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Coal India Limited Versus Addl. C.I.T., Range-5, Kolkata

Disallowance u/s 14A - Held that:- The contention put forth by the ld. AR that it had earned dividend income of ₹ 262907.86 lakhs without incurring any expenses does not convince us at all. The term ‘expenditure’ as per section 14A would include the expenditures that are related to investments made i.e. expenditures on administration, capital expenses, travelling expenses, operating expenses etc. It is difficult to accept that the assessee company was making investments decisions to the tu .....

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y 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. 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 t .....

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sions 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 COURT) wherein held market to market loss is an expenditure incurred by the assessee and thus allowable as deduction. - Decided in favour of assesse for statistical purposes only

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during the year. It is still a contingent liability which had not yet finalised 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 assesse - Decided against assesse.

Disallowance u/Rule 8D(2)(ii) and Rule 8D(2)(iii) of IT Rules - CIT(A) deleted addition - Held that:- Rule 8(2)(ii) can be invoked when the assessee had i .....

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dia till the present A.Yr. and there was no private placement in the form equity before A.Yr.2008-09. The entire share capital invested in the subsidiary companies from which exempt income in the form of dividend was earned was received by the assessee from the Govt. of India. The assessee had not raised loan or borrowed money for making investment in the subsidiaries. In the written submissions filed before the ld. CIT(A) the assessee had also explained the interest expenditure incurred by it w .....

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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 g .....

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e 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 prio .....

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(Appeals) erred in confirming the disallowance made by the assessing officer on account of provision for market to market foreign exchange transactions amounting to ₹ 23.30 crores for the purpose of computing book profit under section 115JB of the Act. 6. That the appellant craves leave to add to and/or alter, amend, modify or rescind the grounds hereinabove before or at the hearing of this appeal. 2.1. The Revenue has raised the following grounds of appeal :- 1. That on the facts and circ .....

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pany constituted by Government of India through Coal Mines Nationalisation Act 1973. The assessee is primarily engaged in the business of coal mining and 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 t .....

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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 (Valued at cost) (Rs. in lacs) 22184500 Equity Shares of ₹ 1000/- each in Eastern Coalfields Ltd. (Previous Year 221,84,500 Equity Shares of ₹ 1000/- each 221845.00 21180000 Equity Shares of S .....

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(Previous Year 1,90,400 Equity Shares of ₹ 1000/- each 1904.00 1864009 Equity Shares of ₹ 1000/- each in Mahanadi Coalfields Ltd. (Previous Year 18,64,009 Equity Shares of ₹ 1000/- each 18640.00 1776728 Equity Shares of ₹ 1000/- each in Northern Coalfields Ltd. (Previous Year 17,76,728 Equity Shares of ₹ 1000/- each 17767.28 3597000 Equity Shares of ₹ 1000/- each in South Eastern Coalfields Ltd. (Previous Year 35,97,000 Equity Shares of ₹ 1000/- each 35 .....

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8D (2)(ii) of the IT Rules and ₹ 31,58,18,185/- under Rule 8D(2)(iii) of the IT Rules. The AO further disallowed the provision of foreign exchange transactions amounting to ₹ 23.30 crores and prior period expenses of ₹ 5,93,000/-. 3.3. The matter was carried to the ld. CIT(A) wherein the ld. 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 .....

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egard 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 n .....

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-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 .....

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come of ₹ 262907.86 lakhs without incurring any expenses does not convince us at all. The term expenditure as per section 14A would include the expenditures that are related to investments made i.e. expenditures on administration, capital expenses, travelling expenses, operating expenses etc. It is difficult to accept that the assessee company was making investments decisions to the tune of ₹ 6,31,637 lakhs of public money without incurring a single penny out of its pocket. Such deci .....

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iture. 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 .....

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ature 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 .....

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o 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 analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of s. 14A. In s. 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Ch .....

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ome for the purpose of chargeability to tax under those heads. Secs. 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in ss. 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in ss. 15 to 59 but related to the income not forming part of total incom .....

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urther 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 com .....

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ned 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 ₹ 90,64,63,336 between exempt income (i e., dividend) and non-exempt income in the ratio of the receipts (total receipts .....

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aggrieved by the aforesaid order and is now in appeal before this Tribunal. 13. It is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that the only expenses involved in earning the dividend income are those incurred on collection of dividend or on encashing a few dividend warrants. A company cannot earn dividend without its .....

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d of directors for which administrative expenses are incurred. 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 de .....

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on 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 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 .....

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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 income can be regarded as expenditure incurred in relation to dividend income. In Everplus Securities& Finance Ltd. vs. Dy. CIT (2006) 102 TTJ (Del) 120, the Delhi Bench of this Tribunal has held that merely because the assessee did not earn the dividen .....

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e to the present case of the assessee. 5.4. The findings recorded by us as regards the expenditure required to be incurred by the assessee company for carrying out the investments and earning dividends income also finds force from the decision rendered by ITAT, Chennai Bench in the case of Southern Petro Chemical Industries vs DCIT (2005) 3 SOT 157 dated 20th October, 2004 relevant part of which is reproduced as under :- 6. We have considered the rival submissions and perused the records of the .....

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ecisions 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 Un .....

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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 d .....

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e quantum of deduction claimed by the assessee in earlier years under s. 57(i) from the dividend income (when it was taxable) and make a pro rata adjustment on the basis of subsequent investments made, inflation, etc. This ground is, accordingly, allowed for statistical purposes. 5.5. Since the assessee had claimed that no expenditure was incurred, the assessing authorities were correct to estimate the incurring of such expenditure u/s 14A read with Rule 8D. It is pertinent to refer to the obser .....

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nience as a deeming provision. When such deeming provision is made on the basis of statutory presumption, the requirement of factual evidence is replaced by statutory presumption and the Assessing Officer has to follow the 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 .....

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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 be a nexus between the two. To substantiate the same, the assessee has relied upon the decisions .....

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pt 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 years i.e. A.Yrs. 2009- 10 and 2010-11, the aforesaid issue has been decided in favour of the assessee. The aforesaid orders of the ld. CIT(A) will not help the assessee as the same has no bearing on the present case. 5.8. The ld. AR submitted without prejudice to the aforesaid groun .....

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under rule 8D(iii), the matter is remanded back to the file of AO. Accordingly Grounds 1(a), 1(b), 1(c), 2(b) and 2(c) of the assessee are dismissed. 5.9. As regards the issue in relation to section 115JB, the ld. Counsel for the assessee in support of the aforesaid grounds of appeal submitted that disallowance computed as per Rule 8D of the Rules cannot be applied u/s 115JB of the Act and the provisions of section 14A are restricted to computation of income under normal provisions of the Act w .....

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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 afore .....

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i) 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 .....

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in fact booked profit on account of foreign exchange fluctuation. If that be so, the same shall be dealt with in accordance with aforesaid judgement in the case of Woodward Governor India (Supra). We, accordingly allow ground no.4 & 5 for statistical purposes only. 6. Now we take up ground no.3 of the assessee with regard to the prior period expenses . The brief facts of the case are reproduced for the sake of convenience as under :- From the audited accounts, it is evident that assessee ha .....

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for the year. The contention of the assessee is not accepted. The assessee has been unable to prove whether the amount has been crystallised during the financial year or not. The onus of proving it fell on the assessee, which he has failed to utilise. Therefore, in the absence of any evidence regarding crystallisation of these expenditures 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) co .....

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77; 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 .....

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ses 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 money has not been advanced by the appellant to such security deposits. It is a reverse case where the appellant is a creditor because of receiving security deposits and earned interest income thereon. The appellant cannot claim the same as bad debt. The Circular No.551 and other case .....

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enditure. Therefore the ratio decindi of the said appellate order is not applicable. Therefore, the addition made by the Assessing Officer is upheld but he will correct the figure from ₹ 5,93,00,000/- to ₹ 5,93,000/-. This ground of appeal is dismissed subject to the correction of figure. 7. We have heard the rival contentions and perused the facts of the case. It was stated that the assessee had coal dumps against which deposits were received by it. The assessee had earned interest .....

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ts. 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 .....

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t 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 amou .....

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