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2016 (4) TMI 119 - ITAT MUMBAI

2016 (4) TMI 119 - ITAT MUMBAI - TMI - Validity of the disallowance u/s. 14A - correct quantification of the disallowance of the indirect interest expenditure u/s. 14A r/w r. 8D(2)(ii)- Held that:- The excess current liabilities (over current assets) translate into liquid funds with the entity only on the liquidation of the corresponding current assets. It is only this excess Ė and to that extent only, that represents a non-dedicated source of funds, and go to swell the general pool of funds or .....

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ific asset/s (or class of assets). Self generated funds (profits), which are normally also available, again on a non-dedicated basis, is absent in-as-much as the assessee-company has suffered a loss during the year, which is primarily responsible for the decline in the NWC. Rather than being a generator or source of funds, the firmís operations have become an avenue for absorption of the funds for the current year. In fact, the excess (outstanding) current liabilities (as at the year-end), as a .....

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rage assets, including investments, held during the year, signifying the appropriateness of the formula u/r. 8D(2)(ii) both on facts and in law. Finally, the ld. CIT(A) has, subject to A.O.ís verification, held for an adjustment for interest on (bank) FDRs. The same shall, accordingly, stand to be similarly excluded, at an average for the year, both from the value of investments and the total assets in computing the pro-rata indirect interest u/r. 8D(2)(ii). Subject to these adjustments in apply .....

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me Tax Act, 1961 ( the Act hereinafter) for the assessment year (A.Y.) 2009-10 vide order dated 25.3.2011. 2. The issue arising in this appeal is the validity of the disallowance u/s. 14A effected by the Assessing Officer (A.O.) in assessment, as further modified by the first appellate authority. The A.O. observed the assessee to have, in respect of dividend income of ₹ 1,98,500/-, claimed and allowed tax exempt, made a disallowance for ₹ 3,799/- toward direct (Demat) charges only. H .....

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09 24,23,22,749 26,42,53,971 Average value of investments 13,21,26,988 C. Average value of total assets Assets as on 01.4.2007 45,19,93,626 Assets as on 31.3.2008 67,71,65,873 112,91,59,499 Average value of assets 56,45,79,750 D. Expenditure relatable to exempt income i) Direct Expenses (disallowed suo motu by the assessee) 3,799 ii) A x B/C = 1,69,38,980 x 13,21,26,988 56,45,79,750 39,64,181 iii) 0.50% of 13,21,26,988 6,60,635 46,28,615 In appeal, the assessee found favour with the ld. CIT(A) i .....

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isions of section 14A of the Income Tax Act, 1961 cannot be applied unless there is a proximate cause for disallowance and application of sub sections (2) & (3) of section 14A and Rule 8D of the Income Tax Rules, 1962 is not automatic in each and every case where there is income not forming part of total income. 2. On the facts and circumstances of the case and in law, the learned CIT (A) has erred in only partially deleting the disallowance by not appreciating the fact that the AO has appli .....

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us, the ld. Authorized Representative (AR), adverting to the assessee s balance-sheet as on 31.3.2009 (PB pgs. 6-13), would submit that the proportionate formula for computing the disallowance of interest expenditure attributable to income not forming part of the total income shall not apply in the instant case as there has been, as apparent, a decline in the net working capital, i.e., from (a positive of) ₹ 8.15 lacs as on 31.3.2008 (i.e., immediately prior to the beginning of the current .....

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, i.e., to the extent as may be found valid upon verification by the A.O. 4. We have heard the parties, and perused the material on record. 4.1 The principal issue, thus, arising in the instant appeal, i.e., as argued before us, is the correct quantification of the disallowance of the indirect interest expenditure u/s. 14A r/w r. 8D(2)(ii); no contention qua indirect administrative expenses, disallowed per the prescription of r. 8D(2)(iii), having been made. Without doubt, the disallowance u/s. .....

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the relevant provision (s. 14A) itself, which speaks of expenditure incurred by the assessee in relation to such, tax-exempt income. This, however, does not take us far, i.e., in-so-far as the present case is concerned, as the Revenue seeks and has disallowed only the proportionate interest expenditure (incurred in the sum of ₹ 169.39 lacs), i.e., as could be reasonably attributed to the investment yielding (or liable to yield) income not forming part of the total income, i.e., is tax-exem .....

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ce u/s.14A(1). This would, for the reasons afore-stated, defining the rationale of the provision, hold equally where borrowed funds so utilized are in excess of that on a pro-rata basis. The matter, in other words, is fact-specific, and would stand to be established, even as we may clarify that the AO, where not satisfied with the assessee s working in respect of the disallowance u/s. 14A (including at nil), is bound by the manner prescribed u/r. 8D(2), and is thus statutorily proscribed to appl .....

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g been made either before the A.O. or even the ld. CIT(A) by the assessee, who has merely chosen not to make any disallowance qua interest, their action in adopting the statutory formula (ratio) cannot be faulted. The said formula, we may clarify, is valid and shall hold irrespective of the nature and composition of the financing, so that the assessee s alluding to interest-free funds in the form of excess current liabilities (over current assets) before us may not hold - no interest, which only .....

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ion with regard thereto. This fact, duly noted by the A.O., is even otherwise admitted and not denied. Further, while the A.O. s disapproval of the assessee s claim is to be with reference to the assessee s accounts, can the latter s claim be independent of and without reference to its accounts? The assessee cannot, after all, de hors and without regard to its accounts, claim that the entire of such expenditure is only toward income forming part of the total income, i.e., either towards investme .....

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emed reasonable, correcting the assessee s claim to the extent found deficient, or merely adopt the proportionate formula, as mandated by law. Reference in this regard may profitably be made to the decision by the tribunal in the case of AFL P. Ltd. vs. Asst. CIT [2013] 28 ITR (Trib) 263 (Mum), where this aspect stands discussed in detail. Even so, in the present case, the ld. CIT(A), on such a contention being raised before him, states the reasons which are patent on the face of the balanceshee .....

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d which it does not, i.e., apart from merely taking it as a Ground in the memorandum of appeal. Then, vide Ground 3, it states of restricting the disallowance u/s. 14A(1) to the dividend income, i.e., ₹ 1,98,500/-. No basis for the same is given. Income from any activity, including from investments, is a matter of fact, other than where its quantum is presumed by law. The assessee has incurred some expenditure toward the investment activity, yielding (or liable to yield) tax-exempt income. .....

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Reference in this regard may also be made to the decision in CIT v. Rajendra Prasad Mody [1978] 115 ITR 519 (SC), wherein, even by giving examples, it was explained by the Hon ble Apex Court that even if no income results, the expenditure incurred in its respect would yet stand to be deducted in arriving at (net) income . The assessee s plea is wholly without merit. Reference in this regard may be made to the discussion by the tribunal in the matter per its decisions in D. H. Securities (P.) Lt .....

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ee s claim of no indirect expenditure on interest or administrative expenses being not supported by any working, much less made with reference to its accounts - could be made at this stage, the matter in our view would require being considered holistically, taking into account the entirety of the facts and circumstances of the case, i.e., does not admit of any standard prescription. In a given case, the assessee may raise a very pertinent aspect, apparent from a bare reference to its accounts (o .....

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, proportionately, so that, by implication, so is the case for interest-bearing borrowings (by way of unsecured loans - again, a non-dedicated source of finance), on which interest is incurred, as well. The assessee s argument is, thus, to no moment. We have however, two observations, patent from the face of the balance-sheet, that, therefore, ought to be taken into account. One, the value of the assets, to arrive at the average value thereof, is to be as at the beginning and end of the relevant .....

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ities over current assets that can be considered as forming part of the general pool of funds and subject to the pro-rata formula. Needless to add, the value of total assets shall be adjusted accordingly, i.e., by taking the current assets at net of current liabilities - a net positive figure. We may explain this further. The current liabilities (for most part) arise spontaneously on the acquisition of the current assets, and are thus only toward the same, constituting a dedicated source of fina .....

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as well, as to the extent the amount is retained in the form of current assets (as cash/bank balance or inventory of goods), the same is only a targeted funding, financing current assets only. The unsecured loans, constituting the other major source of finance, is similarly not toward financing any specific asset/s (or class of assets). Self generated funds (profits), which are normally also available, again on a non-dedicated basis, is absent in-as-much as the assessee-company has suffered a l .....

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