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2015 (5) TMI 426 - ITAT DELHI

2015 (5) TMI 426 - ITAT DELHI - TMI - Disallowance u/s 14A read with Rule 8D(2)(iii) - CIT(A) allowed part relief - Held that:- Assessee had share capital of ₹ 19.29 crores and reserves and surplus of ₹ 201.15 crores, sum of which far exceeded the investments of ₹ 41.68 crores of the assessee company in shares and mutual funds at the end of the year and therefore, as held by various Hon'ble Courts, no interest expenditure can be held to be attributable to earning to exempt .....

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ng exempt income and in the absence of exercise not carried out by the AO as prescribed by section 14A before invoking Rule 8D as afore-stated, we find force in the contention of the counsel of the assessee and direct that only ₹ 1,72,879/- suo- motto disallowed by the assessee can be upheld and the rest of the addition made need to be deleted. - Decided in favour of assessee.

Addition on account of product development expenses as deferred revenue expenses - CIT(A) deleted addi .....

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requirement of customers are allowable expenses u/s 37(1) of the Act and are not covered by Section 35D of the Act. - Decided in favour of assessee. - ITA No. 1718/Del/2012, ITA No. 2550/Del/2012 - Dated:- 30-4-2015 - Shri S. V. Mehrotra And Shri A. T. Varkey,JJ. For the Petitioner : Sh. Salil Agarwal, Adv Sh. Sailesh Gupta, Adv For the Respondent : P Damkanunjna, Sr. DR ORDER Per A. T. Varkey, Judicial Member This is an appeal preferred by the assessee and cross appeal filed by the revenue agai .....

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e 8D are not applicable. 4. The above grounds of appeal are independent and without prejudice to one and another. 2. The grounds of appeal raised by the revenue are as follows:- 1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in restricting the disallowance u/s 14A to ₹ 18,02,321/- from ₹ 1,45,72,152/- and not applying Rule 8D of the Income Tax Rules which is mandatory from A.Y.2008-09. 2. Whether on the facts and circumstances of the case, the Ld. CIT .....

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assessee not only during the financial year but also on a longer basis. 4. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of ₹ 7,91,00,000/- made by the AO on account of Product development expenses. The benefit of the product development expenses of the company is derived by the company over a period of three years as per the judgement of the Hon'ble Apex Court in Madras Industrial Investment Corporation Ltd. Vs. CIT 225 ITR 802. .....

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8377; 1,72,879/- on dividend income earned only of ₹ 1,18,076/-. 5. Brief facts of the case are that the assessee company is engaged in manufacturing and export of readymade fashion garments outside India to countries like USA, Canada etc. During the year under consideration the assessee company has done sales both export sales as well as domestic sales. The assessee had electronically (e-return) filed return of income on 30.09.2008 at a total income of ₹ 19,04,66,504/- after claimin .....

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thereon to earn this exempt dividend income were offered for taxation. Pursuant to the same, notice was issued by the AO on this aspect. The assessee explained its stand before the AO, which was not acceptable to him, so he invoked Rule 8D and computed the disallowance to the tune of ₹ 1,45,72,152/-. 7. Aggrieved by the order of the AO, the assessee preferred an appeal before ld the ld CIT(A), who has given partial relief to the assessee. Aggrieved by the said order of the ld CIT(A), the .....

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possession of huge own funds on which no interest is being paid and all the investment in shares and mutual funds amounting to ₹ 41.68 crores as on 31.03.2008 was made out of its own funds. It was submitted by the ld counsel that there was no fresh investment in shares/ mutual funds being made during the year under consideration but the assessee company has increased the borrowed capital (Loan Funds) by ₹ 24.93 crores., total amounting to ₹ 435.85 crores as on 31.03.2008. Copie .....

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red earning dividend income during the year under consideration. According to him, the interest payment was made for working capital requirement and no part of it can be attributed to have been paid towards investment made in shares and securities. Further reference was made to the decision of CIT vs. Hero Cycles, decided by Hon ble Punjab and Haryana High Court decided on November 4, 2009, wherein the court has given decision as under (Head-note only): The assessee earned dividend income on sha .....

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bearing funds had been invested in the tax - free investments and the nexus was established by the Revenue, s. 14A could not be applied on mere presumption. The Revenue appealed to the High Court and claimed that in view of s. 14A (2) and Rule 8D (1)(b), a disallowance could be made even if the assessee claimed that no expenditure had been incurred in 'respect of the tax - free income. HELD dismissing the appeal: (i) If the investment in the shares is out of the non-interest bearing funds, d .....

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he A.Y. 2006-2007 & A.Y. 2007-2008 and the CIT(A)-XVI, New Delhi; in Appeal No.183/2009-10 vide order dt.17/05/2010 has accepted the contention of the assessee by allowing the relief U/s 14A of the Act. 10. Reliance was placed on the following case laws by the ld counsel where in it has been held that where assessee has interest free funds far in excess of amount invested in shares of other companies, no disallowance could be made U/s 14 A on the ground that the interest bearing funds were i .....

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ment of ₹ 83,72,347/- on which tax free Income was earned. The AO has observed that the said investments were made out of working capital of the business and sum borrowed from the bank. At the end of the relevant financial year the total amount payable to the bank was ₹ 96,58,766/-. The co-ordinate Bench observed that the AO has no where specifically stated that interest bearing funds were used or investment purposes which has generated interest free income. It was held by the Tribun .....

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be deleted. 13. On the other hand, the ld DR relied on the order of the AO and defended the action of the AO in applying Rule 8D which according to him was in force during the relevant assessment year and the ld CIT(A) erred in giving partial relief to the assessee, which according to him need to be set right and so he pleaded that the order of the ld CIT(A) may be reversed and AO s order be restored. 14. We have heard both the parties and perused the records and have gone through the case laws .....

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iture can be held to be attributable to earning to exempt income from share and mutual funds at the end of the year and therefore, as held by various Hon ble Courts, no interest expenditure can be held to be attributable to earning of exempt income from shares and mutual funds. Accordingly, no disallowance is warranted in the appellant s case under Rule 8D(2)(i) and Rule 8D(2)(ii). We endorse the finding of the ld CIT(A) to his finding that no disallowance is warranted in the assessee s case und .....

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irement and no part of it can be attributed to have been paid towards investment made in share and securities. 15. However we find that the ld CIT(A) after rightly holding that Rule 8D(2)(i) and (ii) are not applicable to the case in hand, has resorted to apply Rule 8D(2)(iii) on the ground that some administrative expenses is inevitably incurred by the assessee for salary, management, telephone, stationary etc, which in our opinion is not correct because the assessee himself has suo-motto disal .....

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d that invoking Rule 8D is not mandatory, it will be resorted to only if he is not satisfied as to the correctness of the claim made by the assessee as stipulated and mandated in section 14A ; and invoking Rule 8D is not automatic ; and here the AO erred in not recording his satisfaction as to why the suo motto disallowance made by the assessee is incorrect, without doing so, his exercise to invoke Rule 8D lacks jurisdiction. 16. Here the facts clearly indicates, as claimed by the assessee that .....

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ssee that on identical facts in earlier years, no disallowance was made by the assessee and it was accepted. In the present assessment year also, no borrowed funds were invested by the assessee for making investment in shares or for earning dividend income. Disallowance u/s 14A r.w. Rule 8D cannot in any rate exceed the expenditure that has been actually incurred by the assessee as per its books of account for earning exempt income and in the absence of exercise not carried out by the AO as pres .....

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the addition of ₹ 7,91,00,000/- made by the AO on account of product development expenses as deferred revenue expenses. 18. The ld DR submitted that the claim of the assessee that these designs were given to the customers free of cost is one thing but it cannot be denied that the sample and design created by the assessee and supplied to its potential buyers create a market and goodwill for the assessee which has an enduring benefit in soliciting customers for the assessee not only during t .....

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nue expenditure in accordance to the judgement of the Apex court In Madras Industrial Investment Corporation Ltd Vs CIT 225 ITR 802. According to ld DR it was rightly held by the AO that the benefit of the product development expenses of the Company is derived by the company over a period of three years. So one third of the product development expenses ₹ 3.95 crores is allowed in the instant assessment year and the balance ₹ 7.91 crores is disallowed for the year to be allowable over .....

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rder of the AO. 20. On the other hand the ld counsel submitted that during the year under consideration, the assessee company incurred an expenditure of ₹ 11.87 cr on development of samples/ preparation of samples as per the requirements of the foreign buyers. These expenses are of revenue nature and no benefit of enduring nature is available to the assessee as the market of readymade garments is seasonal and short lived; and style changes from season to season. A detailed note on product .....

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eloping samples of garments as per requirements of the buyers as compared to other business areas. The ratio of the judgment in the case of Madras Industrial Investment Corporation Ltd. 225 ITR 802 is not applicable as the facts of the case are different from the facts of the assessee company. In the said case, discount on debentures were written off over the period of debentures as deferred nature. According to the ld counsel the assessee company is regularly incurring sample development expend .....

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al No.1153/2009-10 vide order dated 17.05.2010 was pleased to delete the additions made on account of Product Development Expenses. 21. The ld AR relied on the case law of CIT Vs. Haring Crank Shafts Ltd. 207 Taxation 737 (Del) where the jurisdictional High Court held that the product development expenses were deductible as revenue expenditure. In the case of Glaxo Smith Kline Consumer Healthcare Ltd. vs. ACIT 112 TTJ 94 (Chd), the ITAT even held that the "expenses incurred for introducing .....

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e assessee for improving and developing new varieties of films were not capital in nature since these did not pertain to extension of its business nor there was any change in the installed capacity. Also , the expenses were not subject to section 35D of the Act as they were allowable under section 37(1) of the Act, even if the assessee had amortized these expenses in its books of account. 22. In the light of the aforesaid facts and case laws cited before us the ld counsel does not want us to int .....

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