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2016 (5) TMI 254 - ITAT CHENNAI

2016 (5) TMI 254 - ITAT CHENNAI - TMI - Disallowance u/s.14A - Held that:- When the authorities below have observed that the assessee has received ₹.70.00 lakhs from the group concern was interest free and no interest was debited on this amount, the ld. CIT(A) has rightly held that the disallowance under Rule 8D(2)(ii) cannot be made when there was no interest burden on the amount borrowed from the group concern - Decided against revenue.

Disallowance of additional depreciation .....

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to situation, the legislature, 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 or .....

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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 CIT(A) is contrary to law and facts of the case. 2.1 The learned CIT(A) erred in directing the AO to withdraw the disallowance made under Rule 80(2)(ii). 2.2 The learned CIT(A) ought to have appreciated the Hon'ble Delhi Tribunal's decision in the case of Cheminvest Ltd vs ITO reported in 121 ITD 318 (2009 .....

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ng additional depreciation on Ready Mix Concrete to the tune of ₹ 15,234/-. 3.2. The learned CIT(A) ought to have appreciated the decision of the Hon'ble Apex Court in the case off CIT vs. N. Boodharaja & Co and others reported in 2045 ITR 412 (SC). Since the preparation of ready mix concrete is nothing but a activity allied to construction activity in lieu of the decision of the Hon'ble Supreme Court, it Is not a manufacturing activity. 3. For these and other grounds that may .....

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come Tax Act, 1961 [ Act in short] on 31.3.2012. Subsequently, the case was selected for scrutiny and notice under section 143 (2) of the Act dated 26.8.2011 was issued. After considering the submissions of the assessee, the Assessing Officer has completed the assessment under section 143(3) of the Act on 20.3.2013 by making various disallowances. 3. On appeal, after considering the detailed submissions of the assessee and by relying various case law, the ld. CIT(A) has directed the Assessing Of .....

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) 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 inc .....

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as well. Therefore, the interest expenditure incurred by the assessee with respect to borrowed amount appears to be an expense incurred in respect of earning income from the investment of shares. It was further stated that the assessee has incurred certain administrative expense which is also relatable to earning of exempted income out of investment in shares. The Assessing Officer has observed that though the assessee has not received dividend income, there is a possibility that exempted incom .....

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ovisions of section14A and Rule 8D(2). The Assessing Officer has observed that that the reserves and surplus available with the assessee do not support huge investment of ₹.70 crores and there is an increase in unsecured loans to the extent of ₹.40,36,86,094/- compared to previous year and the assessee has claimed interest expenditure of ₹.2,85,70,074/- against it. The Assessing Officer further stated that if the assessee has 'internally generated funds' then why should .....

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disallowance under section 14A of the Act on the expenditure incurred for earning income is warranted, notwithstanding the fact that no such income was 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 secti .....

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yable 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 crores from Chettinad Corporation Ltd., a group company and invested directly on the same day in Allied Minerals and Metals P. Ltd. for purchase of shares. .....

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s working capital of the business, the assessee has claimed interest expenditure of ₹.2,85,70,074/-. In the assessment order, the Department has not proved that the unsecured loans were put in use for the purpose of investment. Whereas, the ld. CIT(A) has observed from the account copies of the assessee company and the bank account copy maintained with ICICI Bank that ₹.70.00 crores received from Chettinad Corporation Ltd., a group company was invested directly within same day in All .....

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n make disallowance towards interest expenditure, if any, incurred by the assessee on the borrowed funds utilized for investments purpose, but, the Assessing Officer cannot question the assessee as to why the assessee can utilize the interest bearing borrowed funds as working capital for its business when the interest free internally generated funds were utilized for investment in shares. 10. Under the above facts and circumstances, when the authorities below have observed that the assessee has .....

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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 proc .....

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efore the Tribunal. 13. We have heard both sides and perused the materials on record. With regard to the additional depreciation on Ready Mix Concrete [RMC], by following the order for the assessment year 2009-10 in assessee s own case, wherein, the decision of ITAT Delhi in the case of YCF Projects P. Ltd. v. DCIT (2010) 134 TTJ 167 has been followed, the ld. CIT(A) allowed the ground raised by the assessee. However, on an identical issue in similar facts and circumstances, in the case of Cheri .....

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of ITAT (supra), we reverse the findings of the ld. CIT(A) on this issue and restore that of the Assessing Officer. Accordingly, the ground raised by the Revenue stands allowed. I.T.A. No. 1544/Mds/2015 14. The only effective ground raised in the appeal filed by the assessee is with regard to sustenance of disallowance made under Rule 8D(2)(iii). Against the disallowance made by the Assessing Officer, the ld. CIT(A), after considering the submissions of assessee as well as various decisions, sus .....

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vested in shares, the direct/indirect management and administrative expenses qualify for disallowance under section 14A. 17. We have considered rival submissions and perused the orders of authorities below. During the year under consideration, the Assessing Officer has observed that the assessee has not 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 exp .....

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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 Chem .....

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TTJ 522, the ITAT Delhi has clearly held that indirect management and administration expenses qualify for disallowance u/s 14A and there is no decision so far by any similar forum contradicting the above findings. Similar view was also taken by ITAT Chennai in the case of Southern Petrochemical Industries (93 TTJ 161) as under: " ... Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called u .....

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;, This view has been further supported by the decision of Hon'ble Kerala High Court in the case of Smt. Leena Ramachandran (2011) (339 ITR 293) (Kerala HC). 18. In view of the above findings and decisions, the ld. CIT(A) has held that the Assessing Officer has rightly invoked the provisions of the section 14A of the Act and Rule 8D(2) and sustained the disallowance worked out under limb (iii) of Rule 8D(2) since limb (iii) is invokable as incurring of certain expenditure is not ruled out. 1 .....

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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 .....

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