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TMI Blog2015 (5) TMI 843X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of the case. 1(c) That the learned CIT(Appeals) erred in upholding the action of the assessing officer in applying Rule 8D in the instant case. 2(a) That on the facts and circumstances of the case, the learned CIT(Appeals) erred in holding that proportionate business expenditures of Rs. 31,58,18,185/- was alleged to be utilized to earn dividend income and thereby erred in adding the said proportionate business expenditure for the purpose of computing book profit under section 115JB of the Act. 2(b) That the observation of the learned CIT(Appeals) is contrary to the facts of the case. 2(c) That the learned CIT(Appeals) erred in upholding the action of the assessing officer in applying Rule 8D in the instant case. 3. That on the facts and circumstances of the case, the learned CIT(Appeals) erred in confirming the disallowance made by the assessing officer on account of prior period expenses amounting to Rs. 5,93,000/- under the normal provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of all the subsidiary and wholly owned companies. There is no private investment in any of the eight subsidiary companies from which assessee had received the dividend. 3.1. During the year the assessee has earned dividend income of Rs. 2,62,907.86 lakhs which have not been claimed as exempt u/s 10(34) of the Act from the tax. During the year assessee had made the total investment of Rs. 6,31,63,637/- lakhs as their details below : Investment (Unquoted) CURRENT YEAR In Fully Paid up Equity Shares of Subsidiary Companies (Valued at cost) (Rs. in lacs) 22184500 Equity Shares of Rs. 1000/- each in Eastern Coalfields Ltd. (Previous Year 221,84,500 Equity Shares of Rs. 1000/- each 221845.00 21180000 Equity Shares of Rs. 1000/- each in Bharat Coking Coal Ltd. (Previous Year 211,80,000 Equity Shares of Rs. 1000/- each 211800.00 94,00,000 Equity Shares of Rs. 1000/- each in Central Coalfields Ltd. (Previous Year 94,00,000 Equity Shares of Rs. 1000/- each 94000.00 2971000 Equity Shares of Rs. 1000/- each in Western Coalfields Ltd. (Previous Year 29,71,000 Equity Shares of Rs. 1000/- each 29710.00 1,90,400 Equity Shares of Rs. 1000/- each in Central Mine Planning and Design I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the purpose of earning dividend. According to the assessee it has not incurred any expenses to earn the dividend income and therefore Rule 8D(iii) is not applicable. The ld. Counsel for the assessee inter alia relied upon various judicial pronouncements to advance his effective grounds of appeal listed as under : (i) M/s. Balram Chini Mills Ltd. vs DCIT ITA No.504/Kol/2011 for AY 2008-09 dated 29.07.2011 (ii) CIT vs REI Agro Limited [GA 3022 of 2013, ITAT 161 of 2013 Calcutta High Court order dated 23rd December, 2013 (iii) REI Agro Ltd. vs DCIT, Central Circle-XXVII, Kolkata. ITA No.1331/Kol/2011 4. The ld.DR, on the other hand, has opposed the contention put forth by the ld. AR and has sought our attention to the orders of ld. CIT(A) and AO. 5. We have heard the rival contentions and perused the facts of the case. The ld. AR has strongly argued that no satisfaction as to the correctness of the claim made u/s 14A read with 8D(iii) has been recorded by the AO as well as the ld. CIT(A). The aforesaid contention of the assessee is not acceptable for the reasons hereinafter. The order passed by the AO goes to show that AO has complied with the requirement of section 14A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of S. 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of S. 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 s. 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 been cases 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. On the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancing, equipment finance, advances against financial assets and inter-corporate loans and deposits. During the course of the assessment proceedings, the AO noticed that the assessee had earned dividend of Rs. 4,85,24,362 which was exempt from tax. Taking note of s. 14A of the IT Act, he called upon the assessee to furnish the details of expenditure incurred in earning the aforesaid dividend and also to explain as to why expenditure on pro rata basis should not be apportioned to the earning of the aforesaid dividend. In reply, the assessee submitted before the AO that it had not incurred any expenditure in earning the aforesaid dividend and hence the prorate basis could not be applied to allocate the expenditure for earning the said dividend. In the absence of details, the AO applied pro rata basis for allocating the total expenditure of Rs. 90,64,63,336 between exempt income (i e., dividend) and non-exempt income in the ratio of the receipts (total receipts being Rs. 119,48,19,592 including dividend receipts of Rs. 4,85,24,362). In this manner, he quantified the expenditure at Rs. 3,68,02,411 being 4.06 per cent of total expenditure as having been incurred in relation to earning t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T vs. S.G. Investments & Industries Ltd. (2004) 84 TT] (Kol) 143 : (2004) 89 ITD 44 (Kol), the Calcutta Bench of this Tribunal has laid down two propositions: one, in view of s. 14A inserted in the IT Act with retrospective effect from 1st April, 1962, pro rata expenses on account of interest relatable to investment in shares for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses; and two, the expression "expenditure incurred by the assessee in relation to income which does not form part of the total income" in s. 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following the decision of the Hon'ble Supreme Court in CI Tvs. United General Trust Ltd. (1994) 116 CTR (SC) 194 : (1993) 200 ITR 488 (SC), the Calcutta Bench of the Tribunal has also held that the interest paid by the assessee being attributable to the money borrowed for the purpose of making the investment which yielded the dividend and other expenses incurred in connection with or for making or earning the dividend incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Distributors (Baroda) (P) Ltd. vs. Union of India (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC), reversed the decision of the Hon'ble Bombay High Court in CIT vs. United General Trust (P) Ltd. (supra), wherein the question was as under: "Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in applying the decision of the Bombay High Court in the case of CIT vs. New Great Insurance Co. Ltd. (1973) 90 ITR 348 (Born) to the assessment year in question without considering the effect of the amendment operative from 1stApril, 1968, and in thus holding that the assessee would be entitled to the deduction under s. 80M on the gross dividend before deduction of the proportionate management expenses ?" Thus, when the decision of the Hon'ble Bombay High Court has been reversed, the proportionate management expenses are required to be deducted while computing the dividend income. In the decision of the Hon'ble Calcutta High Court, relied upon by the learned counsel for the assessee, Mr. Dastur, in the case of CIT vs. United ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered in the case of REI Ltd., Kolkata (supra) In the aforesaid decision, the issue with respect to the disallowance made under section 14A read with Rule 8D(2)(iii) was restored to the file of AO and no judgment was rendered on merits of the contentions of assessee. The assessee has submitted that for disallowing the expenditure incurred for earning the exempt income there must be a nexus between the two. To substantiate the same, the assessee has relied upon the decisions of various courts listed as under : (i) Balram Chinni Mills Ltd. Vs DCIT in ITA NO.504/Kol/2011 (ii) CIT vs Hero Cyccles Ltd. 323 ITR 518 (Pun&Har) (iii) Saurabh Agrotech (P) Ltd vs DCIT in ITA No.786/JP/2011 (iv) Hindusthan paper Corporation Ltd. In ITA No.47/Kol/2012. The aforesaid judgements will not support the case of the assessee as the same are rendered in the different facts altogether. In the aforesaid decisions, the ratio was that only those expenditures which has nexus to the exempt income are to be disallowed. However in the present case the nexus between the expenditure incurred and the dividend income was established by the revenue authorities. 5.7. The ld. AR submitted that in subsequent ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; "In conclusion, we may stated that in order to find out if an expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation." The assessee has f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00/-. The appellant has filed copy of the account showing the amount is actually Rs. 5,93,000/-. The appellant has filed an application u/s 154 which has not been disposed of till date. The Assessing Officer is hereby directed to correct the figure from Rs. 5,93,000/- to 5,93,000/-. The appellant had stated that this expenditure is being allowed over the period in earlier year also. The appellant had some coal Dumps against which some deposits were received by it. The appellant had earned interest income on the said deposits and certain legal disputes against the claim by the coal dealers of coal dumps are in the courts and the appellant feels that such interest may have to be paid back by it to the said claimants. It is observed that there is a possibility of refunding the said amounts but it is all dependent upon the future date. Merely the matter is disputed cannot make it allowed as a provision of expenditure. The appellant has not accounted the prior period expenses which crystallised during the year. It is still a contingent liability which is not finalised and the appellant has made a provision in apprehension to write off it as bad debts. It is not a bad debt since the mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the present appeal we are concerned with the correctness of the deletion of addition of Rs. 1,19,45,03,740/- made by the ld. CIT(A) as regards Rule 8D(2)(ii). 10.2. Before adverting the issue of the concerned it should be apposite to refer to Rule 8D(2)(ii) of the IT Rules which is extracted herein below :- "8D(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :- (i) The amount of expenditure directly relating to income which does not form part of total income; (ii) In a 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 following formula namely :- A x B C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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