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2016 (5) TMI 315 - ITAT CHENNAI

2016 (5) TMI 315 - ITAT CHENNAI - TMI - Disallowance u/s 14A - Held that:- It is apparent that the assessee company and those companies in which the assessee has invested in shares are all Government undertakings vested with inter-related and ancillary objectives to promote the activities of port. In these circumstances, the assessee company has made strategic investments in its sister companies. Therefore, there would be no expenditure incurred for monitoring the investment activity of the asse .....

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d held that when investments are made by the assessee company from its interest free funds in its sister/subsidiary companies, for strategic business reasons, then the provisions of section 14A will not be applicable. - Decided in favour of assessee

MAT applicability - Held that:- While computing the tax under the provisions of section 115JB of the Act which is a provision with fiction, any disallowance made by virtue of another provision with fiction viz., section 14A of the Act, can .....

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Chennai dated 16.09.2015 in ITA No.120/2014-15 passed under section 143(3) r.w.s. 250(6) of the Act. 2. The assessee has raised several grounds and additional ground in its appeal and they are concised herein below for adjudication:- i) The learned Commissioner of Income Tax (Appeals) has erred in sustaining the addition made by the learned Assessing Officer by invoking the provisions of section 14A r.w.rule 8D of the Act. ii) The learned Commissioner of Income Tax (Appeals) has erred in sustain .....

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x under section 115JB on book profit of ₹ 120,46,01,185/-. The assessment was completed by the learned Assessing Officer under section 143(3) of the Act on 30.01.2015, wherein the learned Assessing Officer made certain additions amongst which one of the addition was with respect to disallowance of expenditure incurred for earning exempt income under section 14A read with rule 8D of the Act amounting to ₹ 2,59,90,908/- and computation of tax under the provisions of 115JB of the Act by .....

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ssee, it was submitted that the investments were made from the assessee s own interest free funds and the accumulated profits. It was further submitted that the loans taken by the assessee was for setting up of port facilities and obtained before making such investments. It was also explained that the assessee had not incurred any expenditure for making the investment for earning exempt dividend income or for monitoring the investment. However, the learned Assessing Officer rejected the contenti .....

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come. The expenses relating to the exempt stream of income cannot be claimed against the taxable stream of income. It is not necessary that there should be any income earned during the year. The expenditure incurred for earning an income can be lesser than the income itself. On some occasions, there could not even be any income though expenses are incurred towards earning the same. Even in such circumstances, the provisions of section 14A read with rule 8D were held to be applicable as held by t .....

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s. Reliance Utilities & Power Ltd. (313 ITR 340)(Bom) While doing so, the learned Commissioner of Income Tax (Appeals) made the following observations in his order:- i) The shares purchased and held in any manner would attract the provisions of section 14A of the Act. ii) In the case of the assessee investments were made in equity shares and the assessee was monitoring its investment by virtue of the position it had in the Board of those companies in which the assessee has invested. iii) Dis .....

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ia. Both these Government Undertakings were connected to the port activities which enhances the activity of the assessee. It was therefore argued that all these companies are sister companies with ancillary supporting objects and incorporated by the Government of India for the development activities of the port. Hence, it was pleaded that the provisions of section 14A of the Act would not be applicable in the case of the assessee. 6. The learned Departmental Representative on the other hand, veh .....

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Therefore, there would be no expenditure incurred for monitoring the investment activity of the assessee company in its sister companies or for making such decision. Further, it is evident that the assessee is having share capital and reserves & surplus to the extent of ₹ 5,38,04,75,152/- which is much more than the investment made by the assessee company in its sister companies amounting to ₹ 43.75 crores. Hence, it is apparent that the assessee is having interest free funds in .....

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72/Mds/2015, order dated 03.02.2016 is reproduced herein below for reference:- 7. We have heard both the par t ies and careful ly perused the mater ials avai lable on record. I t is a normal pract ice to make investment in sister companies due to commercial exigencies. Whi le doing so, no expense can be at t r ibutable other than interest expense for making such investments because al l management costs wi l l be absorbed for st rategic decision making process which is al lowable as business exp .....

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ut by the Ld. A.R. the Chennai bench of the Tribunal in ITA No.156/Mds/2013 vide order dated 20/08/13 for the assessment year 2009-10 has remitted back the matter to the Ld. Assessing Officer to decide the matter once again afresh based on the findings whether the assessee had actually incurred any expenditure in earning the dividend income. The relevant portion of the order is extracted herein below for reference:- Further, on the identical issue various Benches of the Tribunal and the Hon ble .....

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ollows:- No disallowance of interest is required to be made under rule 8D(i) & 8D(ii) where no direct or indirect interest expenditure was incurred for making investments. Where the assessee had utilized interest free funds for making fresh investments and that too into its subsidiaries, which was not for the purpose of earning exempt income and which was for strategic purposes only, no disallowance of interest was required to be made under Rule 8D(i) & 8D(ii) and strategic investment ha .....

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that no expenditure has been incurred for maintaining the 98% of the investment made in the subsidiary companies, therefore, in the absence of any finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the Assessing Officer is not justified, accordingly the same is deleted. (iv) CIT Vs. Bharti Televenture Ltd. reported in (2011) 331 ITR 0502. Where the assessee was found to be having adequate non-interest bearing fund by way of share capital and r .....

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he investments in sister concerns were made by the assessee out of interest free funds and therefore no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. (vi) EIH Associated Hotels Ltd Vs. DCIT reported in 2013- TIOL-796-ITAT-MAD …. The investments made by the assessee in the subsidiary company are not on account of investment for earning capital gains or dividend income. Such investments have been made by the asses .....

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ovisions of Rule 8D after deleting investments made by the assessee in subsidiary company. Taking note of the above decisions and the decision of the Chennai bench of the Tribunal in ITA No.156/Mds/13 cited supra, we hereby remit the matter back to the file of Ld. Assessing Officer to examine the issue involved in this case afresh and pass appropriate order as per law and merits and in the light of the decisions cited herein above. While doing so, we also direct the Ld. Assessing Officer to cons .....

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isallowance - Held that - investments made by the assessee in the subsidiary company are not on account of investment for earning capital gains or dividend income. Such investments have been made by the assessee to promote subsidiary company into the hotel industry. A perusal of the order of the CIT(Appeals) shows that out of total investment of ₹ 64,18,19,775/-, ₹ 63,31,25,715/- is invested in wholly owned subsidiary. This fact supports the case of the assessee that the assessee is .....

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subsidiary company - Decided in favour of assessee. For the above said reasons, we hereby hold that in the case of the assessee the provisions of Section 14A read with Rule 8D will not be applicable in regard to investments made for acquiring the shares of the assessee s sister concerns. Accordingly we restrain ourselves from interfering with the Order of the Ld.CIT(A) on this regard. 8. Therefore, following the aforesaid decision of the Tribunal, we hereby direct the learned Assessing Officer t .....

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section 14A will not be applicable since it has invested its interest free funds in the sister companies for strategic business reasons. Therefore, we hereby direct the learned Assessing Officer to delete the addition made on account section 14A of the Act. Accordingly, the first ground raised by the assessee is decided in its favour. 9. Since we have held that in the case of the assessee provisions of section 14A will not be applicable, the question of disallowance under section 14A read with R .....

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which is a provision with fiction, any disallowance made by virtue of another provision with fiction viz., section 14A of the Act, cannot be added to the book profit because a provision with fiction cannot be superimposed on another provision with fiction. The gist of the order is reproduced herein below for reference:- 8.1. Ground No.5.(a) - Computation of book profit U/s.115JB of the Act by giving effect to the disallowance of expenditure made invoking the provisions of the Section-14A of the .....

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relevant portion of the order of the Ld. CIT (A) is reproduced herein below for reference:- 10.2 I have gone through the facts and circumstances of the case. The Assessing Officer has taxed the income U/s.115JB since the tax on book profits is more than the tax under normal computation. While doing so, she made disallowance of the amount relatable to exempt income on the basis of the amount worked out U/s.14A r.w.Rule 8D under normal computation. The provisions of clause (f) of Explanation-1 to .....

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he amount disallowable U/s.14A can be added back while computing book profit under Explanation-1 to s. 115JB(para 6). Respectfully following the above decisions, I uphold the addition made by the Assessing Officer. This ground is dismissed. However, on perusing the Explanation-1(f) of Section-115JB(2) of the Act, we do not find merit in the contention of the Ld. CIT (A). The relevant provision of the Act is extracted herein below for reference:- Section.115JB Explanation-[1] - For the purposes o .....

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e Act while arriving at the Book Profit for the purpose of Section- 115JB(2) of the Act. Further Section 14A of the Act is a provision with fiction disallowing the deemed expenditure attributable to exempt income viz., dividend income U/s. 10 of the Act and Section 115JB of the Act is also a provision with fiction for payment of tax in respect of deemed income. Therefore while computing the profit for the purpose of Section 115JB of the Act another provision with fiction cannot be superimposed. .....

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nce:- The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J . The Assessing Officer does not have the j .....

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