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2015 (7) TMI 118 - ITAT AHMEDABAD

2015 (7) TMI 118 - ITAT AHMEDABAD - TMI - Disallowance u/s.14A - Held that:- There is no dispute in assessee’s appeal that the authorities below have invoked Rule 8D(2)(ii) and (iii) of the Income Tax Rules in computing the impugned section 14A disallowance. The assessment year in question is 2006-07. It does not require much discussion that Rule 8D is applicable from assessment year 2008-09 onwards. The case law of Godrej Boyce and Co.[2010 (8) TMI 77 - BOMBAY HIGH COURT] is quoted in support. .....

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reads a sum of ₹ 24.42 lacs. There is no other dispute involved in its appeal on facts and figures narrated in the CIT(A) order comprising of Assessing Officer’s findings hereinabove. We observe in these circumstances that larger interest of justice would be met in case a lumpsum adhoc disallowance of ₹ 2.5 lacs is made in these peculiar facts with a rider that the same shall not be treated as a precedent. Ordered accordingly. The assessee gets part relief. The Assessing Officer is d .....

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IT.Cir.1/371/09-10, in proceedings under section 143(3) of the Income Tax Act, in short the Act . 2. The assessee s substantive grounds raised in its appeal ITA 1816/Ahd/2011 read as follows: 1. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance to the extent of ₹ 1,12,55,780 from out of the total disallowance of ₹ 1,15,28,410 made by the Assessing Officer u/s.14A of the I.T. Act. 2. Without prejudice to the above, on the facts and .....

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empt income, since the assessee had not furnished specific evidence to show that the investment was actually in foreign company. The abovesaid pleadings raise the solitary issue of section 14A disallowance. Both parties reiterate their respective submissions. We proceed to deal with section 14A disallowance in succeeding paragraphs 3. The case file reveals that the CIT(A) s order under challenge comprises of relevant extract of the assessment order dated 31.12.2009 as under: 4. The ground No.3 i .....

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10/2009 (received on 17/11/2009), the assessee furnished the details. Perusal of the said details reveals that the dividend has been received against the investment in shares of M/s. AtuI Ltd. as well as investment in mutual funds. Vide the order sheet entry dtd. 17/11/2009, the assessee was asked to submit contention in respect of applicability of provision of Sec.14A of the I.T. Act. Vide submission dtd. 10/12/2009, the assessee submitted as under :- "2. Justification for no disallowance .....

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s of the assessee company or strategic investments in group companies. The income received, if any, from foreign subsidiaries is taxable and therefore, the provisions of sec.14A shall not apply with reference to the same. 2.2 As regards the all the other investments, it is submitted that they represent the long term strategic investments in group companies. The investments in such subsidiary company are not for earning any exempt income. 2.3 The said investments do not require constant monitorin .....

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uantum of expenditure is incurred by the assessee in respect of earning of such income which do not form art of the total income. The submission of the assessee found to be very general and no specific evidences have been furnished to show that no disallowance u/s.14A is called for. Accordingly, vide the order sheet entry dtd.10/12/2009, the assessee was asked to show cause why disallowance u/s. I4A be not made in response, the assessee vide submission dtd. 24/12/2009 submitted as under: The ass .....

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rmation Technology Vs. Dep. CIT (Bang) 88 TTJ 378 (4) Dep. Comm. of I.Tax Vs. Shree Synthetics Ltd. (Indorej 88 TTJ 717. 15) Harish K. Shaft Vs. ITO 85 TT J 872. Further, from the submission of the assessee itself, if is seen that expenditure to the extent of ₹ 20.98 lacs has been incurred which can not be directly related to a certain income. Therefore, some disallowance out of interest expenses is also called for in view of provision of Rule 8D(2)(ii). It is also to be noted that the var .....

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eminvest Ltd. vs. ITO. (ITAT, Delhi (SB) in ITA No. 87/Del/2008. In view of the above discussion, it is seen that the provisions of section 14A are clearly applicable to the assessee. In view of the same, the disallowance is computed as below: Calculation of Average Value of Investments: Details Opening Closing Investments 1302595622 3253453680 Average value of investments 2278024651 Direct Expenses Incurred Disallowance of interest: Interest paid x Average value of Investment Average value of t .....

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.7.7 The Assessing Officer has made disallowance u/s. 14A by applying the calculation mechanism given in Rule 3D. In this regards, it may be pointed out that the said rule has been inserted by the I.T. (Fifth Amendment) Rules, 2008, w.e.f. 28-03-2008. Thus, the said Rule has been inserted almost after two years from the end of year under consideration. Further, the said rule has been inserted in order to prescribe the method to determine the amount of expenditure incurred in relation to earning .....

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the Assessing Officer in making disallowance u/s. 14A. Therefore, the disallowance needs to be deleted. 3.2 Without prejudice to the above, it may be pointed out that a perusal of the relevant portion of the impugned assessment order shows that the learned Assessing Officer has made the impugned disallowance without appreciating: (a) that Section 14A cannot be so read as to entail a disallowance of expenditure in every single case where the assesses had tax exempt income; (b) that it was only i .....

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any case, there could be absolutely no question for making a disallowance u/s. 14A of an amount which was higher than even the tax exempt income of the assessee, which is ₹ 24.42 lacs. 3.3 The disallowance made by the Assessing Officer comprises of Interest of ₹ 138287/- and Other Expenses of ₹ 113,90,123/-. With reference to the same, it is submitted that the impugned disallowance has been made without the Assessing Officer having any real reason for being satisfied in the ma .....

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ic business purpose borrowing and general business purpose borrowing. However, the same cannot be interpreted to mean that the interest on general purpose borrowings was not related to earning business income. Further, in connection with the utilization of borrowed funds only: for the purpose of business, it may be important to note that though disallowance has been made u/s. 14A in earlier year(s), no disallowance has been made u/s. 14A in any year prior to the year under consideration. This pr .....

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27.16 crores. The said funds are far in excess of what has been invested in shares of subsidiary company of the assessee company, amounting to ₹ 195.08 crores. Therefore, there is no utilization of borrowed funds for the purpose of making any investments. In view of the above, no disallowance can be made u/s. 14A, out of interest expenses. 2.3.2 As regards the Disallowance of ₹ 1,13,90,1231- out of Other Expenses, the Assessing officer has observed as under: The assessee must have in .....

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y Vs. Dep. CIT (Bang.) 88 TTJ 378 (4) Dep. Comm. of I. Tax Vs. Shree Synthetics Ltd. (Indore) 88 TTJ 717. (5) Harish K. Shaft Vs. ITO 85 TTJ 872." As regards the above observation, it may be noted that the assessee company has neither put in any extra efforts nor employed any staff in connection with the investments made. The Assessing Officer has failed to appreciate the fact that the investments made by the assessee company are in shares of subsidiary companies or other group companies. T .....

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uld be considered, where in it has categorically held that even under Rule 8D of S. 14A, disallowance can be made only if there is actual nexus between tax-free income and expenditure disallowance under section 14A of the Act and in the case of appellant company no such nexus have been established or proved by the Income Tax Department. 3.5 without prejudice to above, the Assessing Officer failed to appreciate that the company has earned exempt income of ₹ 24.42 lacs. Therefore, disallowan .....

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computation of disallowance u/s. 14A. Therefore, without prejudice to the other contention of the appellant, even on the basis Assessing Officer's view, the disallowance u/s. 14A would be worked out to ₹ 172,55,780/- and not ₹ 1,15,28,410/-." 4.3 I have considered the facts of the case, assessment order and appellant's submission. Assessing officer made disallowance of expense relating to exempt income. Such disallowance was considered necessary since appellant did not .....

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other administrative expenses totaling to ₹ 670 crores, part of which may relate to investment resulting in exempt income. Similarly payment of interest will also partly relate to investment resulting in exempt income therefore disallowance under section 14 A on account of interest and other expenses are necessary. Coming to the method of computation of disallowance under section 14 A, assessing officer disallowed expenses relatable to exempt income as per rule 8D. For interest, proportion .....

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atable to investment resulting in exempt income. In absence of specific details of expenses incurred in earning exempt income, the formula given in rule 8D is adopted for making disallowance. In view of this the addition @ .5% of investment resulting in exempt income made by the assessing officer is confirmed subject to following para-. Appellant submitted that investment in foreign subsidiary will not result in exempt income hence disallowance for the same cannot be made. I agree with the appel .....

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er has taken only that part of interest paid for general borrowings not made for any specific purpose. Therefore In the absence of clear cut details of utilization of funds, the formula given in rule 8D is most appropriate method. Since assessing officer worked out interest disallowance on the same basis, the interest disallowance is confirmed. This leaves both the parties aggrieved and in cross appeals. 4. We have heard both sides and gone through the case file. There is no dispute in assessee .....

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