TMI Blog2015 (8) TMI 1037X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 of various payments, as the plain consequence of the disallowance and add back made by the Assessing Officer is an increase in the business profits of the assessee and the same to be considered for the purpose of computation of deduction u/s.10A of the act. Adopting the similar principle, we are inclined to direct the Assessing Officer to consider the disallowance u/s. 14A r.w Rule 8D as part of business profit so as to compute deduction u/s.10A of the Act. - Decided partly in favour of assessee. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earn the exempt income considering the human resources cost, interest cost of the investment and other relevant cost which should go into earning of the exempt income. The Assessee was accordingly asked to give details of the expenditure incurred on earning the above income in the course of hearing. The Assessee vide written submission filed on 02-12-11 stated mainly as follows: i) The investments in mutual funds 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, 1962 the expenditure in relation to income which does not form part of the total income shall be the aggregate at 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 interest bearing borrowed funds are put into a common pool of funds. From this common kitty all the outgoings (i.e. investments in shares, regular business expenses etc) are met with. In other words, once the funds, i.e. whether the interest-free own funds or the interest bearing borrowed funds, are put into a common pool of funds, they will loose their distinction and all types of funds will be treated alike. In such a situation, the only way to ascertain the investments made from the borrowed funds, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, even if there are no such exempt income earned during the year. 4.4 As could be seen from the P L account, the assessee has several activities including investments in shares. For the purpose of making these investments etc, the same management, manpower, machinery and infrastructural facilities of the assessee are being used. 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, even in case it is not possible to identify expenses incurred in earning income which does not form part of total income, disallowance has to be made on some basis. Marezban Bharucha v. Asstt. CIT (2007)12 SOT 133 (Mum.- Trib): Where an expenditure is composite one, i.e., relating to taxable receipts as well as non-taxable receipts, Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 record. In this case the ld. Authorised Representative for assessee submitted that no disallowance is warranted u/s.14A r.w. Rule 8D, 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. She drew our attention to the financial statement for the year ending 31.03.2008, stating that the assessee is having share 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of share capital and reserve and surplus. The amount of investment made by the assessee is less than the interest free funds. Further, Rule 8D was introduced with effect from 24.03.2008, which was prospective in operation and cannot be regarded as being retrospective as held by Delhi High Court in the case of Maxopp Investment Ltd vs. CIT 347 ITR 272. However, incurring certain administrative expenses cannot be ruled out. Accordingly, placing reliance on the judgment of the jurisdictional High 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 Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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