TMI Blog2015 (1) TMI 1239X X X X Extracts X X X X X X X X Extracts X X X X ..... iven by the Government for a specific purpose and were to be utilized for that purpose only and the assessee corporation being only a trustee of these funds, the interest income of ₹ 13,75,418/- on such funds ought not to have been assessed as the income of the assessee corporation. 1.2. Because the funds being made available by the Government of U.P. only for disbursement to the employees of UPTRON India Limited under the Voluntary Retirement Scheme (VRS) and the Government having decided that the interest on such funds could not be appropriated by the assessee company towards its income, the learned CIT(Appeals) erred in upholding the action of the learned Assessing Officer of treating such interest of ₹ 13,75,418/- as income of the assessee company. 1.3. Because, in any case, the deposit account having been seized/ attached by the Provident Fund Commissioner and the assessee company having no control over these funds, the interest on such funds of ₹ 13,75,418/- ought not to have been treated as income of the assessee company. 2.1. Because the learned 1st appellate authority erred in confirming the addition made by the Assessing Officer u/s 14A of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to re-examine the issue afresh in the light of the order of the State Government dated 3.4.1980. Therefore, in this appeal also, this matter should go back to the Assessing Officer, as while dealing with the issue, the ld. CIT(A) has followed his order for assessment year 2005-06. 3. The ld. D.R. did not dispute this factual aspect of the matter. 4. Having carefully examined the orders of the lower authorities in the light of the rival submissions and the order of the Tribunal in the assessee s own case for assessment year 2005-06, we find that while adjudicating the impugned issue, the ld. CIT(A) has followed his earlier order for assessment year 2005-06 and rejected the ground of the assessee. During assessment year 2005-06, the Tribunal has examined this issue and has restored the matter to the file of the Assessing Officer with a direction to re-adjudicate the issue in the light of the order of the State Government dated 3.4.1980. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:- 6. Having heard the rival submissions and from a careful perusal of the record, we find that before the lower authorities the assessee has taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of computation furnished by the assessee. It was further contended that the claim of disallowance under section 14A of the Act cannot exceed the income. In support of this contention, the ld. counsel for the assessee has placed reliance upon the decision of the Chandigarh Bench of the Tribunal in the case of ACIT vs. Punjab State Coop Marketing Fed. Ltd. in I.T.A. No. 548/CHD/2011, dated 30.9.2011. The ld. CIT(A) re-examined the claim of the assessee, but was not convinced with it and he confirmed the disallowance. 8. Now the assessee has preferred an appeal before the Tribunal with the submission that whatever investment was made, it was made in the 100% owned subsidiary concerns of the assessee. In support of the contention, the ld. counsel for the assessee has invited our attention to Schedule E containing details of investment appearing at page 31 of the compilation of the assessee, according to which investments were made in Uptron India Limited; Uptron Powertronics Ltd. and Uplease Financial Services Ltd. The total investments made in these companies in the impugned assessment year was ₹ 60,90,10,559/-. Since the investment was in 100% owned subsidiaries, no disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y companies and the Tribunal has finally concluded that sub-section (2) of section 14A of the Act does not ifso facto empower the Assessing Officer to apply the method prescribed by Rules straightaway without considering whether the claim made by the assessee is correct. 11. With regard to the investment in subsidiary companies, the Tribunal has also held that in the absence of any finding that any expenditure has been incurred for earning exempted income, the disallowance made by the Assessing Officer is not justified. The relevant observations of the Tribunal in the case of M/s JM Financial Limited vs. Addl. CIT (supra) are extracted hereunder for the sake of reference:- 7. Having considered the rival submissions as well as relevant material on record, we note that so far as applicability of Rule 8D is concerned, there is no quarrel on this point that for the A.Y. under consideration Rule 8D is applicable. Further for the A.Y. 2008-09, the Tribunal held in para 15 as under:- We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. Therefore, prima facie the assessee has made out a case to show that no expenditure has been incurred for maintaining these long term investment in subsidiary companies. The Assessing Officer has not brought out any contrary fact or material to show that the assessee has incurred any expenditure for maintaining these investments or portfolio of these investments. In the case of Godrej Boyce Mfg. Co. Ltd. (supra) Hon ble Jurisdictional High Court while dealing with the issue of disallowance u/s 14A and application of Rule 8D has recorded the principles as laid down by the Hon ble Supreme Court in the case of WalfortShare and Stock Brokers P. Ltd. [2010] (326 ITR 1,) in para 31 as under:- (a) The mandate of section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income. (b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) The principle of apportionment of expenses is widened by section 14A to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of the expression prescribed in section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer 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 Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules 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 Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowed the decision of special bench of Tribunal while deciding the issue. Therefore, we do agree with the finding of the Tribunal on this point. Further since the assessee has raised the new plea in the year under consideration that no expenditure had been incurred by the assessee for earning the exempt income or for the investment in question. We find merit and substance in the contention of the assessee on this point because the investment has been made by the assessee in the group concern and not in the shares of any un-related party. Therefore, the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. Further the investment were made long back and not in the year under consideration. Therefore, in view of the fact that the investment are in the group concern we do not find any reason to believe that the assessee would have incurred any administrative expenses in holding these investments. The Assessing Officer has not brought on record any material to show that the assessee has incurred any expenditure in relation to the income which does not form part of the total income. Section 14A has within it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r:- '6.3 We have carefully considered the submissions and perused the records. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that only interest of ₹ 2,96,731/- was paid on funds utilized for making investments on which exempted income was receivable. Further, Ld. Commissioner of Income Tax (Appeals) has observed that in respect of investment of ₹ 6,07,775,000/- made in subsidiary companies as per documents produced before him, they are attributable to commercial expediency, because as per submission made by the assessee, it had to form Special Purpose Vehicles (SPY) in order to obtain contracts from the NHAI and the SPVs so formed engaged the assessee company as contract to execute the works awarded to them (i.e. SPVs) by the NHAI. In its profit and loss account for the year, the assessee has shown the turnover from execution of these contracts and therefore no expense and interest attributable to the investments made by the appellant in the PSVs can be disallowed u/s 14A LW. Rule 8D because it cannot be termed as expense/interest incurred for earning exempted income. Under the circumstances, Ld. Commissioner of Income Tax (Appeals) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act which is to the effect that 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 expenditure incurred in relation to the income which does not form part of the total income. Therefore, the invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is neither automatic and nor is triggered merely because assessee has earned an exempt income. The invoking of rule 8D of the Rules is permissible only when the Assessing Officer records the satisfaction in regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. In other words, section 14A(2) of the Act envisaged a condition precedent for invoking rule 8D of the Rules and computing disallowance thereof only if the Assessing Officer records that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure, having regard to the account of the assessee. In this context, it would be appropriate to refer to the following observations of the Hon ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. When a statute postulates the satisfaction of the Assessing Officer Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated . (M. A. Rasheed v. State of Kerala [1974] AIR 1974 SC 2249*). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the present case. In this case, assessee has earned by way of dividends a sum of ₹ 5,45,58,685/-, which is exempt u/s 10(38) of the Act and thus the same does not form part of the total income under the Act. In the computation of income, assessee having regard to section 14A of the Act, determined the amount of expenditure incurred in relation to such income at ₹ 5,00,000/-. The Assessing Officer has not found it acceptable and has instead determined the amount of expenditure in relation to such income by applying rule 8D of the Rules. Ostensibly, the action of the Assessing Officer cannot be upheld unless he has complied with the pre-requisite of invoking rule 8D of the Rules, namely, recording of an objective satisfaction with regard to the claim of the assessee that an expenditure of ₹ 5,00,000/- has been incurred in relation to the exempt income, is incorrect. In order to examine the aforesaid compliance with the pre-condition, we have perused the para 4 to 4.2 of the assessment order and find that no reasons have been advanced as to why the disallowance determined by the assessee was found to be incorrect, having regard to the accounts of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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