TMI Blog2016 (5) TMI 254X X X X Extracts X X X X X X X X Extracts X X X X ..... ture, after taking various factors into consideration, came to a conclusion that such expenses can be reasonably calculated @ 0.5% of the average investments made by the assessee. For this purpose, the legislature has arrived at a common formula to calculate the expenses @ 0.5% of the average investments made as per step-3 of the formula given in Rule-8D. Accordingly the legislature incorporated and introduced the Rule-8D. Further, as could be seen from the assessment order, the Assessing Officer has rightly quantified the expenditure under Rule 8D(2)(iii) and disallowed under section 14A of the Act. - I.T.A.No.1645/Mds/2015 - - - Dated:- 31-3-2016 - Shri Chandra Poojari, Accountant Member AND Shri Duvvuru RL Reddy, Judicial Member For The Department : Shri A. B. Koli, JCIT For The Assessee : Shri K.B. Muralidharan, C.A. ORDER PER DUVVURU RL REDDY, JUDICIAL MEMBER: The cross appeals filed by both the Revenue as well as assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 1, Chennai, dated 25.03.2015 relevant to the assessment year 2010-11. The Revenue has raised the following grounds: 1. The order of the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 8D(2)(ii) and sustain only the disallowance worked out under limb (iii) of Rule 8D since limb(iii) is invokable as incurring of certain expenditure is not ruled out. 4. On being aggrieved, the Revenue is in appeal with regard to the directions of the ld. CIT(A) to the Assessing Officer to withdraw the disallowance made under Rule 8D(2)(ii) and the assessee has also preferred an appeal against sustenance of disallowance worked out under limb (iii) to Rule 8D(2). 5. We have heard both sides, perused the materials on record and gone through the orders of authorities below. The Assessing Officer has observed that the assessee has invested ₹.70,00,00,000/- in equity shares of M/s. Allied Metals and Minerals P Ltd (AMM) during the year and that as on 31.3.2010 Reserves Surplus of the assessee was ₹.35,88,20,576/- only and obtained unsecured loans of ₹.71,79,72,152/-. He further observed that the unsecured loan was increased from ₹.31,42,86,058/- (as on 31.3.2009) and the assessee has claimed interest expenditure of ₹.2,85,70,074/- on loans. The Assessing Officer has stated that the investment in shares is made out of borrowed capital since the rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned. Accordingly, the Assessing Officer has disallowed a sum of ₹.79,34,631/- under limbs (ii) (iii) of Rule 8D(2). 6. Before us, the ld. DR strongly contended that the Delhi Benches of the Tribunal in the case of Cheminvest Ltd v. ITO in 121 ITD 318 (2009) has held that since dividend income is exempted from tax by virtue of section 10(34) of the Act, the interest paid on borrowed capital utilized in purchase of shares, being expenditure incurred in relation to dividend income not forming part of assessee's total income, cannot be allowed as a deduction. Further the court held that, such disallowance u/s.14A can be made even in a year in which no exempt income has been earned or received by the assessee. 7. On the other hand, the ld. Counsel for the assessee has strongly contended that when no interest was paid or payable on the amount of ₹.70.00 crores received from Chettinad Corporation Ltd. and invested in Allied Minerals and Metals P. Ltd. for purchase of shares, the question of disallowance does not arise. He also strongly supported the order passed by the ld. CIT(A) on this issue. 8. It is not disputed that the assessee received ₹.70.00 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount borrowed from the group concern. Thus, the ground raised by the Revenue stands dismissed. 11. The next ground raised in the appeal of the Revenue is with regard to deletion of disallowance of additional depreciation on Ready Mix Concrete [RMC]. The Assessing Officer has denied the claim of additional depreciation on the ground that the assessee is engaged in the business of civil construction and not manufacturing. The assessee has submitted before the Assessing Officer that the assessee is engaged in manufacturing of ready mix concrete and gypsum and stated that once the raw materials mixed cannot be reconverted into their original shape and character and the resultant product known as RMC is totally varied character. Therefore, the process involved a manufacturing activity and hence the assessee has claimed additional depreciation for RMC. However, the Assessing Officer has not accepted the submissions of the assessee and by relying various decision, he held that the production of RMC cannot be stated to be that of manufacturing. On appeal, the ld. CIT(A) allowed the ground raised by the assessee by following the decision for earlier assessment year 2009-10 where t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received dividend income but there is a possibility that exempted income may arise out of investment in equity shares. Therefore, during the scrutiny proceedings, the assessee was required to explain vide letter dated 24.01.2013 as to why disallowance under section 14A should not be made with respect to expenses claimed in relation to exempt income. In response thereto, the assessee has filed its detail reply and with regard to this issue, the assessee has submitted that since there is no income realized during the current year, section 14A is not applicable in its case. The above explanation was not accepted by the Assessing Officer, since; there is no requirement for earning an income to claim expenditure because as per the provisions of the Act, it is clear that the relation has to be seen between the exempt income and the expenditure incurred in relation to it and not vice versa. The Assessing Officer has further observed that what is relevant is to work out the expenditure in relation to earning exempt income and not to examine whether the expenditure incurred by the assessee has resulted into exempt income or taxable income. By relying on the decision in the case of Cheminves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfied in view of the decision in the case of Cheminvest Ltd. v. ITO and worked out the disallowance under Rule 8D(2)(iii). Thus, we find that the Assessing Officer has satisfied that there was an element of expenses involved in making investments and the Assessing Officer is duty bound to invoke the provisions of Rule-8D. Once the provisions of Rule 8D are invoked, the Assessing Officer has no option but to arrive at the expenses @ 0.5% as per step-3 of the formula which is mandatory. In fact, the Assessing Officer in his order has clearly stated these facts before invoking the provisions of section 14A r.w.r.8D. Hence the Assessing Officer rightly invoked the Rule-8D and arrived at the disallowance of expenses u/s.14A r.w.Rule-8D. The ld. CIT(A) confirmed the disallowance by relying various decisions as reproduced hereinabove. We find that while making investment, the element of expenditure involved in the process cannot be ruled out. However, this expenditure may not be direct. Thus, there is an expenditure involved in making these investments. Therefore, there is a need to identify and apportion a reasonable amount of expenses as attributable for earning the exempted income. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
