TMI Blog2015 (5) TMI 843X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure. It is pertinent to mention here that even the assessee did not rebut the findings of AO that the assessee was required to supervise and administer all the investments made. Thus in the present case the nexus between the expenditure incurred and the dividend income was established by the revenue authorities - Decided against assesse. Disallowance computed as per Rule 8D of the Rules cannot be applied u/s 115JB - Held that:- Provisions of section 14A are restricted to computation of income under normal provisions of the Act which cannot be extended to the computation of income u/s 115JB of the Act as relying upon the decisions of ITAT Delhi Bench in the case of Goetze (India)ltd vs CIT (2009 (5) TMI 615 - ITAT DELHI ). - Decided in the favour of the assesse. Expenses pertaining to foreign exchange fluctuation disallowed - Held that:- In view of the submissions made by the ld. AR the issue is restored back to the file of AO to examine as to whether the assessee has in fact booked profit on account of foreign exchange fluctuation. If that be so, the same shall be dealt with in accordance with judgement in the case of Woodward Governor India (2009 (4) TMI 4 - SUPREME ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - - Dated:- 13-5-2015 - Shri Mahavir Singh Shri B.P.Jain, JJ. For the Appellant : Shri Aakash Mansinka, FCA Shri Vivek Rui For the Respondent : Shri Varinder Mehta, CIT ORDER Per Shri B.P.Jain, AM : These cross appeals of the Assessee and Revenue arise from the order of ld.CIT(A)-VI, Kolkata dated 03.04.2012 for Assessment Year 2008-09. 2. The assessee has raised the following grounds of appeal : 1(a) That on the facts and circumstances of the case, the learned CIT(Appeals) erred in holding that proportionate business expenditure of ₹ 31,58,18,185/- was alleged to be utilized to earn dividend income and thereby erred in disallowing the said proportionate business expenditure for the purpose of determination of income under the head Profits and gains of business or profession . 1(b) That the observation of the learned CIT(Appeals) is contrary to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a company wholly owned by Govt. of India in the present year under consideration. The Govt. of India gave funds to the assessee for further investments in its subsidiary and wholly owned companies as approved by the Govt. of India. The money received in the form of share capital was compulsorily required to be invested and the assessee was to subscribe the shares of the subsidiary companies. All the money invested in the subsidiary companies was received by the assessee from Govt. of India for making direct investments in equity for running and controlling the production, distribution, business 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 ₹ 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 ₹ 6,31,63,637/- lakhs as their details below : Investment (Unquoted) CURRENT YEAR In Fully Paid up Equity Shares of Subsidiary Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT(A) partly allowed the appeal of the assessee. On the question of disallowance u/s 14A of the Act, the ld. CIT(A) observed that Rule 8D(2)(ii) of the IT Rules was not applicable to the facts of the case since no borrowed funds have been invested in the subsidiary companies and deleted the addition made under Rule 8D(2)(ii) amounting to ₹ 119,45,03,740/-. However, the addition made under 8D(2)(iii) was held to be applicable and addition of ₹ 31,58,18,185/- was confirmed by ld. CIT(A). The addition made on account of prior period expenses as well as foreign exchange transactions stood confirmed by the ld. CIT(A). 3.4. In ground no.1(a),1(b),1(c), 2(b) and 2(c) with regard to disallowance made u/s 14A of the Act the case of the assessee is that application of section 14A of the Act cannot be mechanically made by AO in an automatic fashion without recording reasons for his satisfaction that the assessee s claim is incorrect. The ld. Counsel for the assessee had further contended that the assessee made the investment for the purpose of holding controlling stake in the group concern and not for the purpose of earning dividend. According to the assessee it has not incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made. By no stretch of imagination, it can be assumed that such activities were done without incurring any expenditure. It is pertinent to mention here that even the assessee did not rebut the findings of AO that the assessee was required to supervise and administer all the investments made. 5.2. It is pertinent to refer to the observations made by the Hon ble Supreme court in the case of CIT vs Walfort Share Stock Brokers (P) Ltd. (2010) 326 ITR 1 (SC) defining the scope of section 14A of the Act incorporated retrospectively from 1st April, 1962. Relevant portion is reproduced herein below : 17. The insertion of S. 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dt. 22nd Nov., 2001). In other words, S. 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under s. 14A. Reading s. 14 in juxtaposition with ss. 15 to 59, it is clear that the words expenditure incurred in s. 14A refers to expenditure on rent taxes, salaries, interest, etc. in respect of which allowances are provided for(see ss.30to37). 5.3. It is further apposite to refer to the decision of the ITAT Mumbai Bench in the case of ACIT vs Citicorp Finance (India) Ltd. (2007) 108 ITD 457 dated 21st November, 2006 wherein on similar facts, the contention of the assessee that it had incurred no expenditure for earning high dividends was negated. The relevant portion of the decision is reproduced herein below :- Briefly stated, the facts of the case are that the assessee company was engaged in the business of providing financial services like commercial vehicle financing, equipment finance, advances against financial assets and inter-corporate loans and deposits. During the course of the assessment proceedings, the AO notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. This aspect of the matter has also received careful attention of Chennai Bench of this Tribunal in Southern Petro Chemical Industries vs. Dy. CIT (2005) 93 TT] (Chennai) 161. After comprehensive consideration of all the relevant aspects of the case including the provisions of law, the Chennai Bench has held that investment decisions are very strategic decisions in which top management is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. In Harish Krishnakant Bhatt vs. ITO (2004)85TT](Ahd) 872 : (2004) 91 ITD 311 (Ahd), the Ahmedabad Bench of this Tribunal has held that, the dividend income being exempt under S. 10(33), the interest on capital borrowed for acquisition of relevant shares yielding such dividend cannot be allowed deduction by operation of S.14A.In Dy. CIT 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investments had been made by the assessee in earlier years, and during the current year as well the assessee made an investment of ₹ 19 crores. Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take. These are mind-boggling decisions and top management is involved in taking these decisions. This decision making process is very complicated and requires very careful analysis. Moreover, the assessee has to keep track of various dividend incomes declared by the investee companies and also to keep track of the dividend income having been regularly received by the assessee. This activity itself calls for considerable management attention and cannot be left to a junior clerk. The Hon'ble Supreme Court in the case of United General Trust Ltd. (supra), applying the decision of Hon'ble Supreme 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: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e consequences stated in the statute. 5.6. The decisions relied upon by the assessee to support the aforesaid grounds of appeal are distinguishable on facts and law and does not help the cause of assessee. The assessee relied upon the decision of various courts of law listed as under : (i)Maxopp Investments Ltd. Vs CIT 347 ITR 272 (Del) (ii) Godrej Boyce Mfg.Co.Ltd. vs DCIT 328 ITR 81 (Bom) (iii) Relaxo Footwears Ltd. Vs Addl.CIT (2012) 50 SOT 102 (iv) REI Agro Ltd. Kolkata vs D CIT ITA No.1331/Kol/2011 (v) DCIT vs Ashish Jhunjhunwala In all of the aforesaid judgements, the ratio was that the AO failed to record any satisfaction u/s 14A read with rule 8D whereas in the present case proper satisfaction was recorded by the AO u/s 14A of the Act. Reliance was placed on the judgments rendered 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The issue is squarely covered in the favour of the assessee. Accordingly, we partly allow ground no.2(a) of the assessee as regards the addition to book profit made u/s 115JB of the Act. 5.10. As regards ground no 4 and 5 the AO has disallowed expenses pertaining to foreign exchange fluctuation in view of CBDT instruction No.3/2010 and has disallowed ₹ 23.30 crores which are debited in P L A/c of the assessee. The ld. AR has relied upon the decision of the Hon ble Supreme Court in the case of CIT vs Woodward Governor India (P)Ltd 312 ITR 254 (SC) and submitted that market to market loss is an expenditure incurred by the assessee and thus allowable as deduction. The Hon ble Apex Court in the aforesaid case has held as under (relevant portion reproduced):- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 5.93 lakhs are added back to normal computation of income. Penalty initiated on this issue u/s 271(1)(c)of theI.T.Act,1961. 6.1. The ld. CIT(A) confirmed the action of AO. The relevant findings are reproduced herein under :- I have carefully considered the observations of the Assessing Officer in the assessment order, and submissions of the appellant. The Assessing Officer has added back an amount of ₹ 5,93,000/- in the assessment order while computing the income u/s 115JB. The appellant informed that it is a typographical mistake and actually it is ₹ 5,93,000/- which has been wrongly mentioned by the Assessing Officer as ₹ 5,93,000/-. The appellant has filed copy of the account showing the amount is actually ₹ 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 ₹ 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lised and the assessee had made a provision in apprehension to write off it as bad debts. In the circumstances and facts of the case we find no infirmity in the order of the ld. CIT(A), who has rightly disallowed the claim of assessee. Thus ground no.3 of the assessee is dismissed. 8. Ground NO.6, being general in nature does not require adjudication. 9. In the result the appeal of the assessee is partly allowed for statistical purposes. 10. Now we take up the revenue s appeal in ITA No.1238/Kol/2012 as under :- 10.1. The AO vide order dated 2nd December, 2010 after recording the satisfaction as required u/s 14A of the Act made disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii) of IT Rules. In the present appeal we are concerned with the correctness of the deletion of addition of ₹ 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 :- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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