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2015 (11) TMI 858 - ITAT AHMEDABAD

2015 (11) TMI 858 - ITAT AHMEDABAD - TMI - Disallowance out of fees and legal expenses - CIT(A) deleted the addition - Held that:- We find that the genuineness of the payment is not in dispute. The Assessing Officer after observing about the loss incurred by the assessee company has brought no material on record after making investigation to show that the assessee has not received the services for which payments were made by the assessee. Rather, on the other hand, the allowance of deduction at .....

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f the above facts and circumstances, we do not find any good reason to interfere with the order of the Ld.CIT(A) - Decided against revenue.

Disallowance of employees contribution to Provident Fund u/s.36(1)(via) - CIT(A) deleted the addition - Held that:- This issue has been decided against the assessee in A.Y. 2007-08 by co-ordinate Bench following the judgment of Hon'ble Gujarat High Court in case of CIT vs. Gujarat State Road Transport Corporation [2014 (1) TMI 502 - GUJARAT HIGH C .....

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e u/s.14A read with Rule 8D - Held that:- firstly the AO is required to find out the nexus between the expenditure incurred and exempt income. If the expenditure is not related to the exempt income, in our considered view the AO is not empowered to make disallowance u/s.14A of the Act by applying Rule 8D of the Income Tax Rules. Thus, first requirement of law is that the expenditure should be related to the exempt income. In case, where the assessee makes a claim that 'x' amount is related to th .....

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ates 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 on both the counts, the AO has failed to record his finding, we are of the considered view that disallowance as made by the AO cannot be sustained.- Decided against revenue. - ITA No. 2120/Ahd/2011, CO No. 197/Ahd/2011 - Dated:- 30-9-2015 - Anil Chaturvedi, AM And Kul Bhara .....

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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 the Income Tax Act, 1961 (hereinafter referred to as 'the Act') was framed vide order dated 24.12.2010. While framing assessment, the Assessing Officer (AO in short) made disallowance of ₹ 8,61,908/- by applying Rule 8D of the Income Tax Rules, 1962, disallowance of fees and legal expenditure of .....

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f ₹ 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. In respect of book profit, the ld. CIT(A) deleted the addition. 5. Now, both the Revenue and the assessee have challenged the order. 6. The first ground of deletion of addition of ₹ 12 lacs made on account of disallowance out of fees and legal expenses. Ld. Sr. D.R., Shri Narendra Singh veheme .....

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mployees 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 company. On the contrary, ld. Counsel for the assessee submitted that the finding of the Assessing Officer is misplaced. Ld. Counsel reiterated the submissions as were made before the CIT(A). 7. We have heard the rival contentions and perused the material available on record. We find that the ld. CI .....

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oceedings 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, some of the employees referred herein above have worked for Appellant Company for which it has made payment of ₹ 1 lacs per month. In the present case, Assessing Officer has never denied that appellant has not used the services of employees and considering it, AO has allowed 50% of paymen .....

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nsidering 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 that the payments have been recently introduced. The agreement between 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. Further, the Assessing Officer observed that no supportin .....

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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 confirmed the finding of the ld. CIT(A). We find that the co-ordinate Bench in ITA No. 45/Ahd/2011 for A.Y. 2007-08 has confirmed the order of ld. CIT(A) in para 13 by observing as under: "13. We find that no specific mistake in the findings of the Ld.CIT(A) could be pointed out by the .....

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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 same. It is also observed that the amount of consideration paid was as per Memorandum of Understanding entered into by the assessee with the payee company. In view of the above facts and circumstances, we do not find any good reason to interfere with the order of the Ld.CIT(A), hence thi .....

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nst 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. Gujarat State Road Transport Corporation as under: "18. The Ld. DR filed before us copy of the order of Hon'ble Gujarat High Court in the case of CIT Vs. Gujarat State Road Transport Corporation (2014) 41 taxmann.com 100 (Guj.) and submitted that the Hon'ble High Co .....

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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 in nature need no separate adjudication. 10. In the result, appeal of the Revenue is partly allowed. 11. Now, we take up the assessee's C.O. No. 197/Ahd/2011 (arising out of ITA No.2120/Ahd/2011 - Revenue's appeal). 11 .....

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e 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 addition of ₹ 7,61,9087- made by him U/S.14A r.w. Rule 8D, deserves to be deleted. 3. The respondent craves leave to add, alter, amend and/or withdraw any ground or grounds either before or during the course .....

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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 submitted in statement of facts-cum-synopsis are as under: "1. The brief facts of the case giving rise to the present cross-objections are that the Assessing Officer made following three disallowances in his or .....

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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 the total income. For better appreciation of the legal position, the relevant parts of section 14A are reproduced below:- "Expenditure incurred in relation to income not includible in total income. 14 .....

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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 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" [Emphasis supplied] From perusal of the above, it can .....

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re 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 which the income derived is exempt from tax. In such circumstances, it is most respectfully submitted that there cannot be any presumption that the borrowings were made for the purpose of makin .....

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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 form part of the total income, in accordance with the prescribed method, arises if the AO is not satisfied with the correctness of the claim of the assessee in respect of the expenditure w .....

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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 claim of the assessee, that the legislature directs him to follow the method that may be prescribed." [Emphasis supplied] 3.1 From perusal of the aforesaid observations of the Hon. Mumbai .....

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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 constitutionally valid and the provisions of Rule 8D of the IT. Rules are not ultra-virus the provisions of Sec.14A and do not offend Article 14 of the Constitution; (ii) The provisions of Rule .....

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h 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 expenditure was incurred and consequently made a disallowance u/s 14A. This was partly upheld by the CIT (A). On further appeal by the assessee, the Tribunal deleted the disallowance by noting .....

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ure 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 be disallowed u/s 14A cannot be accepted; (iii) Disallowance u/s 14A requires a finding of incurring of expenditure. If it is found that for earning exempted income no expenditure has .....

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, 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 investment can be said to be established only where it is shown that interest free fund are not available with assessee - Held, yes - Whether since Commissioner(Appeals) had merely picked u .....

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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 above, and with regard to disallowance of interest expenditure, the appellant submits that appellant has got following interest-free funds available with it to cover investments made i .....

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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(1)(iii) of the Act. Apart from above, following decisions also support the case of assessee: (i) Torrent Financiers Vs. ACIT 73 TTJ 624, Ahmedabad; (ii) CIT Vs. Radico .....

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WED 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. Accordingly he disallowed interest amounting to ₹ 4.40 crores calculated at 12 per cent per annum for three months from January, 2000 to March, 2000. The Commi .....

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rise 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 INDIA PHARMACEUTICAL WORKS LTD. v. CIT [1997] 224 ITR 627 (SC) and WOOLCOMBERS OF INDIA LTD. v. CIT [1982] 134 ITR 219 (Cat) relied on." [Emphasis supplied] (b .....

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77; 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 Officer that the appellant has made investment in shares out of the huge interest-free funds available in the form of paid upshare capital a .....

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e 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, it cannot be said that investments in shares were made out of interest bearing funds. After hearing the parties, we decline to interfere w .....

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ubmitted 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 of the appellant relating to expenses of ₹ 1,00,000. Not only this, the Assessing Officer has not challenged the correctn .....

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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 Considering this, no disallowance of administrative expenses is justified. 7. As regards the Grounds of Appeal taken by the Dep .....

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e 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 any nexus between the expenditure disallowed and investment made from which the income denied is exempt from tax. Sec .....

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me 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 section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the li .....

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nditure 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 evident that making of disallowance by applying Rule 8-D of the Income Tax Rules, 1962 is not automatic. The AO has .....

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