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2015 (8) TMI 605 - ITAT BANGALORE

2015 (8) TMI 605 - ITAT BANGALORE - TMI - Disallowance u/s 14A - Held that:- It is not disputed that there was no dividend or exempt income claimed by assessee during the relevant previous year. Other income shown by the assessee in its Schedule 15 shows dividend income as nil. No doubt there is a sum of ₹ 160,701,177/- appearing as miscellaneous income in the P & L account. However, this was the subject of an analysis by the AO wherein the AO himself has given a finding that ₹ 16 cr .....

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t had not made any claim of exempt income is found to be correct. We are of the view that a disallowance u/s.14A could not have been made when there was no claim for exempt income during the relevant previous year. Such disallowance stands deleted. - Decided in favour of assessee.

Disallowance u/s.57 in respect of the interest paid on borrowed funds - Held that:- t. None of the Authorities below have examined the purpose for which loan was borrowed from HDFC. U/s.57(iii) of the Act, e .....

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pose of verifying the purpose for which loans were borrowed by the assessee from HDFC Ltd, and which were utilised in making investment in debentures. If the borrowing is for working investments then the deduction u/s.57(iii) of the Act has to be allowed. - Decided in favour of assessee for statistical purposes.

Set off of losses suffered in the eligible 80IB unit against the income from non eligible unit - Held that:- he contention that under section 80-I(6) the profits derived from .....

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tion 80-I(1) lays down the broad parameters indicating circumstances under which an assessee would be entitled to claim deduction. On the other hand section 80-I(6) deals with determination of the quantum of deduction - section 80- I(6) lays down the manner in which the quantum of deduction has to be worked out. After such computation of the quantum of deduction, one has to go back to section 80-I(1) which categorically states that where the gross total income includes any profits and gains deri .....

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industrial undertaking as the only source of income in order to arrive at the deduction under Chapter VI-A. However, this court finds that the non obstante clause appearing in section 80-I(6) of the Act, is applicable only to the quantum of deduction, whereas, the gross total income under section 80B(5) which is also referred to in section 80-I(1) is required to be computed in the manner provided under the Act which presupposes that the gross total income shall be arrived at after adjusting the .....

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and Revenue respectively, directed against the order of CIT (A)-III, Bangalore, dt.27.09.2012, for the assessment year 2009-10. 02. Assessee has raised five grounds in its appeal of which, grounds 1 and 5 are common needing no adjudication. Ground 4 is on levy of interest u/ss.234A, 234B and 234C of the Income-tax Act, 1961 ('the Act'in short), which is consequential in nature and also do not need need specific adjudication. Effective grounds 2 and 3 are reproduced hereunder: "2. Th .....

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, Revenue has taken four grounds of which, grounds 1, 3 and 4 are general, needing no specific adjudication. Effective ground of the Revenue, numbered as ground 2 is reproduced hereunder : "2. On the facts and in the circumstances of the case the learned CIT (A) has erred in law in directing the AO to allow set off of losses suffered in the eligible 80IB unit against the income from non eligible unit without appreciating the statutory position as envisaged under sub section 5 of Section 80I .....

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ssessment proceedings, it was noted by the AO that assessee had claimed deduction u/s.80IB of the Act, in respect of one of its two projects. It had loss in the project on which it was eligible for claiming deduction u/s.80IB of the Act, but it effected a set off of the said loss against its income from projects on which 80IB deduction was not available. AO was of the opinion that loss in the 80IB unit could not be allowed for set off against business income from non-eligible units in view of su .....

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e Hon'ble Apex Court in the case of Liberty India v. CIT [(2009) 317 ITR 218] and due to the overriding provision contained in Sec.80IA of the Act, loss of eligible business could not be allowed for set off from profit from non-eligible business. Taking this view of the matter, he disallowed the loss of ₹ 1,13,69,446/- claimed for set off against the business profits of the non-80IB projects. 05. AO also found that assessee had closing value of investments of ₹ 54,77,66,006/- and .....

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vestments made were in shares and debentures of one M/s. Sterling Urban Developments P. Ltd ('SUDPL' in short) during the financial year 2005-06. As per the assessee, it had borrowed ₹ 50 Crores from HDFC for making these investments. Assessee pointed out that there was a survey u/s.133A of the Act in the premises of the assessee, when the Department had taken a stand that proportionate interest on the loans utilised for investments in shares and debentures could not be allowed as .....

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was not impressed with the above reply. According to him, investments in shares of SUDPL made by the assessee were to earn income from dividends which was not includible in the total income. According to the AO, there was no business income directly relatable to the interest expenditure during the relevant previous year. According to him, a part of the interest out go of ₹ 12,13,19,585/- had to be disallowed applying the formula prescribed in Rule 8D of the IT Rules. He worked out the rati .....

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s. Such interest income, came to ₹ 19,05,000/-. Against the interest income, assessee had claimed interest on the loans raised from HDFC for subscribing to such debentures coming to ₹ 1,64,97,300/-, which had resulted in a loss under the said head. AO was of the opinion that what could not be considered as an allowance u/s.37 of the Act, if the income from interest was reckoned under the head 'profits and gains from business or profession' could not be considered under the he .....

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T (A). 09. Vis-à-vis set off of loss of 80IB, against profits of non-80IB projects, CIT (A) was of the opinion that the procedure followed by the assessee was acceptable and for taking this view he relied on his own order in assessee's own casefor A. Y. 2008-09. Ld. CIT (A) held that assessee was eligible for claiming loss under 80IB project against its income from non-80IB project. 10. Vis-à-vis the second issue viz., disallowance u/s.14A of the Act, argument of the assessee w .....

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e part of the loans were utilised for its business. Assessee also pointed out that average investments considered by the AO at ₹ 55,83,03,916/- was incorrect and the actual figure should have been ₹ 37,42,52,916/-. CIT (A) partly agreed with the contentions of the assessee and held that average value of the investments was wrongly considered by the AO while working out the disallowance under Rule 8D. He also held that a sum of ₹ 44,16,600/- had to be excluded from the total int .....

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As per the assessee, the reasoning given by the AO that what could be disallowed u/s.37 could not be claimed u/s.57 was incorrect. CIT (A), though in principle agreed with this contention of the assessee was of the opinion that income from debentures was reduced by M/s. SUDPL from 10% to 1% during the relevant previous year, resulting in substantial reduction of interest income. As per the CIT (A), the directors of the assessee company were common as that of SUDPL and assessee had critical cont .....

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on account of payment of interest and it was a colourable device which had no proper economic justification and rationale. He confirmed the addition of ₹ 1,64,97,300/- made by the AO, though for a different reason. 12. Now before us, Revenue in its appeal is aggrieved on the direction of the CIT (A) to allow set off of loss of 80IB project against profits of non-80IB projects whereas assessee is aggrieved on the additions made u/s.14A and disallowance of the claim u/s.57 of the Act. 13. Ld .....

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entions and perused the orders. CIT (A) relied on his own order for A. Y. 2008-09 in directing the AO to set off the loss from 80IB unit with the profits of non-80IB projects. This Tribunal on appeal filed by the Revenue, in its order dt 31.01.2013, held as under : 5.3.1 We have heard both parties and have carefully perused and considered the material on record. At the outset it must be mentioned here that the Hon'ble Apex Court in the case of Synco Industries Ltd (supra) was concerned with .....

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l, for the purposes of determining the quantum of deduction under sub-section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or business of the hotel (or the business of repairs to ocean going vessels or other powered craft) were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year u .....

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under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made." 5.3.2 From a perusal and comparison of both these provisions, namely sections 80 I(6) .....

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eld after an elaborate analysis of the provisions at paras 12 and 13 of its order which are extracted and reproduced hereunder : "12. The contention that under section 80-I(6) the profits derived from one industrial undertaking cannot be set off against loss suffered from another and the profit is required to be computed as if profit making industrial undertaking was the only source of income, has no merits. Section 80-I(1) lays down that where the gross total income of the assessee include .....

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s to be worked out. After such computation of the quantum of deduction, one has to go back to section 80-I(1) which categorically states that where the gross total income includes any profits and gains derived from an industrial undertaking to which section 80-I applies then there shall be a deduction from such profits and gains of an amount equal to 20 per cent. The words "includes any profits" used by the legislature in section 80-I(1) are very important which indicate that the gross .....

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under section 80B(5) which is also referred to in section 80-I(1) is required to be computed in the manner provided under the Act which presupposes that the gross total income shall be arrived at after adjusting the losses of the other division against the profits derived from an industrial undertaking. If the interpretation as suggested by the appellant is accepted it would almost render the provisions of section 80A(2) of the Act nugatory and therefore the interpretation canvassed on behalf o .....

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therefore the non obstante clause in section 80-I(6) cannot restrict the operation of sections 80A(2) and 80B(5) which operate in different spheres. As observed earlier section 80-I(6) deals with actual computation of deduction whereas section 80-I(1) deals with the treatment to be given to such deductions in order to arrive at the total income of the assessee and therefore while interpreting section 80-I(1), which also refers to gross total income one has to read the expression 'gross tota .....

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irst got to be determined after adjusting losses, etc., and if the gross total income of the assessee is 'Nil' the assessee would not be entitled to deductions under Chapter VI-A of the Act." 5.3.3 The above decision of the Hon'ble Apex Court squarely supports the case of the assessee that the provisions of section 80 IA(5) of the Act would not restrict the operation of the provisions of section 70(1) of the Act with respect to the set off of the loss. The operation of the provi .....

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Apex Court in the case of Synco Industries Ltd (supra) and that there is no merit in the plea of revenue that the said judgment is not applicable to the facts of the present case of the assessee. 5.3.4 That apart, the learned counsel for the assessee has rightly contended that the provisions of section 80 IA (5) of the Act applies in computing the profits of an eligible business for the purposes of working out the quantum of deduction for the initial assessment year and for every subsequent year .....

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ions of section 80 IB (13) of the Act, that makes the provisions of section 80 IA(5) applicable to section 80 IB also, applies only 'so far as may be'. Thus, by virtue of the fact that there is no concept of initial assessment year under section 80IB(10) of the Act, we are also of the view that the provisions of section 80 IA(5) of the Act would not be applicable to the deduction claimed under section 80 IB(10) of the Act. From this angle of the matter also, we find no merit in the view .....

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of the lower authorities. 18. We have perused the orders and heard the rival contentions. In the decision of the coordinate bench in the case of M/s. ASK Brothers Ltd, (supra), it was held as under : "9. We have duly considered the rival contention and gone through the record carefully. The Assessing Officer has disallowed the interest expenditure on the ground that the assessee has borrowed the money which has been invested. The investment would ultimately result dividend income which will .....

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the year, therefore, section 14A is not applicable. This stand of the assessee has been accepted by the Coordinate Bench in the case of DCIT vs. M/s. Bhuwalka Steel Industries Ltd in ITA No.349/bang/2013. The finding of the Tribunal in this case read as under:" "14. The only issue that arise for consideration in this appeal by the assessee is with regard to the disallowance made by the Assessing Officer by invoking the provisions of section 14A of the Act. The Assessing Officer has obs .....

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n response, the assessee submitted that the investments were made in its subsidiary company out of the profit earned by the assessee. The Assessing Officer did not accept the explanation given by the assessee and was of the view that whether the investment was made with a subsidiary company or with an outside company, the intention of making investment was to earn dividend income which is exempted under the I. T. Act. By applying the provisions of section 14A r/w Rule 8D, the Assessing Officer d .....

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expenditure' used in section 1 4A of the Act has a wider meaning. The term 'expenditure' would take in its sweep not only expenditure but also all forms of expenditure regardless of whether it is fixed, direct, indirect, administrative, managerial or financial. Therefore, the said rule provides for the indirect expenditure as a fixed percentage of the average investments as per the formula laid down. As already state, the Assessing Officer has power to invoke rule 8D even in a case w .....

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14A includes indirect expenditure, the Assessing Officer's action in making a disallowance of ₹ 4,40,500/- is justified and the same is confirmed". 16. Before us the learned Counsel for the assessee pointed out that there was no exempt income earned by the assessee during the previous year. In this regard our attention was drawn to page 84 of the assessee's paper book which contains the computation of total income of the assessee. Our attention was drawn to the fact that no in .....

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17. The learned Counsel for the assessee relied on the following judicial pronouncements of the Hon'ble High Courts to the proposition that if there is no exempt income during the previous year, then the provisions of section 1 4A of the Act, cannot be invoked: * CIT v. Winsome Textile Industries Ltd (2009) 319 ITR 204 (P&H) * Cit v. Corrtech Energy P. Ltd (Tax Appeal No.23 9 of 2014, dt 24.03.2014)(Guj.) * JCIT v. Shivam Motors (F) Ltd (ITA 17/Lkw/2012, dated 12.11.2013) (ITAT Lucknow); .....

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ttention was drawn it is clear that the assessee did not earn any exempt income during the previous year. In such circumstances as laid down in the decisions relied upon by the learned Counsel for the assessee, provisions of section 14A could not be invoked. The Board circular which is contrary to the Hon'ble High Court's decisions cannot therefore be the basis to sustain the disallowance made by the Revenue authorities. We therefore, hold that the disallowance made u/s 14A of the Act sh .....

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x Appellate Tribunal was justified in upholding the decision of CIT (A) in deleting the disallowance of ₹ 2, 03,752/- u/s 14A ignoring the fact that there is dfference of opinion of various courts on the view taken by the ITAT that in the absence of tax free income, no disallowance u/s 1 4A is permissible". 11. This question has been answered by the Hon'ble Allahabad High Court as under : "As regards the second question, Section 14A of the Act. provides that for the purposes .....

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any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of ₹ 2,03,752/- made by the Assessing Officer was in order." 12. In the light of the above proposition, facts are required to be examined with the angle, whether the assessee has rece .....

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laimed, then disallowance would be there. The learned Assessing Officer shall re-examine this issue with the above angle and adjudicate it in accordance with the law. Our observation would not impair the case of the Assessing Officer and would not cause to the defense/explanation of the assessee. 13. In assessment year 2003-04, the dividend income was not exempt from taxation. Prior and subsequent to this assessment year, dividend income was exempt. Therefore, in this year section 14A would not .....

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No doubt there is a sum of ₹ 160,701,177/- appearing as miscellaneous income in the P & L account. However, this was the subject of an analysis by the AO at para 9 of the assessment order. In such analysis, the AO himself has given a finding that ₹ 16 crores was remuneration received by the assessee for development of properties and not any income considered as exempt. In any case, computation of income of the assessee which appear at page 12 of the assessment order start with th .....

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revious year by virtue of the decision of the Coordinate Bench in the case of ASK Brothers Ltd (supra). Such disallowance stands deleted. 20. Coming to the disallowance of ₹ 1,67,97,300/- made u/s.57 of the Act, Ld. AR submitted that assessee itself had carved out the interest income from debentures from its income under the head 'profits and gains of business'and placed it under the head 'income from other sources. As per the Ld. AR, there was no dispute that the loan taken fr .....

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disallowed. Ld. AR further submitted that for A. Y. 2008-09, interest income from debentures shown by the assessee under the head 'income from other sources' were accepted by the AO in an assessment done u/s.143(3) and interest expenditure on the funds utilised for placing such debentures, claimed u/s.57(iii) of the Act, were allowed. As per the Ld. AR, Revenue's claim that reduction in interest rate on debentures effected by SUDPL was a colourable device was not substantiated. Ld. .....

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terest rate on debentures had come down from 10% to 1% and assessee was not able to show why its associate concern SUDPL reduced the interest rate by 9%. As per the Ld. DR, this was nothing but a colourable device for claiming the loss on account of interest. Ld. DR submitted that SUDPL being an associate enterprise of the assessee, a device was adopted so as to facilitate a claim of loss by the assessee under the head 'income from other sources', when it was obvious that such claim coul .....

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bentures in SUDPL were sourced out of the loan from HDFC on which an interest of ₹ 1,64,97,300/- was paid to HDFC. As per the AO, had such income been shown under the head 'income from business' then the interest out go would have been disallowed u/s.37 of the Act. Or in other words according to him, what was to be disallowed u/s.37 of the Act, could not be claimed by an assessee u/s.57(iii) of the Act. Assessee has in its return of income for A.Y. 2008-09 also showed interest inco .....

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immediate source of the interest income was the debentures. Therefore, interest earned by it from such debentures were rightly classified under the head 'income from other sources'. The sole reason why the interest out go of ₹ 1,64,97,300/- has been disallowed by the AO is that if it was considered as income from business, the interest expenditure would fall under the personal expenditure. On the other hand, CIT (A) justified the disallowance on a ground that SUDPL had unjustifiab .....

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rt in the case of McDowells & Co Ltd (supra), for considering the reduction of interest by SUDPL to be a colourable device. However, as explained by Hon'ble Apex Court in the case of Azadi Bachao Andolan (supra), it is not part of the judicial function to treat as nugatory any step whatever which a tax payer might take with a view to avoidance or mitigation of tax. Their Lordships also observed that a tax payer where he is in a position to carry through a transaction in two alternative w .....

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