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TMI Blog2014 (2) TMI 1234X X X X Extracts X X X X X X X X Extracts X X X X ..... ring of boilers. During the course of assessment proceedings, the AO noticed that the assessee has earned dividend income of Rs. 20,14,033/-, which was exempted from taxation. However, the assessee did not make any disallowance as required u/s 14A of the Act. Hence, the AO, by invoking the provisions of sec. 14A of the Act, (a) disallowed 0.5% of average value of investments, which worked out to Rs.. 4,84,640/- and (b) disallowed a part of interest expenditure in accordance with Rule 8D, i.e., interest expenditure equivalent to proportion of the Average value of investment to Average of total assets. 3.1 In the appellate proceedings, the ld CIT(A) deleted the disallowance of interest made u/s 14A of the Act on the reasoning that the assessee did not incur any interest expenditure for earning tax free dividend. However, he confirmed the disallowance of part of administrative expenditure made, as he found the same to be in accordance with the provisions of sec. 14A of the Act and Rule 8D of the Income tax Rules. In this regard, the Ld CIT(A) also took support of the decision of the Tribunal in the case of Asstt. City v. City Corpn. Finance (India) Ltd. [2007] 108 ITD 457/12 SOT 24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135. The Ld Counsel further submitted that the AO has disallowed the interest expenditure u/s 36(1)(iii) also, which has resulted in double disallowance of same expenditure. Accordingly he submitted that the Ld CIT(A) was justified in deleting the disallowance of part of interest expenditure. 4.1 With regard to the disallowance of part of administrative expenses, the ld counsel submitted that the assessee has received dividend income directly into its bank account and hence, practically no expenditure was incurred in earning the dividend income. Accordingly, he submitted that the AO was not justified in making disallowance of 0.5% of average value of interest towards administrative expenditure. Alternatively, the ld counsel submitted that the AO should have restricted on the value of investment which has actually yielded income. In this regard, he placed reliance reported in Kolkata Tribunal REI Agro Ltd. v. Dy. CIT [2013] 35 taxmann.com 404 (Kol.). 4.2 On the contrary, the ld DR submitted that the borrowed funds would loose its identity, when it is through in the common pool o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing officer shalldetermine 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 relation to income which does not form part of the total income under this Act." 5.2 A careful reading of the provisions extracted above would show that the assessing officer is required to determine the amount of expenditure incurred in relation to exempted income, if he is not satisfied with the correctness of the claim made by the assessee, having regard to the accounts of the assessee. The above cited section no where states that the satisfaction needs to be recorded in writing. The very fact that the assessing officer has proceeded to invoke the provisions of sub-section (2) shows that the assessing officer was not satisfied with the correctness of the claim made by the assessee. In this context, it is also pertinent to note sub-section (3) of sec. 14, which reads as under:- "(3) The provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration. The Balance sheet as at 31.3.2007, i.e., the year immediately preceding to the year under consideration clearly show about the utilisation of loan funds for making investments. Further the Profit for the year ended 31.3.2008 shall be deemed to have accrued only on the last day of the financial year and hence on that count also the contention of the assessee is liable to be rejected. In view of the factual position discussed above, in our view, there is no necessity to follow the principles laid down in the case of Reliance Utilities & Power Ltd. (supra). 5.6 The Ld A.R contended that the average value of investments should be arrived by considering only those investments which have yielded dividend. Though the Ld A.R placed reliance on the decision rendered by Calcutta bench of Tribunal, we are unable to accept the same in view of the clear provisions prescribed in Rule 2(ii) of Rule 8D of the Income tax Rules. For the sake of convenience, we extract below the relevant provisions:- "B the average of value of investmenty, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made for non-business purposes. The revenue is aggrieved by the said decision of Ld CIT(A). 8.1 The Ld D.R submitted that the assessee did not derive any benefit from the investment made in M/s Hassan Biomass Power Co. Pvt Ltd and hence the AO was justified in disallowing the interest expenditure claimed by the assessee. 8.2 On the contrary, the ld counsel for the assessee submitted that there is commercial expediency in making the above said investment. In this regard, the ld counsel invited our attention to page 55 of the paper book wherein a copy of the MoU entered between the assessee and another company named Newcon energy Mart (NEG) is placed. The ld counsel submitted that the assessee and NEG have agreed to jointly colloborate to design, finance, build and commission 8 MW Biomass fueled power plat at Hassen, Karnataka. As per the agreement, the assessee was required to invest approximately Rs. 3.70 crores towards equity shares capital. In pursuance of the said investment, the assessee was selected as a turn key contractor to build a biomass fuelled power plant. In order to execute the MOU, both the parties cited above have formed a special purpose vehicle, i.e., the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sheet as at 31.3.2005. Under these set of facts, the Ld CIT(A) has expressed the view that the investment of Rs. 3.25 crores cannot be said to be for non-business purposes. In view of the foregoing discussions, we are also inclined to accept the view expressed by Ld CIT(A). Accordingly, we uphold his view on this issue. 10. The next issue relates to the head of income under which the gain realized on sale of shares is assessable. The assessing officer assessed the profit on sale of shares under the head "Income from business", as against the claim of the assessee that it should be assessed as "Capital gains". The facts relating to the said issue are discussed in brief. During the year under consideration, the assessee declared the profit from sale of shares as under:- Long term capital gains Rs. 16,16,752/- Short term capital gains Rs. 1,74,14,332/- 10.1 The AO noticed that the tax auditor, while giving the details of businesses carried on by the assessee in the Tax audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of shares as investment. (b) There are high frequency and volume of purchases and sale of shares. (c) The auditor of the assessee has very clearly indicated in the Audit report in Form No.3CD that the assessee company has engaged in trading of shares. The assessee is aggrieved by the said decision of Ld CIT(A). 11. The Ld Counsel for the assessee submitted that the assessee had obtained a clarificatory letter from the tax auditor and furnished the same before the Ld CIT(A). In the said letter, the auditor has clarified that the trading in shares was not the business of the assessee. The Ld Counsel submitted that the Ld CIT(A) had called for a remand report from the AO on the additional evidences filed before him, including the letter referred above. However, the AO did not offer any comment on the letter issued by the AO. The Ld CIT(A) also did not make any observation about the letter. The Ld Counsel submitted that the tax auditor has inadvertently shown the trading in shares as one of the business activities carried on by the assessee, which is against the facts. He submitted that the assessee never intended to carry on the activity of trading in shares as its business ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven the business as "Manufacturing Industry - Engineering goods". The Ld D.R submitted that the auditor is required to give only main area of business activities and not all business activities and hence the tax auditor could not place reliance on it to change his view. The Ld D.R further submitted that the assessee was indulging in frequent purchase and sale of shares of high volume and hence the tax authorities were right in law in assessing the income generated from share trading as business income. 12. We have heard the rival contentions on this issue and carefully perused the record. We notice that the tax authorities have placed strong reliance on the tax audit report and also on the frequency of transactions to decide about the nature of activities carried by the assessee in respect of share trading. The contention of the assessee is that the tax auditor has committed an error and hence he has issued a clarificatory letter. The Ld A.R also pointed out that the said letter was not considered either by the Ld CIT(A) or by the AO (during remand proceedings). The Ld A.R also submitted that the report given by the tax auditor cannot be considered as a sole or ultimate factor in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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