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Hindusthan Paper Corporation Ltd. Versus Deputy Commissioner of Income-Tax, Circle-5, Kolkata

Disallowance u/s. 14A read with Rule 8D - Held that:- There is no link with expenditure for earning of dividend income incurred by the assessee and once the facts are clear, no disallowance can be made by invoking rule 8D of the Rules. 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 re .....

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/Kol/2012 - Dated:- 22-8-2012 - Mahavir Singh (Judicial Member) And C. D. Rao (Accountant Member) For the Petitioner: D. S. Damle For the Respondent: L. K. S. Dahiya ORDER Mahavir Singh (Judicial Member) This appeal by assessee is arising out of order of CIT(A)-VI, Kolkata in Appeal No. 129/CIT(A)-VI/Cir-5/10-11/Kol dated 30.09.2011. Assessment was framed by DCIT, Circle-5, Kolkata, u/s. 143(3) & 115WE(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) for AY 2008-09 vide h .....

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law, the CIT(A) erred in upholding the disallowance of ₹ 1,08,65,937/- u/s. 14A read with Rule 8D under the I. T. Act, 1961. 2. For that on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to correctly appreciate the details and explanations furnished by the assessee in support of the claim that no expenditure had been incurred in relation to earning exempt income in terms of Section 14A of the Act and without assigning cogent reasons upheld the disallowance .....

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assessee that it has invested huge amount of capital in unquoted shares specially shares of subsidiary companies and earned exempted income at ₹ 12.38 cr. Accordingly, AO invoked the provisions of section 14A of the Act r.w.s. Rule 8D of the Rules and made following disallowances: The disallowance u/s. 14A as per Rule 8D is as under: (i) Rule 8D(2)(ii) - axb/c Here, a = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the pr .....

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An amount = ½% of 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. ½% of ₹ 205,19,30,000/- = ₹ 1,02,59,650/- Therefore, total of ₹ 1,08,65,937/- is considered and disallowed as expenditure related to earning of exempt income u/s. 14A, as per method provided under Rule 8D. Aggrieved, assesee preferred .....

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borrowed funds were not utilised for investment in shares from where exempted income was earned. The CIT(A) finally held that the transactions includes investment yielding exempted income, which are integral part of the business of the assessee. Hence, he confirmed the addition made by AO. Aggrieved, now assessee is in appeal before us. 4. Before us Ld. Counsel for the assessee Shri D. S. Damle narrated the facts that the assessee during the year earned dividend income of ₹ 12.38 cr. from .....

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sidiary. According to him, the newsprint division was converted into its wholly owned subsidary at the instance of Govt. of India and it functioned under the administrative control of Ministry of Industries, who required the control operations of these two subsidiary companies. According to Ld. Counsel, the Govt. exercises control over its subsidiaries through the agies of the assessee. He narrated that even financial assistance and funding provided by the Central Govt is routed through the asse .....

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fically wherein it is categorically mentioned that out of the proceeds investment in HNL of ₹ 718.80 cr. was made, the assessee also invested a sum of ₹ 60 cr. out of its internal accruals. The relevant para 2 reads as under: 2. The project cost of ₹ 718.8 crore will be met by the Company through a term loan of ₹ 500.00 crore from Banks and Financial Institutions and the balance amount of ₹ 218.8 crore out of linternal accruals of HPC (Rs.60.00 crore) and HNL (Rs.15 .....

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mp;L Account drawn as on 31.03.2008 which shows that the profit after tax, which assessee earned during the year at ₹ 91.83 cr. and there is sufficient profit available with the assessee to cover up the cost of fresh investment of ₹ 17.46 cr. He also drew our attention to Schedule 1A of the annual financial statement for the year year ending 31st March, 2008 which shows that during FY 2007-08 the Govt. of india infused capital fund of ₹ 54.60 cr. in the assessee company and thi .....

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estment made during the year and subsidiary company HNL from where it earned dividend of ₹ 12.38 cr. He also narrated that the cost of investment ₹ 21,392.30 lacs whereas assessee s own funds available are at ₹ 87981.12 lacs. In such facts, Ld. Counsel stated that there is no need for AO to make disallowance under Rule 8D(2) of the Rules as there was no nexus between borrowed funds and acquisition of investment which gives exempted income to the assessee. According to Ld. Couns .....

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earlier years not in this year. He stated that for collecting dividend warrant the assessee has not to incur any expenditure reason being the dividend warrrant is directly being credited to the bank of the assessee company. Even in collecting there is no expenditure incurred by assessee. In view of these facts, the Ld. Counsel for the assessee stated that the disallowance of administrative expenses however establishing any proximate cost or nexus of the same with the exempted income is without a .....

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nd there is no distinction of own funds or borrowed funds and assessee cannot take the plea that at that particular time it had its own free funds because the borrowed funds were utilised for the purpose of investment. According to him, all the transactions including investments yielding exempted income, are integral part of the business of the assessee. Ld. CIT, DR drew our attention to the provisions of section 14A of the Act r.w.s. 8D and stated that Rule 8D applies to the relevant assessment .....

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ering into crore of rupees and that also ₹ 214 cr. in acquiring shares of its subsidiaries which requires a lot of advisory consultation including payment of fees, technical deliberations, strategic investment, decision by the management which has a cost. Ld. CIT, DR also relied on the decision of Hon ble Calcutta High Court in the case of Dhanuka & Sons Vs. CIT (2011) 339 ITR 319 (Cal). He also relied on 203 Taxman 639, He also relied on the decision of Hon ble Calcutta High Court in .....

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e 8D of the Rules cannot be invoked. He drew our attention to Rule 8D(1) of the Rules wherein the AO s satisfaction in respect to correctness of the claim of the assessee in relation to income which does not form part of the total income is must. Ld. Counsel stated that in the present case before us neither the AO nor the CIT(A) has tried to establish any nexus of borrowed funds with the investment bearing exempted income. In such case, no disallowance can be made. Ld. Counsel for the assessee r .....

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paper book page 5 are as under: (Rs. In Lakh) SCHEDULE : 6 INVESTMENTS - AT COST As at 31.03.2008 As at 31.03.2007 Long Term Investments : (i) Nagaland Pulp & Paper Company Limited 11,39,231 Equity shares of ₹ 1000/- each 11,392.31 11,392.31 (ii) Hindustan Newsprint Limited9,99,99,900 Equity Shares of ₹ 10/- each 9,999.99 8,253.99 Total 21,392.30 19,646.30 It means that during the year the assessee has made investment in acquiring shares of HNL and total investment during the ye .....

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onth of September, 2007, it means that the fresh investment in the shape of acquiring of shares of HNL by the assessee was out of fresh capital infused by Govt. of India. As per the argument of Ld. Counsel and going through the P&L Account for the year ended 31.03.2008, we find that the profit after tax was at ₹ 91.83 cr. which is also available to the assessee for making investment in purchase of shares and subsidiary HNL. These facts clearly establishes that the fresh investment in H .....

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ssessee, but in any case, the AO has to prove the nexus between the borrowed funds and investments made by assessee for earning dividend income. Further, as regards to disallowance of administrative expenses, the assessee s contention was that there is only one dividend and which has been sent through ECS directly in the assessee s bank account by HNL. We find that the facts are clear that the dividend warrant was only one and HNL sent the dividend through banking channel i.e. through ECS and it .....

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by the assessee in relation to income which does not form part of the total income under this Act.] 38[(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 relati .....

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claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). 8. We find from the above factual and legal position, that we have already taken a view exactly on similar facts in the case of M/s. Balarampur Chini Mi .....

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