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2016 (1) TMI 133 - ITAT CHENNAI

2016 (1) TMI 133 - ITAT CHENNAI - TMI - Disallowance u/s.14A of the Act by invoking Rule 8D - Held that:- Though Rule 8D of Income Tax Rules 1962 is not applicable, and provisions of Sec.14A of the Act is only applicable for the assessment year 2008-2009 as the Rule was introduced w.e.f. 24.03.2008. The assessee might have incurred certain administrative expenditure to earn this income. Thus we are inclined to direct the Assessing Officer to disallow 2% of exempt income towards expenditure incur .....

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ved from export business hence not eligible for deduction u/s.80HHC

Disallowance u/s 14A - Held that:- Disallowance u/s.14A r.w. Rule 8D should not exceed the exempt income. The Mumbai Bench in the case of M/s. Daga Global Chemicals Pvt. Ltd. [2015 (1) TMI 1204 - ITAT MUMBAI] sustained the disallowance on applicability of provisions of sec.14A r.w. Rule 8D. However, the alternative claim of the assessee was that disallowance if at all should be made, it should be restricted to exempt .....

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f the Tribunal in the case of London Star Diamond Company (I) P. Ltd vs. DCIT [2013 (11) TMI 424 - ITAT MUMBAI] wherein it was observed that loss arising from cancellation of premature is allowed as business loss. Being so, the assessee cannot have any grievance on this issue as Commissioner of Income Tax (Appeals) has given direction to follow the Tribunal order. Further, we make it clear that loss arising out of derivative transaction in excess of export turnover has to be considered as specul .....

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nai, for the above assessment years. 2. First we take up ITA No.1436/Mds/2014 for adjudication. The first ground raised by the assessee in this appeal is that order passed by the lower authorities is opposed to the principles of equity, natural justice and fair play. This ground was not pressed by the ld. Authorised Representative at the time of hearing. Accordingly, this ground is dismissed as not pressed. 3. The next ground in ITA No.1436/Mds/2014 raised by the assessee is with regard to disal .....

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ents. The borrowed funds are in the nature of export packing credit, export bill discounting and terms loans which were meant for specific purpose and were used for that purpose only. The disallowance at the rate of 5% of average of investment is on higher side. The Assessing Officer has not brought out any specific reason as per the mandate of Sec. 14A(2) before invoking Rule 8D. He relied on the order of the Tribunal in the case of TVS Investments Ltd vs. ACIT in ITA No.1609/Mds/2012, dated 29 .....

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m P. Bharucha vs. ACIT in ITA No.3859/Mum/2011. e. CIT vs. Hotel Savera 23 ITR 795 Mad. Without prejudice to the above, he submitted that, if at all, the expenses can be reasonably estimated as being attributable to management of investment portfolios, salary and associated administrative expenses, the expenses may be restricted to 2% of the dividend income earned by the assessee in the current year. 5. On the other hand, the ld. Departmental Representative relied on the orders of the lower auth .....

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on 15.10.2012, we are inclined to direct the Assessing Officer to disallow 2% of exempt income towards expenditure incurred to earn exempt income. This ground of the appeal of the assessee is partly allowed. 7. The next ground raised by the assessee in this appeal is with regard to exclusion of interest on the margin money deposited with the bank while computing the deduction u/s.10B of the Act. 8. The ld. Authorised Representative contested the said disallowance and submitted that the assessee .....

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ules P. Ltd 247 CTR 372, the assessee has claimed that if the interest income is excluded from the computation u/s.10B and treated as income from other sources, the corresponding expenditure for earning such interest will have to be excluded as per section 57(iii) of the Act. 9. On the other hand, the ld. Departmental Representative relied on the orders of the lower authorities. 10. We have heard both the sides and perused the material on record. Similar issue was considered by Madras High Court .....

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the Act. Since, the interest is consequential and mandatory in nature, the same to be considered by Assessing Officer while passing consequential order. With these observations, the appeal of the assessee is dismissed. 12. In the result, the appeal of the assessee in ITA No.1436/Mds/2014 is partly allowed. 13. Now, we take up ITA No.1643/Mds/2014 and ITA No.910/Mds/2015 for adjudication:- The first common ground raised in these two appeals are with regard to violation of principles of natural ju .....

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rred in relation to such income which does not form part of the total income. The Assessing Officer has not accepted the contention of the assessee counsel stating that assessee has incurred an amount of F10,11,58,000/- as interest on its borrowed capital during the year. Though the assessee claimed that such borrowed funds were not utilized for making investment, it could not clearly establish the same. Funds for a company came in a common kitty and it comprises of borrowed funds, share capital .....

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tments. Hence, a portion of this managerial remuneration and Directors remuneration definitely be attributable towards earning such exempt income and to further to determine the expenses attributable to earning such exempt income, the Finance Act, 2006 had brought in the provisions of Sec.14A(2) which requires the Assessing Officer to determine the expenses already relating to an exempt income in accordance with Rule 8D. The Assessing Officer placed reliance on the decision of the Bombay High Co .....

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essee to explain the expenditure relatable to exempt income. On being not satisfied with the explanation, the AO had made the disallowance by invoking provisions of s.14A r.w. Rule 8D. The AO has noticed that the assessee has received dividend income but not disallowed any expenditure relatable to earning of such income even though it has debited several expenses in earning income during the year. The AO is of the opinion that some expenditure, direct or indirect, must have been incurred and suc .....

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aims that it has not incurred any expenditure in earning exempt income. With regard to satisfaction/reasoning of the AO in rejecting the claim of the assessee, the ITAT Mumbai in the case of Auchtel Products v. ACIT in ITA No.3183/Mum/2011 dated 30.4.2012 held that satisfaction of AO is the sine qua non for disallowance u/s 14A. However, this satisfaction should be with due regard to the "accounts". The provisions of s.14A(2) states that " .... if the Assessing Officer, having reg .....

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ncome Tax (Appeals) submits that reading of this dictum shows that the first part of the sentence bestows the responsibility on the AO to give a finding that there is an expenditure incurred relatable to exempt income. So far as the second part is concerned, it is incumbent on the part of the assessee to give a similar finding that there is no such expenditure which has been incurred for earning exempt income. Of course, both findings should be "having regard to the accounts". When the .....

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ot;Even in the absence of sub-section (2) and (3) of section 14A and of Rule 8D, the AO was not precluded from making apportionment. Such an apportionment would have to be made in order to give effect to the substantive provisions of sub-sec (1) of s. 14A which provides that no deduction would be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. Consequently, de hors the provisions of sub-sec (2) and (3) of Sec.14A and Ru .....

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hat it has not incurred any expenditure for earning exempt income, therefore invoking of s.14A is not correct, is not acceptable. Therefore, when the AO was not satisfied with the correctness of the claim of the assessee in the absence of detailed accounts, we cannot find fault with the AO when he makes disallowance by invoking provisions of s.14A. In my opinion this is a sufficient reason for AO's dissatisfaction and invoking of the provisions. Before me also, the assessee has not produced .....

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the judgment of the Punjab and Haryana High Court in Haryana Land Reclamation & Development Corpn. v. CIT (2008) 302 ITR 218, two things are noticeable, viz., first, the onus to prove that the expenditure was incurred in the taxable business operations and not the exempt income is upon the Assessee and secondly……." 16.4 With regard to another line of argument that the income disallowed is more than the dividend income earned, it is decided in the case of Cheminvest Ltd (1 .....

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1 of 2013 dated 2.12.2013 wherein it was held that The mere fact of the availability of 46 crores and odd by itself cannot be taken as furnishing of good explanation as regards the investment. Even with the Reserves & Surplus figure quoted in the balance sheet, we feel that the assessee has the responsibility of explaining the interest expenditure of 4.09 crores The decision of Bombay High Court in the case of Reliance Utilities and Power Ltd (213 ITR 340), which states that if interest-free .....

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and not invested in the avenues which have earned exempt income. Even this argument also has to be taken with a pinch of salt since there is a possibility of parking the idle funds for temporary period in exempt income earning avenues and recouped with the other surpluses of the year during the course of time. It is astonishing to note that the appellant is keen to keep record of the expenses relatable to taxable income whereas it is not so keen to keep the track of the expenditure relatable to .....

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ce (supra). Accordingly, the Commissioner of Income Tax (Appeals) confirmed the order of the Assessing Officer. Against this, the assessee is in appeal before us. 17. We have heard both the sides, perused the written submissions filed by the assessee and well as the decisions relied by the assessee. The main contention of the assessee s counsel is that the assessee has not incurred any expenditure for earning exempted income and the assessee has not used any interest bearing funds for investment .....

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of 2015 dated 25.2.2015 is having bearing on this issue, wherein it was observed as under: 6. Heard both the parties. On a perusal of the order of Mumbai Bench of the Tribunal in the case of M/s. Daga Global Chemicals Pvt. Ltd. (supra), we find that an identical issue has been decided by the Tribunal holding that disallowance under section 14A read with rule 8D cannot exceed the exempt income. While holding so, the Tribunal observed as under:- 2. At the time of hearing, Dr. K.Shivaram along with .....

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d. Commissioner of Income tax (Appeals) by contending that a well reasoned order has been passed by the ld. First Appellate Authority as apportionment of expenditure for earning the dividend income was done as per the provisions of the Act. It was pleaded that section 14A r.w. Rule 8D of the Rules is clearly applicable to the facts of the present appeal. 2.2. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is a lim .....

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al, before the ld. Commissioner of Income tax (Appeals) broadly the stand taken in the assessment order was affirmed against which the assessee is in further appeal before this Tribunal. The totality of facts clearly indicates, as claimed by the assessee that no borrowed funds were utilized for earning the exempt income by the assessee and further the dividend were directly credited in the bank account of the assessee and no expenditure was claimed. What it may be, we find that the assessee only .....

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uld be made that can be restricted to ₹ 1,485/- which were claimed as demat charges. Disallowance u/s 14A r.w. Rule 8D cannot exceed the exempt income. In view of this fact, we find merit in the claim of the assessee. The appeal of the assessee is therefore, allowed. Following the above decision of the Mumbai Bench of the Tribunal, we are of the opinion that disallowance u/s.14A r.w. Rule 8D should not exceed the exempt income. The Mumbai Bench in its order sustained the disallowance on ap .....

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to treating the loss on account of cancellation of forward contracts in forex derivatives as business loss and not as speculation loss. 19. The facts of the issue are that the disallowance of claim of loss of F69,26,01,324/- on account of cancellation of forward contracts in forex derivatives treating it as a speculation loss. The assessee had claimed the said loss as against the business income. The AO after analyzing the assessee's transactions in the light of the definition given in Sec. .....

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e entire amount claimed by the assessee However, the AO has allowed the same to be carried forward for set off against any future speculative income. Further, the AO has observed that as per the information given by the assessee the contracts were not settled by actual delivery but by cancellation or premature closure by paying or receiving the difference in amount between the rate at which the contract has been entered and the prevailing exchange rate on the date of cancellation of the settleme .....

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nufacture and export of garments and hence allowable as business expenditure. This issue has engaged the attention of various Courts for quite sometime. The Supreme Court in the case of Woodward Governor India 312 ITR 254 (SC) held that the loss in foreign exchange, if any, as at the end of the year would be deductible u/s 37 by valuing the outstanding liability at the rate marked to market as on date of closing of accounts, and the method of accounting that has been regularly followed would hav .....

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r capital assets. The decision so rendered in Woodward Governor India (supra) was applied and the law was reiterated in ONGC vs CIT, 322 ITR 180 (SC) reversing the decision of the Uttarakhand High Court in the same case reported in 301 ITR 415 (Uttarakhand), which had treated the exchange loss both relating to current and capital account as a contingent liability. Supreme Court in CIT v. Maruti Udyog, 320 ITR 729 (SC) decided that depreciation on cost enhanced by capitalization of foreign exchan .....

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dging has also been recognized by various decisions, more so, when they are fully covered by the export invoices and as per the regulations of RBI and FEMA no business man can ordinarily engage himself in speculation activity. However, the present issue in question is whether the loss on account of premature closure of the forward contracts can be allowed as business loss. This specific question has been answered by the ITAT Mumbai in the case of London Star Diamond Company (I) P Ltd v DCIT in I .....

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n. While setting aside the order of the AO in the above referred case, the ITAT has directed the AO to disallow the loss in the absence of specific explanation as to why the forward contracts were cancelled prematurely. In the above referred case, the ITAT has allowed one segment of forward contracts which were closed three days before the due date and the explanation given by the assessee as week-end days was accepted. In another segment of forward contracts which were cancelled prematurely, th .....

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