TMI Blog2011 (7) TMI 1150X X X X Extracts X X X X X X X X Extracts X X X X ..... d income incurred by the assessee and once the facts are clear, no disallowance can be made by invoking rule. 8D. Neither the AO nor CIT(A) has recorded any finding that having regard to the account of the assessee, they are not satisfied with the correctness of the claim of expenditure made by assessee or the claim made by assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for the relevant assessment year. In the absence of any such finding, facts of the present case show that the investment in shares was made out of own capital employed and not from borrowed funds, no disallowance on account of interest expenditure can be made by invoking rule. 8D of the Rules. Accordingly, in the given facts and circumstances, we delete the addition - Decision against Assessee. Deduction u/s 80IA - The AO disallowed deduction under sec. 80IA after deducting proportionate head office expenses on turnover basis - CIT(A), confirmed such order HELD THAT:- We find that the issue is squarely covered in favour of assessee in assessee s own case for asst. yr. 2007-08, where it was held that It is also an undisputed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the IT Act, 1961, by applying r. 8D of the IT Rules, 1962, disregarding the computation of disallowance made by the assessee at ₹ 1,49,995 duly supported by the certificate obtained from its statutory auditors. 7.That, on the facts and in the circumstances of the case, the learned CIT(A) erred in sustaining the addition of ₹ 3,90,63,218 being the disallowance under s. 14A of the Act/r. 8D of the Rules to the net profit of the assessee company for the purpose of computation of its book profit under the provisions of s. 115JB of the IT Act, 1961. 3. The brief facts leading to the above issue are that the assessee company is engaged in the business of manufacture and sale of sugar, industrial alcohol, bio-compost fertilizers and generation of power in the form of steam and electricity. Its head office is at Calcutta but its factories, power undertakings, distillery undertaking etc. are located at various places in UP. The AO during the course of assessment proceedings noticed that the assessee has claimed exempt income of dividend at ₹ 1,08,72,574 and offered a sum of ₹ 1,49,995 as expenses attributable to such exempt income and disallowed from its claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure by a statutory auditor cannot override the estimation of expenditure as prescribed in IT Rules. In view of these facts and position of law, I hold that AO has rightly disallowed the expenditure of ₹ 3,90,63,218 consisting of interest of ₹ 3,38,47,524 and indirect expenditure of ₹ 52,15,694 to earn exempt income under s. 14A of the IT Act. Aggrieved, assessee came in appeal before Tribunal. 4. We have heard rival contentions and gone through facts and circumstances of the case. The first argument made by the learned counsel before us was that the assessee admittedly earned dividend income at ₹ 1,08,72,574 and claimed exemption under s. 34/35 of the Act. Learned counsel for the assessee stated that it has incurred expenditure to the sum of ₹ 1,49,995 as expenditure was relating to earning of exempt dividend income and this was disallowed suo motu by the assessee in view of certificate of its statutory auditors. Learned counsel for the assessee stated that there is no other expenditure except disallowed by assessee which is relatable to exempted income and the lower authorities i.e. neither AO nor CIT(A) has proved any nexus or expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d balance sheet as on 31st March, 2008 5 2,59,121.75 Average application of funds as per audited balance sheet as on 31st March, 2008 10 2,59,121.75 (1) Average net fixed assets - (Rs. 88,110.87 + ₹ 78,503.34 + ₹ 3,706.56 + ₹ 12,630.71) lacs = ₹ 1,82,951.48 lacs. Further, learned counsel also filed calculation sheet of opening application of funds and closing application of funds for the entire financial year 2007-08 relevant to this assessment year. This calculation sheet is being reproduced as it is : Balarampur Chini Mills Ltd. Asst. yr. 2008-09 Calculation sheet Sl. No. Particulars Calculation particulars Calculation workings (Rs in lacs) Amount (Rs in lacs) 1. Average owned capital employed (Op. share capital and reserves and surplus plus clause share capital and reserves and surplus)/2 (1,02,71,844 + 9,43.66.07)/2 98,542.26 2. Average rupee term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2008 and compared the same with the balance sheet for the year ending 31st March, 2007 and showed that the reserve and surplus as on 31st March, 2007 was at ₹ 94,366.07 (in lacs) and as against the same reserves and surplus (including share capital) becomes at ₹ 1,02,718.44 (in lacs). The learned counsel for the assessee also referred to loan funds and the position was stated as under : Loan funds 31-3-2008 31-3-2007 (a) Secured loans 1,42,900.22 1,09,934.06 (b) Unsecured loans 34,000.00 7,500.00 1,76,900.22 1,17,434.96 Learned counsel for the assessee also stated that even there is reduction in deferred tax liability from 31st March, 2007 at ₹ 13,419.91 (in lacs) to ₹ 12,483.90 (in lacs) as on 31st March, 2008. Learned counsel also stated that no loan amount is put in investment as is clear from the above position as the investments in the net fixed asset have increased in asst. yr. 2008-09 from 2007-08 as under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Rules, while assessing the total income of the assessee. The break-up of the said disallowance as per r. 8D made by the AO is as under : (i) Interest expenditure disallowed as per r. 8D 3,38,47,524 (ii) 0.5% of average value of investments disallowed under r. 8D 52,15,694 3,90,63,218 We find that the computation so made by assessee was certified by its statutory auditors and this fact has been recorded by AO as well as CIT(A). We find from the orders of the lower authorities that none of them had pointed out any defect in the correctness of the assessee s claim of expenditure amounting to ₹ 1,49,995 as certified by its auditors. We find from the above statement showing sources of funds and its utilization during financial year 2007-08 that assessee borrowed money primarily for its main business activities of manufacture and sale of sugar, industrial alcohol, fertilizer, generation and distribution of power etc. and no part of borrowed money had any direct link or nexus with the investments made by assessee company, which had yielded tax- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A B/C Where A = amount of expenditure by way of interest other than the amount of interest included in cl. (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii)an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. (3) For the purposes of this rule, the total assets shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. From r. 8D of the Rules, it is clear that the AO can invoke this rule in case he is not satisfied with regard to the account of assessee that the claim of expenditure made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to income which does not form part of the total income under the IT Act. The proposed amendment will take effect retrospectively from 1st April, 1962 and will accordingly, apply in relation to the asst. yr. 1962-63 and subsequent assessment years. From the above Memorandum Explaining the Provisions of Finance Bill, 2001 clearly suggests that the expenses incurred can be allowed only to the extent that they are relatable to earning of the taxable income and expenses relatable to exempted income are to be disallowed. 8. Here in the present case, there is no linkage or nexus between the funds borrowed by assessee and the impugned investments, hence, no interest expenditure can be disallowed by mechanically applying the provisions of r. 8D of the Rules. The assessee has explained that the share capital and reserves, that is its own funds, were utilised for the purpose of investment in shares for earning dividend income and this has not been negated by lower authorities i.e. neither CIT(A) nor AO. The assessee has explained each and every investment with sources of funds and its utilization as well as opening application of funds and closing application of funds as no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee s submissions supported by several judicial decisions holding that indirect expenses or expenses which have a remote connection should be ignored and only expenditure directly relatable to or have direct nexus with the industrial unit should be deducted. 6. That, while dismissing the assessee s submission that the head office expenses should not be disallowed, the learned CIT(A) erred in observing that the assessee had not identified the direct head office expenses or that it itself worked out the pro rata allocation of head office expenditure of ₹ 16.89 crores on the basis of turnover. 10. The AO disallowed deduction under s. 80-IA of the Act after deducting proportionate head office expenses on turnover basis. The CIT(A) also confirmed the action of AO exactly on same facts and same reasoning, as under : 4. I have gone through the assessment order and submissions of appellant. I have decided same issue with almost identical facts in my appellate order for asst. yr. 2007-08 in appeal No. 133/CC-XIX/CIT(A)-C-11/Kol/2009-10. The only addition in the argument of appellant in the current appeal is that the AO should have bifurcated the direct or indirect expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de order dt. 24th June, 2011 has decided the issue in favour of the assessee exactly on similar facts. Learned senior Departmental Representative however, conceded that the facts in the present year are exactly identical, hence Tribunal can decide the issue. We find that the Tribunal has decided the issue as under : 11. We have heard the rival submissions and perused the material available on record. On a careful consideration of the same we are of the view that the claim of the assessee has to be allowed. In order to arrive at the said conclusion we would first refer to the undisputed facts on record. 11.1 The undisputed facts on record are that the assessee made a claim under s. 80-IA/80-IB of the Act duly supported by the auditors report and Form No. 10CCB. It is also an undisputed fact that identical claims qua these undertakings in the very same manner and the very same set up have been allowed under s. 143(3) proceedings. 11.2 It is also an undisputed fact that the assessee following the earlier years constant practice has reduced from the profits of these undertakings the expenditure directly related to these undertakings. 11.3 It is seen that in the course of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Bench of the Tribunal in the case of M/s Tide Water Oil (I) Ltd. which on facts fully supports the case at hand as the Co-ordinate Bench has on the facts available before it has held that deduction under s. 80-IA allowed by the CIT(A) was to be restored by the Tribunal to the file of the AO in view of r. 46A violations giving directions that direct expenses had to be reduced from the Silvasa unit and since fresh evidence had been entertained by the CIT(A) without furnishing the same to the AO, the facts were required to be verified. Thus this direction of the Tribunal fully supports the case at hand as there can be no two opinions on the principle that direct expenses pertaining to the eligible units had necessarily to be reduced from the profits of the said units so as to arrive at the deduction claimed. In the second round it is seen that on record it was evident that head office had accounted for office expenditure of Silvasa unit as such reduction of the said direct expenses from the profit of Silvasa unit had to be done, this does not mandate that in a case where direct expenses have already been accounted for in the eligible units even then a proportion of head office expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ires that the profit of every unit had to be computed as if it were the only source of income of the assessee during the relevant previous years and such expenditure incurred by the head office to the extent it is relating to the business unit eligible for deduction under s. 80-IA/80-IB should be deducted while determining profit of the said unit as eligible deduction under s. 80-IA/80-IB. This principle has been followed by the Co-ordinate Bench in the first round as well as in the second round in the case of Tide Water. No material has been placed on record to show that the assessee in the year under consideration has not followed this principle. 11.5 Coming to the other judgments referred to before us, it is seen that the Hon ble apex Court in the case of Pandian Chemicals Ltd. v. CIT [2003] 183 CTR (SC) 99/[2003] 262 ITR 278 (SC) has dwelt at length on the wordings derived from and attributable to . Their Lordships in the case of Liberty India (supra) although in the context of duty drawback and DEPB incentives also had an occasion to hold that connotation of the words derived from is narrower in meaning as compared to that of the words attributable to by using the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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