TMI Blog2016 (1) TMI 1100X X X X Extracts X X X X X X X X Extracts X X X X ..... , Chennai dated 21.10.2014 in ITA No.849/13-14(A)-V passed under Sec.143(3) read with Sec. 250 of the Act. 2. The Assessee has raised three elaborate grounds in its appeal, however the crux of the issue is that the assessee is aggrieved by the order of the Ld. CIT (A), Chennai who has sustained the addition made by the Ld. Assessing Officer for ₹ 2,46,85,257/- being expenses incurred for earning exempt dividend income by invoking section14A of the Act r.w Rules 8D. 3.1 The brief facts of the case are that the assessee company is the holding company of Rane group companies , engaged in the business of supporting service in the areas of management, information technology, business development and infrastructure, filed its return of income on 01.10.2010 for the assessment year 2010-11. Subsequently, the case was selected for scrutiny and the assessment u/s.143(3) was completed on 28.03.2013 wherein the ld. Assessing Officer made certain disallowances amongst which one of the disallowances was made by invoking Section.14A r.w. Rule 8D for ₹ 2,46,85,257/- being the expenditure incurred for earning exempt dividend income of ₹ 21,51,35,562/-. The assessee had expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds have been used for making the investments. Without prejudice to the fact the Rule 8D is not applicable, we submit that disallowance of interest under clause (ii) of the Rule is not warranted . 3.2.1 Further, the assessee relied upon the decisions in the cases of CIT Vs. Hero Cycles in 323 ITR 518(P H), Greaves Leasing Finance Ltd Vs. ITO (ITA No.5634(Mum.) of 2009) and ACIT Vs. Champion Commercial Company Ltd in ITA No.6441KoL/2012 in support of its contentions. However, the explanation offered by the assessee was rejected by the Ld. Assessing Officer by observing as under:- 3.3 The reply of the assessee has been considered. A plain reading of section 14A read with Rule 8D clarifies the legislative intent that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. No expenditure, whether direct or indirect, which is not attributable or relatable to earning to taxable income can be allowed. In a particular year there may not be an income which does not form part of total income but still disallowance under the provisions of section 14A read with rule 8D as the source for generating income is already created which r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue and after considering the submissions of the AR of the appellant, the AO applied the provisions of Section 14A read with Rule 8D. It is a fact that there may not be an income in a particular year which does not form part of total income but still disallowance under the provisions of Section 14A read with Rule 8D as the source from generating income has already created. Even though the said source may not yield income in a particular year, but the source remains maintained and nurtured. Even if there is no exempt income earned during a particular year still disallowance u/s 14A read with Rule 8D can be made. If the expenditure is incurred in relation to income which does not form part of the total income, it has to suffer disallowance irrespective of the fact whether any income is earned by the assessee or not. However, the reliance placed by the Assessing Officer on the ratio held in Walfort Share Stock Brokers P Ltd., the Hon ble Supreme Court has held that the basic reason for insertion of Sec.14A is that certain incomes are not includible while computing total income as these are exempted under certain provisions of the Act. 5.1 The Assessing Officer made a valid observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Rules. In this backdrop, it is to be seen from the assessment order that before invoking exigibility of the charging section itself i.e. section 14A, the Assessing Officer has nowhere recorded satisfaction specifically rebutting the assessee s contention that it had not incurred any expenditure whilst earning the exempt income in question. In such a case, we find that the Kolkata tribunal (supra) has categorically held that before invoking the Sec.14A of the Act, it is the duty of the Assessing Officer to record such a satisfaction that the plea of the assessee averring no expenditure to have been incurred is not correct. The relevant observation of the Co-ordinate Bench read as under:- 6. We have considered the rival submissions. A perusal of the provisions of section 14A, more specifically sub-section (2), shows that if the AO is not satisfied with the correctness of the claim of the assessee, then the AO shall determine the amount of expenditure incurred in relation to such income, which does not form part of total income under the Act. For this the method is prescribed in rule 8D. The provision of section 14A, sub-section (3) specifies the provision of 14A(2) would a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar income or receipt. This clearly means that if there is any interest expenditure, which is directly relatable to any particular income or receipt, such interest expenditure is not to be considered under rule 8D(2)(ii). In the assessee s case here the interest has been paid by the assessee on the loans taken from the banks for its business purpose. There is no allegation from the banks nor the AO that the loan funds have been diverted for making the investment in shares or for non business purposes. Further rule 8D(2)(ii) clearly is worded in the negative with the words not directly attributable . Thus for bringing any interest expenditure, claimed by the assessee, under the ambit of rule 8D(2)(ii) it will have to be shown by the AO that the said interest is not directly attributable to any particular income or receipt. Why we say here that it is to be shown by the AO is on account of the words in Rule 8D(1) being where the Assessing Officer, is not satisfied with. (a) .. (b) .. in relation to income ., he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). In the assessee s case, admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indings of the ld. CIT(A) on the issue stand confirmed and consequently the appeal filed by the Revenue stands dismissed. 8. In respect of provisions of rule 8D(2)(iii), which is the subject-matter of the appeal in the assessee s hand, a perusal of the said provision shows that what is disallowable under rule 8D(2)(iii) is the amount equal to percentage of the average value of investment the income from which does not or shall not form part of the total income. Thus, under sub-clause (iii), what is disallowed is percentage of the numerator B in rule 8D(2)(ii). Again this is to be calculated in the same line as mentioned earlier in respect of Numerator B in rule 8D(2)(ii) of the Act. 8.1 Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. The assessee has brought out a case to show 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 noninterest bearing fund by way of share capital and reserves and there was no nexus between the borrowals of assessee and the advances given, no disallowance for interest was called for. (v) CIT Vs. Reliance Utilities Power Ltd., reported in (2009) 313 ITR 0340(Bom.) has held as follows:- Tribunal having recorded a clear finding that the assessee possessed sufficient interest-free funds of its own which were generated in the course of the relevant financial year, apart from substantial shareholders fund, presumptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 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 not into the business of investment and the investments made by the assessee are on account of business expediency. Any dividend earned by the assessee from investment in subsidiary company is purely incidental. Therefore, the investments made by the assessee in its subsidiary are not to be reckoned for disallowance U/s. 14A r.w.r. 8D. The Assessing Officer is directed to re-compute the average value of investment under the provisions of Rule 8D after deleting investments made by the assessee in 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. It is ordered accordingly. 6. In the result, the appeal of assessee is allowed for statistical purposes. Order pronounced on the 06th January, 2016 at ..... X X X X Extracts X X X X X X X X Extracts X X X X
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