TMI Blog2012 (12) TMI 1036X X X X Extracts X X X X X X X X Extracts X X X X ..... roduction of Section 14A, it was possible to apportion the expenditure between taxable income and exempted income. The perusal of the assessment order shows as observed earlier, no where before the Assessing Officer or the ld. CIT(A), the assessee has made a specific mention to show which particular funds were borrowed for which particular requirement and in the absence of such specific utilization Rule 8D, would be applicable. Perusal of the assessment order shows that disallowance u/s 14A has been worked out on the basis of Rule 8D which is as observed earlier applicable in case of the assessee. Therefore, we set aside the order of the ld. CIT(A) and restore that of the Assessing Officer. - ITA No. 1241/Chd/2011 And 36/Chd/2012 - - - Dated:- 28-12-2012 - SHRI T.R. SOOD, A.M AND Ms. SUSHMA CHOWLA, JM For the Appellant: Shri Sunil Kumar Mukhi For the Respondent: Shri Akhilesh Gupta. O R D E R PER T.R.SOOD, A.M These appeals are directed against the orders passed by the ld. CIT(A)-II, Ludhiana dated 1.11.2011. These are cross appeals raising common issues, therefore, both the appeals were heard together and are being disposed off by this common ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 15,00,000/- 4 M/s Devbhumi Spinning Weaving Mills ₹ 20,00,000/- It was further noticed that the assessee had borrowed funds and claimed interest therefore, the Assessing Officer after relying on the decision of Hon'ble Punjab Haryana High Court in case of CIT V. Abhishek Industries, 286 ITR 1 (PH), disallowed 12% interest which was worked out as under: Name Amount of loan No. of days Disallowance of interest @ 12% Shri Suresh Kumar 3,00,000/- 30 2,959/- M/s Panthur Farms Pvt Ltd 2,50,000/- 365 30,000/- M/s Balwindra Tools Pvt Ltd 15,00,000/- 365 1,80,000/- M/s Devbhumi Spinning Weaving Mills 20,00,000/- 365 2,40,000/- Total disallowance 4,52,959/- 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance was justified. In respect of advance to M/s Balwindra Tools Pvt Ltd, he submitted that iqrarnama for purchase of godown was filed before the ld. CIT(A) for the first time during appellate proceedings and the ld. CIT(A) should not have admitted the same without giving opportunity to the Assessing Officer to examine the same. 9 We have considered the rival submissions carefully and find that as far as the advance to M/s Devbhumi Spinning Weaving Mills is concerned, no purpose for the same was given before the Assessing Officer or the ld. CIT(A). Though before us, it was stated that the same was for the purpose of purchase of property but no evidence was filed before us, therefore, in the absence of any evidence it has to be concluded that money has been diverted for non business purpose. Since the assessee has admittedly borrowed huge amounts on interest, the proportionate interest has to be disallowed in respect of the advances made to M/s Devbhumi Spinning Weaving Mills in view of the decision of Hon'ble Punjab Haryana High Court in case of CIT V. Abhishek Industries (supra). Accordingly we confirm the disallowance in respect of interest relating to advances ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of CIT V. Wallfort Share and Stock Brokers Pvt Ltd. cited in (2009) 310 ITR 421 (Bom). The Assessing Officer after examining the submissions considered the provisions of section 14A. He also considered the Memorandum explaining the provisions in the Finance Act, 2001 as well as Circular No. 14. According to the Assessing Officer in view of these provisions the expenditure related to exempt income, could not be allowed. Accordingly he invoked the Rule 8D and worked out the disallowance vide para 6.13 which is as under: Accordingly disallowance u/r 8D is computed as under: (i) The amount of expenditure directly relating to income which does not form part of total income. (ii) Interest during the previous year which is not directly attributable to any particular income or receipt: A= amount of expenditure by way of interest other than the amount of interest included in cl. (i) incurred during the previous year = 21346266 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) = 21874 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd therefore, that part of the capital cannot be considered for calculating disallowance u/s 14A. In this regard reliance was placed on the decision of Hon'ble Punjab Haryana High Court in case of CIT V. Winsom Textile, 319 ITR 204. The calculation was furnished to show that investment was made out of share capital and free reserves as under: 31.3.2008 Rs. In lakhs Share capital 78.36 Reserves and Surpluses 130.82 Own funds 209.18 Working capital borrowings 1779.62 Current assets 2243.45 Amount invested in excess of loan 463.83 Term loan borrowings 253.31 Fixed Assets 451.82 Amount invested in excess of loan 198.51 Amount invested in Chadha Motors 255.96 Finally relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d only to the extent they are relatable to the taxable income. Since investment in partnership firm is clearly taxable, expenditure so incurred against the same cannot be disallowed. 15 He also submitted that in any case the assessee has made investment out of share capital and reserves available with the assessee and not out of borrowed funds and therefore, the provisions of Section 14A were not applicable. For this he relied on the decision of Hon'ble Punjab Haryana High Court in case of Hero Cycles (Supra) and CIT V. Winsome Textile Inds Ltd, (supra). He also referred to the calculation of surplus funds which was given before the ld. CIT(A). However, on a specific query by the Bench it was admitted that during the year no separate account for surplus funds was being maintained and it was a case of mix funds. 16 On the other hand, the ld. D.R. for the Revenue strongly supported the order of the Assessing Officer. He also submitted that the income charged in the hands of the partnership firm has to be treated as exempt income in the hands of the partners and in this regard he relied on the decision of Hon'ble Bombay Bench of the Tribunal in case of Dharmasingh M. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purposes of IT Act, 1961. here was a judicial opinion that on distribution or division or allotment of assets to partners by the on dissolution or otherwise there resulted no gain exigible to tax, however, by incorporating s. -45(2), 45(3) and 45(4), the legislature has declared its intention in clear terms that partners and the firm are two independent entities not only for the purposes of assessment but also for the purpose of determining the charge of income-tax on the transactions entered into between them. Similarly, from asst. yr. 1993-94 partnership firms have been given a corporate personality in a limited sense by making necessary amendments in the provisions of ss. 10(2A), 28(v), 40(b) and relevant procedural sections which conclusively prove that partnership firm as such is independent from its partners as far as provisions of IT Act, 1961 are concerned. Specific provisions mentioned hereinabove read with Circular No. 636, dt. 31st Aug., 1992 go to show that a firm is to be taxed as separate entity and the gross total income of the firm is to be determined in the normal way under different heads as in the case of any taxable entity, hence, any expenditure which h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in law, the Hon'ble Income-tax Appellate Tribunal was justified in holding that the order of the jurisdictional High Court in the case of CIT V. Abhishek Industries Ltd. reported in (2006) 286 ITR 1 (PH); 156 Taxman 257 (PH) are not applicable in this case and the disallowance made by the Assessing Officer u/s 14A of the Income-tax Act is not as per law. The assessee was engaged in the manufacturing and sale of cotton yarn and had made certain investments. The Assessing Officer disallowed interest on investment in shares u/s 14A because dividend income was exempt. The ld. CIT(A) deleted the disallowance by observing that the assessee had made investment using its own funds and no interest was incurred. The Tribunal confirmed the findings of the ld. CIT(A). Before the Hon'ble High Court the contention was raised that even if the assessee made investment out of its own funds the assessee had taken loans on which interest was paid and therefore, the money available with the assessee was in common kitty in view of the decision of the Court in case of CIT V.Abhishek Industries (supra). Hon'ble High Court held vide para 7 as under:- We do not find any mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, cannot be accepted. Disallowance under section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. In the present case, finding on this aspect, against the Revenue, is not shown to be perverse. Consequently, disallowance is not permissible. We have taken this view earlier ^so in I. T. A. No. 504 of 2008 in CIT v. Winsome Textile Industries Ltd. 1)09] 319 ITR 204 (P H), (decided on August 25, 2009), wherein it was observed as under (page 207) : The contention raised on behalf of the Revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this court in CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1 and, therefore, disallowance under section 14A was justified. We do not find any merit in this submission. The judgment of this court in Abhishek Industries Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds falling within the ambit of section 10(33) of the Income-tax Act, 1961, as was applicable for the assessment year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of section 14A(1) ; (ii) The payment by a domestic company under section 115O(1) of additional income-tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of section 10(33). Income from mutual funds stands on the same basis; (iii) The provisions of sub-sections (2) and (3) of section 14A of the Income-tax Act 1961 are constitutionally valid ; (iv) The provisions of rule 8D of the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... normal taxable income as well as exempted income in view of the decision of Hon'ble Supreme Court in case of Rajasthan Warehousing Cooperation V CIT, 242 ITR 450. This position got changed after the introduction of Section 14A by Finance Act, 2001. The Memorandum explaining the provisions of Finance Bill reads as under: Certain income are not includible while computating the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is again the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel for the revenue submitted that while determining the quantum of deduction admissible to the assessee under Section 80M of the Act, the expenditure incurred relating to the earning of dividend income has to be excluded there-from. According to the learned counsel, the expenditure which was to be deducted was required to be deducted on proportional basis for incurring of such expenditure. Reliance was placed on Section 14A of the Act which was incorporated by Finance Act 2001 retrospectively .w.e.f. 1.4,1962. Support was gathered from the decision of the Rajasthan High Court in Shekhavati General Traders Ltd. vs. Commissioner of Income Tax (1987) 167 ITR116 and the judgment of this Court in Income Tax Appeal No. 530 of 2006 (The Punjab State Cooperative Milk Producer's Federation Ltd, vs. Commissioner of Income Tax-if and another) decided on 28,3,2011 and of the Apex Court in Commissioner of income Tax vs. Walfort Share Stock Brokers (P) Ltd. (2010) 41 DTR Judgments 233. 12. Controverting the aforesaid submission, learned counsel for the assessee relied upon the decision of the Calcutta High Court in Commissioner of Income Tax vs. United Collieries Ltd. (1993) 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xempt income. The basic reason for insertion of Section 14A is that certain Incomes are not includibie while computing total income as these are exempt under certain provisions of the Act. In the past, there have bean in which deduction has been sought In respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt Income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. Oh the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of Section 14A. In Section 14A, the first phrase is for the purposes of computing the total income under this Chapter which makes it clear that various heads of income as prescribed under Chapter IV would fall within Section 14A. The next phrase is, in relation to income which does not form part of total income under the Act . It means that if an income does not form part of total income, then the related expenditure is outside the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Punjab Haryana High Court in case of CIT V. Punjab State Industrial Development Coop Ltd. (supra). 27 Now the question is how such expenditure can be apportioned. There may be a situation whether the expenses or interest cannot be identified against the particular item of income to meet these difficulties rule 8D was introduced which has been held to be constitutionally valid by Hon'ble Bombay High Court in case of Godrej and Boycee (supra). Rule 8D reads as under: Rule 8D reads as under: (1) Where the Assessing Officer having regard to the account of the assessee of a previous year, is not satisfied with (a) the correctness of the 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 hall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) the amount of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of loan 198.51 Amount invested in Chadha Motors 255.96 Consequently by simply saying that the funds invested in fixed assets and current assets are more than the borrowed funds, would not show that specific funds have been borrowed for specific purpose. For example it can be very easily said that the assessee supported its business with own funds and borrowed loans have been used for making investment in assets as well as in investments which generate exempted income. Once the funds are mixed, there is no way to find out actual usage of the funds. To meet this situation only Rule 8D was inserted to remove the difficulties. In fact this aspect was also examined by Hon'ble Bombay High Court in case of Godrej Boycee (supra). Many observations were made under the head parameters of judicial review at para 62 to 72 of the order . Without unnecessarily burdening this order with these observations we will quote para 73 which deals with justification of Rule 8D: In the affidavit in reply that has been filed on behalf of the Revenue an explanation has been provided of the rationale underlying rule 8D. In the written submissions which have been filed by the Additional Solicitor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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