR 188(SC), CIT v. Strawboard Manufacturing Co. Ltd. , 177 ITR 431(SC) and P.R. Prabhakar v. CIT , 284 ITR 548(SC). The learned counsel has then contended that as such, the provisions of sections 80 IA(12) and 80 IB(12) of the Act, being provisions beneficial to the assessee, require to be construed liberally; that deduction under the said sections is allowable to the demerged and resulting company in respect of the profits earned by both the companies for the respective period of ownership of the eligible undertaking in the year of demerger; that the AO has factually erred in observing that no audit report in form No. 10 CCB, as provided under sections 80 IA(12) and 80 IB(12) of the Act was filed; that actually, the audit reports for the respective units were duly filed in the assessment proceedings vide letter dated 7.11.08 by the assessee; that the details of deduction under sections 80 IA(12) and 80 IB(12) of the Act were also given in the tax audit reports, certifying such deduction; that the AO has also wrongly observed that since the deduction was not claimed in the computation of income, it could not be allowed, in view of Goetze India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra), Prisma Electronics (supra) and the CBDT Circular (supra) it has been held that it is the successor on demerger, which would be entitled to the benefit for the unexpired period of 5 years, provided the undertaking was taken over as a running concern. 49. So far as regards the claim made by the assessee, it is on record that the assessee had duly filed the audit report in form No. 10 CCB vide letter dated 7.11.08 before the AO, in which audit report, deductions under sections 80 IA(12)/80 IB(12) of the Act were duly certified to have been claimed by the assessee. It is undisputed that the claim was made by way of a Note appended to the original return of income. It cannot be gain-said that the Note to the return of income formed an integral part of the return. That being the position, obviously, it cannot be held that the deduction was not claimed in the return of income. In this regard, in Sain Processing (supra), it has been held that net profit cannot be determined without taking into account the information disclosed in the Notes appended to the Accounts which formed part of the Accounts of the assessee Company. 50. In view of the above, we hold that the AO er ..... X X X X Extracts X X X X X X X X Extracts X X X X
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