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2015 (11) TMI 858

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..... 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 COURT] to 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 to section 36(1)(va) - Decided against assessee. Disallowance 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 .....

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..... 07/-. 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. 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 vehemently argued that ld. CIT(A) was not justified in deleting the addition. He submitted that the Assessing Officer had given finding on the basis of that payments have been recently introduced. The agreement 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 .....

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..... gement 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 supporting evidence has been placed on record. Service rendered by aforesaid employees of Dharnidhar Chemicals Pvt. Ltd. and proceeded to hold that the fees for services of the employees of the Dharnidhar Chemicals Pvt. Ltd. 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 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 Ld. DR. We find th .....

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..... 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 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). 11.1 The concised grounds raised in Cross Objection are as under: 1. In law and in the facts and circumstances of the respondent's case, the Ld. CIT(A) erred in confirming the disallowance u/s.14A read with Rule 8D for ₹ 7,61,9087-, when no such disallowance is called for. He 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 pronounceme .....

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..... n, the relevant parts of section 14A are reproduced below:- Expenditure incurred in relation to income not includible in total income. 14A.[(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.] [(2) The Assessing Officer shall determine the amount of expenditure 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 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 be inferred that section 14A is appl .....

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..... d 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 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 High Court, it would be seen that Sub-s. (2) of sec.14A does not ipso facto enable the AO to apply the method prescribed by the Rule 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 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 .....

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..... come no expenditure has been incurred, disallowance u/s 14A cannot stand; [Emphasis supplied] 2. Maruti Udhyog Limited Vs. DCIT 92 ITD 119 (Delhi ITAT) From the Head Notes: Section 14A, read with section 36(1)(iii) of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income - Assessment year 1999-2000 - 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 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 up sources on which interest was paid by assessee and had completely ignored other sources and further that interest free funds were available to assessee fo .....

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..... RROWED 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. 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 Commissioner (Appeals) found that the appellant had enough interest-free funds at its disposal for investment and accordingly deleted the addition of ₹ 4.40 cores made by the Assessing Officer and directed him to allow the deduction under section 36(1)(iii). The order of the Commissioner (Appeals) was upheld by the Tribunal. On appeal 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 fun .....

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..... interfere with the order of the Learned CIT (Appeals), which is confirmed. Hence, this ground of Revenue is dismissed. [Emphasis supplied] 5.2 Apart from above, Assessee submits that as against interest expenditure of ₹ 2,25,918, it has earned interest income of ₹ 10,65,299 and as interest income being in excess of expenditure, no disallowance under Section 14A 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 of the appellant relating to expenses of ₹ 1,00,000. Not only this, the Assessing Officer has not challenged the correctness of the said claim with facts figures and the Ld.CIT(A) has also considered the said expenditure of ₹ 1,00,000 and deleted to the above extent, out of the addition of .....

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..... urposes 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 liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.] [(2) The Assessing Officer shall determine the amount of expenditure 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 assessee claims that no expenditure has been incurred by him in .....

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