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2015 (11) TMI 425 - ITAT AHMEDABAD

2015 (11) TMI 425 - ITAT AHMEDABAD - TMI - Disallowance out of fees and legal expenses - CIT(A) deleted the addition - Held that:- As in earlier year similar disallowance was made and predecessor of the CIT(A) in A.Y. 2007-08 had deleted the disallowance. This fact has not been disputed by the Revenue. No material was brought on record to show that the consideration for services received by the assessee was so excessive as to warrant any disallowance out of the same. It is also observed that the .....

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State Road Transport Corporation (2014 (1) TMI 502 - GUJARAT HIGH COURT -) as held that with respect to the sum received by the assessee firm from any of his employees to which provisions of sub-clause (x) of clause (24) of section (2) applies, the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees’ account in the relevant fund or funds on or before the “due date” mentioned in explanation t .....

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apply Rule 8 D of the Income Tax Rules, 1962 for computing disallowance. Hence, another requirement of law is that the AO has to satisfy himself about the correctness of the claim of the assessee having regard to the accounts of the assessee. The provision of section 14A mandates the AO to examine the accounts of the assessee before proceeding to apply Rule 8D of the IT Rules. In the present case, the AO has made disallowance on account of interest expenditure and administrative expenses. Since .....

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ave challenged the order of CIT(A)-VIII, Ahmedabad, dated 15.06.2011 pertaining to assessment year 2008-09 by filing appeal and Cross Objection respectively. Both the appeal and Cross Objection are taken up together and are being disposed of by way of this consolidated order for the sake of convenience. 2. First we take up the Revenue s appeal in ITA No.2120/Ahd/2011. 3. Briefly stated facts are that the case of the assessee was taken up for scrutiny assessment and the assessment u/s.143(3) of t .....

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he same at ₹ 5,44,57,207/-. 4. Assessee feeling aggrieved by the order of the Assessing Officer, preferred an appeal before the ld. CIT(A), who after considering the submissions of the assessee partly allowed the appeal thereby the ld. CIT(A) confirmed the addition. In respect of disallowance of ₹ 12 lacs, the ld. CIT(A)deleted on the ground that the disallowance was merely on the basis of presumption and in respect of the disallowance of employees contribution deleted the addition. .....

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ment between the two concerns under the same management is loosely worded and does not have any outlined detailed nature, purpose and justification of the amount in question. He submitted that the Assessing Officer has observed that assessee has not submitted any detail of services rendered by the employees other than mentioning in general that the secretarial work of the company has increased. Further, it has also not been evidenced that the employees are solely at the disposal of the assessee .....

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cer has disallowed 50% of fees and legal expenses paid by Appellant to DCPL mainly on the ground that payment is to related concern and said related company is incurring loss hence payment made by Appellant is excessive. The Appellant both at the time of assessment proceedings and appellate proceedings submitted Moll entered between both the parties and submitted that as production of current Assessment Year has been increased as well as it required more persons for legal and secretarial work, s .....

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particularly when Assessing Officer has not disputed the work carried out by such persons. Similar disallowance was made in A.Y. 2007-08 and in appeal, vide my order dated 22ndOctober, 2010 in Appeal No. CIT(A)-VIII/DC-4/749/09-10 I have deleted disallowance made by the Assessing Officer. Considering this, the disallowance made by Assessing Officer on presumption is not justified and it is deleted and related ground of appeal is allowed. 7.1. The Assessing Officer made disallowance on the basis .....

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d. as excessive by 50% of the amount paid to the associate concern of the assessee was disallowed and added back to the total income of the assessee. However, the ld. CIT(A) deleted the same on the basis that in earlier year similar disallowance was made and predecessor of the CIT(A) in A.Y. 2007-08 had deleted the disallowance. This fact has not been disputed by the Revenue. Ld. Counsel for the assessee had pointed out that the co-ordinate Bench of this Tribunal in ITA No. 45/Ahd/2011 has confi .....

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o show that the assessee has not received the services for which payments were made by the assessee. Rather, on the other hand, the allowance »f deduction at the rate of 50% shows that the Assessing Officer also agreed that services of the staff of the payee company were utilized by the assessee company for its business purpose. No material was brought on record to show that the consideration for services received by the assessee was so excessive as to warrant any disallowance out of the s .....

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order of the ld. CIT(A) is confirmed. 8. Ground no.2 is against deletion of addition of ₹ 2,23,705/- on account of disallowance of employees contribution to Provident Fund u/s.36(1)(via). Ld. Counsel for the assessee fairly conceded that this issue has been decided against the assessee in A.Y. 2007-08 by co-ordinate Bench in ITA No. 45/Ahd/2011. We find that co-ordinate Bench at para 18 has decided the issue by following the judgment of Hon ble Gujarat High Court in case of CIT vs. Gujara .....

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e referred to in section 28 with respect to such sum credited by the assessee to the employees account in the relevant fund or funds on or before the due date mentioned in explanation to section 36(1)(va). 8.1. Therefore, following the judgment of Hon ble Gujarat High Court and the decision of the co-ordinate Bench, we hereby set aside the order of ld. CIT(A)on this issue and confirmed the order of Assessing Officer. This ground o Revenue s appeal is allowed. 9. Ground nos. 3 & 4 are general .....

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ought to have deleted the entire addition of ₹ 8,61,908/-. 2. In law and in the facts and circumstances of the respondent s case, the Ld. CIT(A) erred in solely relying on the decision of Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT and Another, by not considering the ratio laid down by other judicial pronouncements available on the issue on which the appellant had relied. In view of the various judicial pronouncements cited by the appellant before the CIT(A), the confirmation of add .....

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unsel for the assessee reiterated the submissions made in the statement of fact-cum-synopsis. Ld. Counsel for the assessee submitted that the assessee was having sufficient interest free funds. On the contrary, ld. Sr. D.R. supported the order of the authorities below and submitted that there is no infirmity into the order of the authorities below. 13. We have heard rival contentions and perused the material on record. We find that the contentions of the assessee against the disallowance as subm .....

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he decision of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT and Another. However, he deleted the administrative expenses of ₹ 1,00,000 already shown by the appellant relating to its investments in shares and Mutual funds etc. 2. As regards the disallowance made u/s.14A, at the very outset, the appellant would like to submit that provisions of sec.14A provide that no deduction shall be made in respect of expenditure incurred by the assessee in relation to income which does not form the part of .....

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enditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an as .....

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s not satisfied with the correctness of the claim of assessee in respect of such expenditure. In the above context, the appellant would like to submit that the impugned disallowance of expenditure was made by the Assessing Officer, which was confirmed by the Ld. CIT(A), by simply assuming that the appellant had incurred some expenditure to earn exempt income, however, while doing so, he has failed to establish a pre-requisite nexus between the expenditure disallowed and the investments made from .....

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1,00,000 shown by the appellant. 3. In the case of Godrej & Boyce Mfg. Co. Ltd. V/s. DCIT - 43DTR 178 (2010) - the Hon. Bombay High Court in paras 24 & 25 of their judgment had explained the scope of applicability of Sub-s. (2) of Sec.14A of the Act in detail; the relevant extracts of which are reproduced here below for better appreciation of the facts:- What merits emphasis is that the jurisdiction of the AO to determine the expenditure incurred in relation to such income which does not .....

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straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The AO must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO must be arrived at on an objective basis. It is only when the AO is not satisfied with the clai .....

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rect. The satisfaction of the Assessing Officer must be arrived at on the objective basis. In the light of the aforesaid observation of the court, it would be seen that the Ld.CIT(A) casually followed the decision of Mumbai High Court cited supra without considering the detailed observations given in the judgment. In fact, the aforesaid Mumbai High Court decision is normally quoted and relied upon in the following two areas:- (i) The provisions of Sub-ss. (2) & (3) of Sec. 14A are constituti .....

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expenditure incurred on the same. In this connection reliance may be placed on the following judicial pronouncements:- 1. CIT vs. Hero Cycles Ltd. [2010] 189 Taxman 50 (P & H High Court) Even under Rule 8D of S. 14A, disallowance can be made only if there is actual nexus between tax-free income and expenditure The assessee earned dividend income on shares which was exempt from tax. The AO took the view that the investment in shares was made out of borrowed funds on which interest expenditur .....

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sumption. The Revenue appealed to the High Court and claimed that in view of s. 14A (2) and Rule 8D (1) (b), a disallowance could be made even if the assessee claimed that no expenditure had been incurred in respect of the tax - free income. HELD, dismissing the appeal: (i) If the investment in the shares is out of the non-interest bearing funds, disallowance u/s 14A is not sustainable; (ii) The contention of the revenue that directly or indirectly some expenditure is always incurred which must .....

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99-2000 - Assessee had paid interest to certain parties on advances, deposits, etc. - It had also invested in shares yielding tax-free income -Assessing Officer, relying on section 14A, calculated interest on total investment in shares and made disallowance -Commissioner (Appeals) also held that there was direct nexus between funds borrowed and investment in shares yielding taxfree income but, made disallowance on day to day working product method - Whether nexus between borrowed funds and inves .....

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phasis supplied] On perusal of the above judicial decisions , it may be concluded that It is the onus of the Assessing Officer to establish a nexus between the expenditure incurred and the source of exempt income, in the event he wants to disallow u/s 14A of the Income Tax Act, 1961. In the facts of the case, no nexus whatsoever has been established by the Assessing Officer. Thus, disallowance made by assessing officer u/s 14A requires to be deleted. 5. Without prejudice to what is stated herein .....

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on the ratio of Hon ble Supreme Court s decision in case of Munjal Sales Corporation V/s Commissioner of Income-Tax 298ITR 298; wherein the Apex Court has observed that the assessee had advanced interest free loan to its sister concern amounting to ₹ 5,00,000/-; whereas the opening balance of interest free funds as on 1 April, 1994 was ₹ 1.91 crores, which is sufficient to cover the impugned loan of ₹ 5 lacs. Hence, there cannot be any disallowance of interest under Section 36( .....

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the Head Notes: INTEREST ON BORROWED CAPITAL - INVESTMENTS BY APPELLANT - FINDING THAT INVESTMENTS WERE FROM INTEREST-FREE FUNDS AVAILABLE WITH APPELLANT - BORROWED CAPITAL USED FOR PURPOSES OF BUSINESS - INTEREST DEDUCTIBLE- INCOME-TAX ACT, 1961, S.36(1)(iii). The appellant claimed deduction of interest on borrowed capital. The Assessing Officer recorded a finding that the sum of ₹ 213 crores was invested out of its own funds and ₹ 147 crores was invested out of borrowed funds. Acc .....

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to the High Court: Held, dismissing the appeal, that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the finding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. EAST IN .....

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claimed interest of ₹ 16.78 lacs as bank charges. The Assessing Officer, further, found that the appellant has shown investment of ₹ 26, 71,053/- as on 31-03-2004 as compared to ₹ 19, 49,725/- as on 31/03/2003. Thus, the appellant has made new investment of ₹ 7,21,238/- in shares. The dividend income on the above mentioned investment was examined. The Assessing Officer sought to disallow proportionate interest out of the interest claimed. It was explained to the Assessing .....

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;…………. 6. On the other hand, the Learned Authorised Representative of the appellant submitted that the Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities Power Ltd. 313 ITR 340 (Bom) has held that it has to be first presumed that the investment were made out of interest-free funds available with the appellant. Therefore, no disallowance is called for. It is an undisputed fact that the appellant has substantiate share capital and reserves. Therefore, i .....

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A is required for proportionate interest expenditure. 6. With regard to disallowance of administrative expenditure u/s.14A, it is submitted that administrative expenditure incurred during the current year are mainly for the purpose of assessee s main business. However, in all fairness, the appellant itself has shown ₹ 1,00,000 expenditure incurred in investments made by it in the shares and mutual funds and the income earned there from. In fact, the Ld.CIT(A) has not negativated the claim .....

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earning exempted income by establishing a proper nexus between the two. In fact, there was no need of application of Rule 8D, as the appellant had already shown the administrative expenditure incurred during the year at ₹ 1,00,000. The appellant relies on the following two decisions available on the matter- (1) Decision of Third Member division of Delhi ITAT in case of Wimco Seedlings Vs. DCIT 109 TTJ 462; (2) Decision of Delhi ITAT in case of Malwa Investments Limited Vs. DICT 3 DTR 455 .....

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f the appeal before your honour. 8. In the light of the factual and legal position brought out above, it is prayed that the disallowance of ₹ 7,61,908confirmed by the CIT(A) may kindly be deleted and the Grounds of Appeal raised by the Department against the relief given by the CIT(A) to appellant may kindly be dismissed. 13.1 The Assessing Officer made disallowance by invoking the provisions of Section 14A r.w. Rule 8D of the Income Tax Rules. As per assessee, the AO has not established a .....

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levant provisions of section 14A are reproduced hereinbelow: Section-14A :- Expenditure incurred in relation to income not includible in total income. [(1)] For the purposes of computing the total income under this Chapter no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act:] [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under se .....

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accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.] 13.2. From the conjoint reading of the above provision, it is .....

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