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M/s Inautix Technologies India Pvt Ltd And Others Versus The Assistant Commissioner of Income Tax And Others

2015 (8) TMI 1037 - ITAT CHENNAI

Disallowance u/s.14A - assessee submitted that no disallowance is warranted since the interest free funds available with the assessee in the form of share capital, reserve and surplus, and the same were used for the purpose of investment in assets, the income from which shall not or does not form part of the total income - Held that:- Admittedly, in this case the assessee is having enough interest free funds in the form of share capital and reserve and surplus. The amount of investment made by t .....

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cided partly in favour of assessee.

Whether disallowance, if any, under section 14A should go to increase the profit derived from the eligible undertaking(s)/ unit(s) for purpose of sections 10A? - Held that:- This issue is squarely covered by the order of the Bombay High Court in the case of CIT vs. M/s. Gem Plus Jewellery India Ltd [2010 (6) TMI 65 - BOMBAY HIGH COURT], wherein it was held that the assessee was entitled to exemption u/s.10A with reference to addition or disallowance .....

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e.

Travelling expenses incurred in foreign currency - whether are to be reduced from total turnover also for the purpose of computation of deduction u/s.10A ? - Held that:- This issue is squarely covered by the order of in the case of ITO vs. SAK Soft Ltd, (2009 (3) TMI 243 - ITAT MADRAS-D) wherein it was held that for the purpose of applying the formula under-sub-section (4) of section 10B, the freight, telecom charges or insurance attributable to the delivery of the articles or thin .....

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e Respondent : Shri A Sreekanth, IRS, JCIT ORDER Per Chandra Poojari, Accountant Member The assessee and the Revenue are in cross appeals against the order of the Commissioner of Income Tax (Appeals)-II, Chennai, dated 19.05.2014 for the assessment year 2008-2009. 2. The first ground raised by the assessee is to regard to disallowance u/s.14A of the Income Tax Act. 3. The facts of the case are that the assessee company was found to have invested an amount of ₹ 92.35 crores in shares/funds .....

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uch exempt income at ₹ 37,28,239/- and disallowed the same,both under the regular provisions of the Act as well as u/s.115JB of the Act. The relevant portion of the assessment order held as under:- 6. Disallowance of expenditure attributable to earning of Exempted Income: During the period under reference the Assessee Company has received a dividend of ₹ 4,92,32,251/- which has been claimed as exempt u/s 10(34). However, the assessee has not considered any expenditure attributable to .....

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were not made out of borrowed funds but surplus funds available with the Company. ii) The Company did not incur any expenditure towards banker charges, brokerage or demat charges during the subject F. Y. for earning the income. 6.1 I have carefully gone through the submission of the Assessee. Under Sec. 14A, no deduction shall be allowed In respect of expenditure incurred by the assessee in relation to Income which does not form part of total income. Again a per Rule 8D of Income Tax Rules, 196 .....

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ount of expenditure by way of interest other than the amount of interest include 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 the assessee, on the first day and the last day of the previous year; C= the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last of the previous year; (iii) an amount equ .....

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/- = ₹ 74,56,47,712/-/ 2 ½ % of ₹ 74,56,47,712/- = ₹ 37,28,239/- Accordingly the amount of ₹ 37,28,239/- is added back with the total income being the expense incurred for earning the dividend income exempt u/s.10(34). Accordingly, Assessing Officer added back an amount of ₹ 37,28,239/- with the total income being the expense incurred for earning the dividend income exempt u/s.10(34). Aggrieved, the assessee preferred an appeal before the Commissioner of Inco .....

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maintaining any separate books of accounts for the investments in shares/funds. Nor there was a separate establishment to look after the investments in shares/funds. The assessee may be having substantial interest free own funds (in the form of capital/reserves and surpluses etc). But this does not mean that the investments are made only from these own interest free funds, especially if the books are not maintained separately. Further, all the funds, i.e. the interest-free own funds and the int .....

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ds, if any, was on a proportionate basis. Therefore, the interest expenses, which could not be directly linked to any activity, are to be treated as common interest expenses and considered in the step-2 of the formula given in Rule-8D for the purpose of attributing the indirect interest burden on the investments made, on a proportionate basis. Even Bombay High Court, in the case of Godrej Boyce Mfg Co Ltd v. CIT, decided on 12.08.2010, held that Sec. 14A(2) & (3) of the Act, was constitution .....

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wance of expenses is always in relation to the efforts made for earning such exempt income and not proportionate to the exempt income earned. It is particularly so because, in some years the income so earned may be less or nil. Therefore, the disallowance to be computed should always be with reference to the investments made in such activity and the effort made therein, as held by Special Bench of ITAT Delhi in the case of Cheminvest Ltd. v. ITO [2009] (121 ITD 318)(Del)(SB)/(124 ITJ 577)(Del) ( .....

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l income, cannot be allowed as a deduction - Held, yes- Whether such disallowance under section 14A can be made even in a year in which no exempt income has been earned or received by assessee - Held, yes 4.3 Thus, from the above decision it was clear that the amount of exempt income earned during the year was not relevant for the purpose of disallowance of expenses u/s.14A read with rule 8D. What was to be seen the amount of investments made and the efforts taken by the assessee in the said pro .....

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sed. Hence, there was an element of expenditure involved in the process. This expenditure may not be direct. Thus, there was an expenditure involved in making these investments. Therefore, there was a need to identify and apportion a reasonable amount of expenses as attributable for earning the exempted income. For this purpose reliance placed on the following decisions Dy. CIT vs. SREI International Finance Ltd. (2006) 10 SOT 722 (Delhi) - Tribunal:- In light of clear provisions of section 14A, .....

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.5 According to the Commissioner of Income Tax (Appeals) in order to arrive at a reasonable amount of expenditure, which may vary from case to case and situation to situation, the legislature, after taking various factors into conisation, came to a conclusion that such expenses can be reasonably calculated @ 0.5% of the average investments made by the assessee. For this purpose, the legislature has arrived at a common formula to calculate the expenses @ 0.5% of the average investments made as pe .....

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a satisfaction of the Assessing Officer that there was some element of expenses incurred by the assessee in relation to the investments in shares and earning the exempt income, which needs to be quantified and disallowed u/s.14A of the Act. Accordingly, as provided u/s.14A of the Act the Assessing Officer quantified the said expenses at ₹ 37,28,239/-, by using the rule 8D, and disallowed u/s.14A of the Act. 4.7 According to the Commissioner of Income Tax (Appeals) observed that the Assess .....

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Hence the Assessing Officer rightly invoked the Rule-8D and arrived at the disallowance of expenses u/s.14A r.w.Rule-8D. 4.8 In view of the above he confirmed the Assessing Officer's action of determining the expenses attributable for earning exempt income at ₹ 37,28,239/- u/s.14A, r.w.Rule 8D, both under the regular provisions of the Act as well as u/s.115JB of the Act. Against this, the assessee is in appeal before us. 5. We have heard both the parties and perused the material on re .....

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are capital, reserve and surplus that are interest free funds. The sources of funds are under;- Schedule 31st March, 08 31st March, 07 SOURCES OF FUNDS Shareholders'funds Share Capital 1 181,825,600 181,825,600 Reserves and surplus-Profit and Loss account 2,659,340,503 2,204,527,633 Total 2,841,166,103 2,386,353,233 APPLICATION OF FUNDS Fixed assets Gross block 728,324,538 626,273,101 Less: Accumulated depreciation 523,981,710 455,974,749 Net block 204,342,828 170,298,352 Capital work in pro .....

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Total 2,841,166,103 2,386,353,233 The ld. Authorised Representative for assessee submitted that the assessee is having enough interest free funds to make investments which are yielding tax free income not used the borrowed funds to make such investment. 6. On the other hand, the Departmental Representative relied on the orders of the Commissioner of Income Tax (Appeals). 7. We have heard the rival submissions. Admittedly, in this case the assessee is having enough interest free funds in the form .....

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Court in the case of Simpson & Co Ltd in T.C. No.2621/2006, dated 15.10.2012, we direct the Assessing Officer to disallow 2% of exempt income as income expenditure towards earning that income. This ground of the assessee is partly allowed. 8. The next ground for our consideration is that the Commissioner of Income Tax (Appeals) erred in not adjudicating the following ground. Admittedly, the assessee raised the following ground before the Commissioner of Income Tax (Appeals), which was not ad .....

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