TMI Blog2016 (3) TMI 724X X X X Extracts X X X X X X X X Extracts X X X X ..... this issue and delete the disallowance made by the Assessing Officer on account of indirect expenditure under section 14A by applying Rule 8D(2)(iii). - Decided in favour of assessee Disallowance under section 36(1)(iii) being interest calculated at the rate of 10% on the increase in work-in-progress - Held that:- When there is no dispute that the interest expenditure was incurred by the assessee on the term loan used for expansion of its business, then the same cannot be allowed as revenue expenditure but has to be capitalized as cost of the expansion being part of the work in progress. Accordingly, we do not find any error or illegality in the orders of authorities below on this issue. - Decided against assessee Disallowance of interest attributable to the diverted fund to the related parties by invoking the provisions of Section 40A(2) - Provisions of section 40A(2) invoked and a proportionate disallowance of interest expenditure made - Held that:- We find that when there is no fresh investment during the year under consideration therefore, in view of our finding on this issue in the earlier assessment years, we do not find any error or illegality in the order of the CIT ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the business of the assessee. On appeal, the CIT (Appeals) deleted the disallowance made by the Assessing Officer under Section 14A on the ground of sufficient interest free funds utilized for investment purpose. However, the CIT (Appeals) confirmed the disallowance made by the Assessing Officer under Section 14A on account of indirect administrative expenses. As regards, the disallowance made by the Assessing Officer 40A(2) in respect of interest free advances given to the related parties. The CIT (Appeals) deleted the said disallowance made by the Assessing Officer on the ground that the said advances made by the assessee from its own funds and not from the interest bearing fund. As regards the disallowance made by the Assessing Officer under Section 36(1)(iii) in respect of the interest on loan taken for expansion of business for the Assessment Year 2010-11, the CIT (Appeals) confirmed the disallowance made by the Assessing Officer. Thus both the assessee as well as the revenue are aggrieved by the impugned orders of the CIT (Appeals) and filed the cross appeals. 3. First we take up the appeals of the assessee wherein except for the issue of disallowance of interest on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance of interest expenditure under Section 14A. On appeal, the CIT (Appeals) has confirmed the disallowance made by the Assessing Officer on account of indirect expenditure by applying Rule 8D(2)(iii) of I.T. Rules. 6. Before us, the learned Authorised Representative of the assessee has submitted that the assessee has not incurred any expenditure for earning the dividend income. He has further submitted that there is no change in the investment portfolio of the assessee during the year under consideration, therefore, there cannot be any expenditure attributable to the income not forming part of the total income of the assessee being dividend income. Even otherwise, before making an addition under Section 14A of the Act, the Assessing Officer needs to arrive at proper satisfaction that the assessee has incurred certain expenditure for earning the exempt income. In the case of the assessee, the Assessing Officer has not arrived at a proper satisfaction and directly applied Rule 8D(2)(iii) without even giving any finding on the claim of the assessee that no expenditure has been incurred by the assessee for earning the dividend income. The learned Authorised Representative has sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has pleaded that the disallowance made by the Assessing Officer and confirmed by the CIT (Appeals) on account of indirect expenditure is not called for and the same may be deleted. 7. On the other hand, learned Departmental Representative has submitted that during the course of assessment proceedings, the Assessing Officer has asked the assessee to file the details regarding the expenditure to be disallowed under Section 14A. The assessee has not furnished any details and even the assessee has not made suo moto disallowance under Section 14A. Therefore the Assessing Officer was justified in making the disallowance under Section 14A. She has relied upon the orders of the authorities below. The learned Departmental Representative further contended that when the assessee has earned dividend income during the year under consideration, then, the provisions of section 14A are applicable and the disallowance has to be computed as per the Rule 8D(2)(iii). 8. We have considered the rival submissions as well as the relevant material on record. We find that the Assessing Officer has made a disallowance by noting the fact that the assessee has made investment of ₹ 7.1 Crore on tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he apportionment by applying the formula under Rule 8D. Thus the Rule 8D cannot be applied automatically but it is only a method of apportionment of an expenditure which has been incurred for an indivisible activity resulting in taxable and non-taxable income. As it is manifest from the assessment order that there is no such ascertainment of expenditure which can be apportioned and attributable to the tax exempt income. The co-ordinate bench of this Tribunal in the case of Subramanya Constructions Development Co. Ltd. (supra) while dealing with an identical issue has held in para 9 as under :- 9. Vis- -vis the disallowance made under Rule 8D(2)(iii), a look at the assessment order clearly show that assessee, though it did not take specific plea it had stated that there was nothing which called for a disallowance under section 14A investment portfolio. Reply of the assessee on the proposed disallowance under section 14A of the Act given before the AO read as under : The question of disallowance u/s 14A r.w. Rules 8D will not arise since the company has not made investments out of the loans taken from various banks. All these investments have been made out of its internal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. We concur with the view of the co-ordinate bench of this Tribunal in the case of Subramanya Constructions Development Co. Ltd. (supra) and accordingly delete this disallowance made by the Assessing Officer on account of indirect expenditure by applying Rule 8D(2)(iii). Further we note that there is no change in the investment portfolio of the assessee as it is evident from the record that except an investment of ₹ 20,000 in NSC, there is no other change in the existing investment of the prior years. Therefore, there is no movement in the investment portfolio except ₹ 20,000 which too in NSC. Accordingly when there is no movement in the investment portfolio, then, we are in agreement with the claim of the assessee that there is no expenditure incurred by the assessee on account of indirect expenditure for earning the dividend income. Even otherwise while applying the provisions of section 14A and computing the quantum of disallowance under Rule 8D(2)(iii), it cannot exceed the amount which is attributable for the earning the exempt income. Since the formula given in the Rule 8D does not recognize the actual expenditure incurred by the assessee but it calculates the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture attributable for earning the dividend income and further the Assessing Officer has not recorded any satisfaction for rejecting the claim of the assessee that no expenditure has been incurred. 11. We have considered the rival submissions and relevant material on record. As regards the non-expression or recording of satisfaction by the Assessing Officer, we find that the Assessing Officer has made no efforts to ascertain and identify the expenditure which is attributable to the activity which has resulted taxable and non taxable income and therefore can be apportioned under Section 14A r.w. Rule 8D. Therefore, so far as the requirement of recording the satisfaction the assessment order is lacking this requirement and consequently for want of the pre-requisite condition for making the disallowance under section 14A on account of indirect expenditure the action of the Assessing Officer is not sustainable. In view of our findings for the Assessment Year 2008-09 which are applicable for the Assessment Year 2009-10. As regards the new investment in the sister concern, as it is clear from the business of the sister concern being Green Food Park Ltd. the assessee is also in the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n absence of any distinguishable feature brought to our notice by the learned Counsel for the assessee against the order of the CIT(A), we do not find any infirmity in the same. Accordingly the same is upheld and the ground raised by the assessee is dismissed. 8. As it is clear from the finding of Tribunal that the assessee failed to furnish the details of disallowance under section 14A and, therefore, the disallowance made by the AO was found by the Tribunal without any infirmity. For the year under consideration the assessee has specifically raised a point before the AO that 97.82% of the investment is in the subsidiary companies and joint venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature in the subsidiary companies on long term basis and, therefore, no direct or indirect expenditure is incurred. We find that the department has not disputed this fact that out of the total in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year beginning on or before the 1st day of April, 2001. (The proviso was inserted earlier by the Finance Act of 2002 with retrospective effect from May 11, 2001) 33. Under sub-section (2), the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an assessment year beginning on or before April 1,2001, either to reassess under section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154. 10. It has been made clear by the Hon ble High Court that sub-section (2) does not ifso facto empower the AO to apply the method prescribed by Rules straightaway without considering whether the claim made by the assessee is correct. 11. The assessee has relied upon various decisions of this Tribunal wherein an identical issue has been considered. In the case of Garware Wall Ropes Limited Vs. Addl. CIT (supra), the Tribunal while deciding an identical issue has held in para 2.4 as under:- We have considered the rival submission and carefully perused the relevant records. So far as the issue regarding disallowance u/s 14A in the case where no dividend has been received, the same is covered against the assessee by the order of Tribunal in assessee s own case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the income which does not form part of the total income. In the case in hand the assessee has claimed that no expenditure has been incurred for earning the exempt income, therefore, it was incumbent on the AO to find out as to whether the assessee has incurred any expenditure in relation to income which does not form part of the total income and if so to quantify the expenditure of disallowance. The AO has not brought on record any fact or material to show that any expenditure has been incurred on the activity which has resulted into both taxable and non taxable income. Therefore, in our view when the assessee has prima facie brought out a case that no expenditure has been incurred for earning the income which does not form part of the total income then in the absence of any finding that expenditure has been incurred for earning the exempt income the provisions of section 14A cannot be applied. Accordingly we delete the addition/disallowance made by AO u/s 14A r.w. Rule 8D. 12. A similar view was taken by the Delhi Bench of this Tribunal in the case of M/s Oriental Structural Engineers (P) Ltd (supra) which has been confirmed by the Hon ble Delhi High Court vide decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is disallowed. 12. For the Assessment Year 2010-11, the facts are identical to the Assessment Year 2008-09 as there is no fresh investment during the said assessment year and therefore in view of our finding for the assessment year 2008- 09 the disallowance made by the Assessing Officer under section 14A on account of indirect expenditure is deleted. 13. The assessee has also raised another ground for the Assessment Year 2010-11 being Ground No.6 as under : 6. The learned CIT (Appeals) is not justified in law in conforming the disallowance made by the ld. Assessing Officer under section 36(1)(iii) of the Act of ₹ 21,03,510 being interest calculated at the rate of 10% on the increase in work-in-progress amounting to ₹ 2,10,35,105 (i.e. ₹ 9,21,96,773 minus ₹ 7,11,61,668) instead of deleting the entire disallowance under the facts and circumstances of the case. During the course of assessment proceedings, the Assessing Officer has noted that the assessee has shown capital work in progress of ₹ 7,11,61,668 as on 31.3.2009 and ₹ 9,21,96,773 as on 31.3.2010. The average of the said amount works out to ₹ 8,16,79,220 Thus the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese appeals. The grounds for the Assessment Year 2008-09 are reproduced as under :- 1. The order of the learned CIT (Appeals) in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The CIT (Appeals) erred in deleting the disallowance of ₹ 34,23,969 calculated under rule 8D(2)(ii) holding that none of the interest payments claimed by the assessee can be taken for the purpose of rule 8D(2)(ii) without appreciating the fact that the finance charges included ₹ 11,77,98,115 and ₹ 81,36,431 respectively towards interest on working capital and KSBCL advance respectively. 3. The CIT (Appeals) erred in not appreciating the facts and circumstances that investments are made form a common pool of funds i.e. working capital and / or cash credit or overdraft accounts. 4. The CIT (Appeals) erred in not appreciating that the interest payments on working capital and KSBCL advance indirectly were used for the purpose of making tax free investments. 5. The CIT (Appeals) erred in deleting the disallowance ofRs.34,23,969 calculated under Rule 8D(2)(ii) holding that no tax free investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neral in nature and is not for specific purpose and can be used for the purpose of investment. She has relied upon the order of the Assessing Officer. 19. On the other hand, the learned Authorised Representative of the assessee has submitted that the investments were made in the earlier years out of the assessee's own fund. He has further submitted that there was no disallowance on account of interest expenditure under Section 14A for the earlier assessment years when the investment was made. Since there is no investment made during the year under consideration, therefore, no disallowance on account of interest expenditure can be made under Section 14A. He has further submitted that whatever expenditure on account of interest has been incurred by the assessee during the year under consideration is in respect of specific loans taken by the assessee which has been used for specific purposes therefore there cannot be any diversion of the said interest bearing fund using other than the specific purpose. Thus the learned Authorised Representative has submitted that the CIT (Appeals) has recorded this fact that none of the interest expenditure can be attributable to the earning of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come which is exempt income. Accordingly, in view of the fact that there is no disallowance on account of interest expenditure under Section 40A in the earlier year and there is no fresh investment during the year under consideration as well as the interest expenditure during the year is on account of specific loans for specific purposes, we do not find any error or illegality in the order of the CIT (Appeals) in deleting the said disallowance made by the Assessing Officer under Section 14A on account of indirect interest expenditure. 21. The next issue raised by the revenue in the Ground Nos.6 to 8, regarding the disallowance made by the Assessing Officer of interest on account of interest free advances given to related parties/sister concerns. The Assessing Officer noted that the assessee had advanced interest free loans to various sister concerns amounting to ₹ 179 Crores though the said amount was found to be incorrect figure and the correct amount of interest free advance was recorded by the CIT (Appeals) only ₹ 155.51 Crores. The Assessing Officer found that the assessee was paying ₹ 17.84 Crores towards interest on borrowals. Accordingly the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund was used for the purpose of advancing interest free loan to the sister concern, no disallowance of interest is called for. He has supported the order of the CIT (Appeals). 25. We have considered the rival submissions as well as the relevant material on record. The Assessing Officer noted that the assessee has given the interest free advances to its sister concerns amounting to ₹ 179 Crores, correct amount is ₹ 155.51 Crores. The Assessing Officer thus invoked the provisions of section 40A(2) and made a proportionate disallowance of interest expenditure. The CIT (Appeals) has deleted the disallowance made by the Assessing Officer. In para 4.4 to 4.7 of the impugned order as under : 4.4 I have carefully considered the appellant s submissions and the reasons given by the AO in the assessment order. The AO noted that the appellant had advanced interest-free loans to various sister concerns amounting to ₹ 179 crores. The AO also found that the appellant was paying ₹ 17.84 crores as interest towards borrowals. In view of this, the AO presumed that interest- bearing funds were diverted to the sister concerns free of interest and accordingly made a dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Prem Engineering Pvt. Ltd. [285 ITR 554]. A similar view has been expressed interest-free funds generated or available with the company if the interestfree funds were sufficient to meet their investments. In the present case, the interst-free funds available with the appellant are ₹ 158.47 crores and whereas the interest-free advances were only ₹ 155.51Crores. Thus there cannot be any disallowance of interest on account of account of interest-free advances made to the sister concerns in the instant case. It is also not the argument of the appellant that the interest-free advances were for any commercial expediency. Therefore, the decision of the Hon'ble Supreme Court in the case of SA Builders [288 ITR 1] is not applicable to the instant case. The AO relied on the following decisions i) Abhishek Industries [20S CTR 304 (P H)] ii) Varinder Agro Chemicals Ltd. [20S CTR 304] iii) Doctor Co. [180-ITR-627] 4.7 The Hon' ble Punjab Haryana High' Court followed the decision in the case of Abhishek Industries Ltd. while giving decision in the Varinder Agro Chemicals Ltd. case cited above. It should be mentioned that the decision in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd (2009) 313 ITR 340 (BOM): (a) In that case, the assessee claimed deduction of interest on borrowed capital. The AO recorded a finding that the sum of ₹ 213 crores was invested out of its own funds and ₹ 147 crores was invested out of borrowed funds. Accordingly, he disallowed interest of ₹ 4.4 crores calculated at 12% per annum. The CIT (A) found that the assessee had enough interest free funds at its disposal for investment and, accordingly, deleted the addition which was subsequently upheld by the Tribunal. On appeal, the Hon ble Court had held that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case, this presumption was established considering the finding the fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. (b) We have, with due regards, perused the judgment of the Hon ble Court (supra) and of the view that the ratio laid down by the Court is directly applicable to the present as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 117.39 Crores advanced in the earlier year the issue has been settled by the Tribunal that the assessee was having sufficient funds. The CIT (Appeals) has recorded that the assessee's own fund during the year is more than the advance given to the sister concern, therefore, we do not find any reason to interfere with the finding of the CIT (Appeals) that the assessee is having its own interest free funds which is sufficient to advance interest free loan to the sister concern. Accordingly, this issue is decided against the revenue and in favour of the assessee. 26. For the Assessment Year 2009-10, the grounds are identical. As regards the disallowance under Section 14A on account of interest expenditure which has been deleted by the CIT (Appeals), the facts are almost identical except the fact that for the said assessment year the assessee has made an investment of ₹ 2 Crores in the sister concern namely Green Food Park Ltd. 27. We have heard the learned Departmental Representative and learned Authorised Representative as well as considered the relevant material on record. The learned Authorised Representative of the assessee has pointed out that the investment is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Year 2008-09, we do not find any error or illegality in the order of the CIT (Appeals) in deleting the disallowance made by the Assessing Officer on this account. 30. For the Assessment Year 2010-11, the identical issues were raised by the revenue as regards the disallowance under Section 14A on account of interest income which was deleted by the CIT (Appeals). We find that when there is no fresh investment during the year under consideration therefore, in view of our finding on this issue in the earlier assessment years, we do not find any error or illegality in the order of the CIT (Appeals) who has recorded that the assessee's own funds are more than ₹ 220 Crores. There is no dispute on this fact that the assessee's own fund as recorded by the CIT (Appeals) amounting to ₹ 220.52 Crores. Therefore, this amount covers the disallowance made by the Assessing Officer by applying the provisions of section 40A(2) of the Act. Accordingly in view of our finding in the appeals for the earlier assessment years, we do not find any error or illegality in the order of the CIT (Appeals) in deleting the disallowance made by the Assessing Officer on account of interest e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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