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2015 (11) TMI 419 - ITAT MUMBAI

2015 (11) TMI 419 - ITAT MUMBAI - TMI - Disallowance u/s. 14A - CIT(A) deleted the addition - Held that:- We have observed that assessee company has its own funds amounting to ₹ 41.64 crores and the investment are to the tune of ₹ 20.41 crores. We have also observed that assessee company has duly demonstrated that the interest bearing funds to the tune of ₹ 12.20 crores on which the assessee company has paid interest have been raised from the banks towards the acquisition of fi .....

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y has demonstrated that the interest bearing funds are bank loans raised by the assessee company for specific purposes and also utilised for the said purposes from which diversion of fund is not permitted and hence the disallowance of the interest expenditure of ₹ 35,21,564/- under Ruled 8D2(ii) by the revenue is hereby deleted and order of the CIT(A) is upheld. - Decided in favour of assessee.

Disallowance towards administrative and indirect expenses @0.5% of the average invest .....

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ns are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. Besides, investment decisions are generally taken in the meetings of the Board of Directors / Shareholders for which administrative and management expenses are incurred and in some businesses regulatory approvals .....

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sallowing the expenditure of ₹ 7,22,027/- towards administrative and other indirect expenses which was affirmed by the CIT(A ) and the same is also hereby affirm by us as we have found no infirmity in the orders of the authorities below. - Decided against assessee. - ITA No. 5366/Mum/2012, CO No. 234/Mum/2013 - Dated:- 30-9-2015 - Shailendra Kumar Yadav, JM And Ramit Kochar, AM For the Appellant : Shri Abani Kanta Nayak For the Respondent : Shri Rajendra Jain ORDER Per Ramit Kochar, Accoun .....

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21,564/- under Rule 8D(2)(ii) without appreciating the fact that the assessee has failed to prove that it has not invested its borrowed funds in respect of shares which are held as investment pertaining to exempt income. 2. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing officer be restored." The assessee company has raised following grounds in the cross objection filed: "1. The Ld. CIT(A)-7,Mumbai on the facts and in circumstance .....

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ance is not justified and is liable to be deleted." 3. The Brief facts of the case are that assessee company is engaged in the business of manufacturing and dealing in flexible packaging material. 4. During the assessment proceedings u/s 143(3) read with section 143(2) of the Income Tax Act,1961 , the assessing officer noticed that the assessee company has received dividend of ₹ 48,925/- which was claimed as exempt income by the assessee company . The assessee company was asked to exp .....

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r rejected the contention of the assessee company that interest free funds are being invested for making investments , rather the assessing officer held that substantial interest expenditure has been incurred by the assessee company. The assessing officer held that the assessee company has not furnished any fund flow statement highlighting that no interest bearing fund was utilized for making the investments, the income of which is exempt from tax with necessary supporting bank statements. The a .....

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that the assessee company is engaged in the business of flexible packaging and is not an investment company and hence had the assessee company not made investments in shares , it would not have required borrowings on which the interest is paid by the assessee company because the assessee company has sufficient funds of its own to invest in its business. Thus, the assessing officer disallowed the expenditure to the extent of ₹ 42,43,553/- out of which ₹ 32,21,526/- is disallowed towa .....

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vant assessment year particularly when the assessee company has denied having spent any expenditure for earning any exempt income. The assessee company submitted that it has total investments of ₹ 20.41 crores as at the end of the assessment year, and own funds consisting of equity capital and reserve and surplus is ₹ 41.64 crores as at the end of assessment year. The assesee company submitted that it has made investment of ₹ 11.93 crores during the assessment year (including i .....

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specific purpose for which the said loans were raised such as acquisition of fixed assets,book debts,stocks and car. (a) Term Loans from Banks -Rs 2.01 crores- utilised for acquiring fixed assets (b) Cash Credit Limit- ₹ 10.16 crores -utilised for stocks and book debts (c) Car Loan-Rs0.03 crores- utiliised for acquiring car (d) Unsecured loans (i) interest bearing- NIL (ii) Interest free- ₹ 2.33 crores Thus , the assessee company demonstrated before the CIT(A) that either it has its .....

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any from the bank and the assessee company stated that it is debarred from diverting bank loans for any other purpose other than for which the bank loans were raised . The assessee company submitted that the fund flow statements were duly submitted before the assessing officer and the assessing officer has wrongly stated that no fund flow statement was submitted before him. The CIT(A) after considering the submission of the assessee company and the case laws relied upon by the assessee company d .....

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ed assets, book debt , stocks and car. The CIT(A) held that the assessing officer has no where pointed out any defect in the assessee company submissions about utilisation of interest free funds for making investments and the assessing officer has not brought on record any cogent material to prove that interest bearing funds are utilised by the assessee company for making investments to the tune of ₹ 20.41 crores.Thus, the CIT(A) allowed the appeal of the assesee company by allowing the in .....

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es are to be disallowed as per mandate of Section 14A of the Act read with rule 8D(2)(ii) of the Income Tax Rules,1962. 8. The assessee company on the other hand reiterated its submissions made before the authorities below and relied upon the order of the CIT(A). The assessee company also relied upon the orders of Delhi Bench of Tribunal in the case of Interglobe Enterprises Ltd. v. DCIT (2014) 40 CCH 022 and contended that the assessee company had utilized interest free funds to make investment .....

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any expenditure for earning any exempt income. The assessee company submitted that it has total investments of ₹ 20.41 crores as at the end of the assessment year, and own funds consisting of equity capital and reserve and surplus is ₹ 41.64 crores as at the end of assessment year which is sufficient to make the investment. The assesee company submitted that it has made investment of ₹ 11.93 crores during the assessment year (including investment in 100% subsidiary company Umax .....

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n of fixed assets, book debts, stock and car. (a) Term Loans from Banks -Rs 2.01 crores- The bank loan was utilised for acquiring fixed assets (b) Cash Credit Limit- ₹ 10.16 crores -The bank loan was utilised for stocks and book debts (c) Car Loan-Rs0.03 crores- The bank loan was utiliised for acquiring car (d) Unsecured loans (i) interest bearing- NIL (ii) Interest free- ₹ 2.33 crores Thus , assessee company submitted that either it has its own fund to the tune of ₹ 41.64 core .....

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loans were raised . 8. We have heard the rival submissions and perused the material on record. We have observed that assessee company has its own funds amounting to ₹ 41.64 crores and the investment are to the tune of ₹ 20.41 crores. We have also observed that assessee company has duly demonstrated that the interest bearing funds to the tune of ₹ 12.20 crores on which the assessee company has paid interest have been raised from the banks towards the acquisition of fixed assets .....

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nstrated that the interest bearing funds are bank loans raised by the assessee company for specific purposes and also utilised for the said purposes from which diversion of fund is not permitted and hence the disallowance of the interest expenditure of ₹ 35,21,564/- under Ruled 8D2(ii) by the revenue is hereby deleted and order of the CIT(A) is upheld. Hence , the appeal of the Revenue is dismissed. 9. We will now dispose off the cross objection filed by the assessee company with respect t .....

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ii) of Income Tax Rules,1962. The assessee company submitted that it has not incurred any administrative or any other in-direct expenses for making or maintaining investment of ₹ 20.41 crores. The assessee company relied upon the submissions made by it before the authorities below. The assessee company contended that investment of ₹ 19.37 crores out of total investment of ₹ 20.41 crores is in 100% subsidiary company M/s Umax Packaging Limited which is a strategic investment and .....

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e of Godrej & Boyce Mfg. Co. Ltd. 234 CTR 1. The assessee company has made average investments of ₹ 14.44 crores computed as per rule 8D(2)(iii) of Income Tax Rules, 1962 . The investments made by the assessee company includes the investment of ₹ 19.37 crores made in 100% subsidiary company. 13. Coming to the submission of assessee that these are strategic investments and no disallowance made towards the administrative expenses. We would like to mention that under normal circumst .....

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strategic investments are made with long term horizon where objective is to set up business and growth of these business over a long period of time. In these type of strategic investments, the investor has to normally devote significant time to plan, execute and monitor these investments regularly and periodically to ensure that these strategic investments are turned viable and profitable. These Investment decisions are very complex in nature. They require substantial market research, day-to-da .....

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investments which also may require participation in the meetings of committees, Board of Director and Shareholder meetings. There will definitely be an expenditure incurred towards administrative and management cost etc. towards planning, executing and maintaining these investments . Our view is fortified by the following decisions : 1. The observation made by Hon ble Supreme Court in the case of CIT v. Walfort Share & Stock Brokers Pvt. Ltd. (2010) 326 ITR 1(SC) defining the scope of Secti .....

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fies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relati .....

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ld mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to 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 section 14A. In section 14A, the first p .....

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of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 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 l .....

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is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37). 2. The ITAT,Mumbai in the case of ACIT v. Citicorp Finance (India ) Limited (2007)108 ITD 457 has negated the contention of the assessee that it had incurred no expenditure for earning high dividends as under: "It is difficult to accept the hypothesis that one can earn substantial divid .....

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decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the Board 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 nomin .....

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e computing the exempt income from dividend. In Harish Krishnakant Bhatt v. Income Tax Officer (2004) 91 ITD 311 (Ahd.), the Ahmedabad Bench of this Tribunal has held that, the dividend income being exempt under section 10(33), the interest on capital borrowed for acquisition of relevant shares yielding such dividend cannot be allowed deduction by operation of section 14A. In Dy. CIT v. SG Investments &Industries Ltd. (2004) 89 ITD 44 (Cal.), the Calcutta Bench of this Tribunal has laid down .....

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e" in section 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following the decision of the Hon'ble Supreme Court in CIT v. United General Trust Ltd. (1993) 200 ITR 488 (SC), the Calcutta Bench of the Tribunal has 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 conne .....

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J (Mum.) 843, the Mumbai Bench of this Tribunal has held that the assessing officer is justified in attributing a part of the financial and administrative expenses as expenditure incurred in relation to exempt income and disallowing the same in view of the provisions of section 14A." 3. The ITAT, Chennai Bench has held in the case of Southern Petro Chemicals Industries v. DCIT (2005) 3 SOT 157 as under: "We have considered the rival submissions and perused the records of the case. Admi .....

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nd 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 United Gener .....

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IT v. New Great Insurance Co. Ltd. (1973) 90 ITR 348 (Bom) to the assessment year in question without considering the effect of the amendment operative from Ist April, 1968, and in thus holding that the assessee would be entitled to the deduction under section 80M on the gross dividend before deduction of the proportionate management expenses ?" Thus, when the decision of the Honble Bombay High Court has been reversed, the proportionate management expenses are required to be deducted while .....

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