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2016 (1) TMI 1100 - ITAT CHENNAI

2016 (1) TMI 1100 - ITAT CHENNAI - TMI - Addition of expenses incurred for earning exempt dividend income by invoking section 14A r.w Rules 8D - Held that:- On the identical issue as pointed out by the Ld. A.R. the Chennai bench of the Tribunal for the assessment year 2009-10 [2013 (8) TMI 999 - ITAT CHENNAI] 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 .....

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ed by the order of the Learned Commissioner of Income Tax(A)-V, 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 invokin .....

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er 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 explained before the Ld. Assessing Officer as to how Section.14A of the Act would not be applicable in the relevant case as follows:- During the previous year relevant to the A. Y. 2010-11, the company earned a dividend income of ₹ 2, 151 lakh .....

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ts Ltd. Pursuant to this merger, the Company became the beneficial owner of shares held by Rane Investments in the group companies. The major investments made by the company are in the group companies and the dividends are directly credited in the account of the assessee company by those companies. These investments are Long Term in nature and normally stay invested for many years. It is also submitted that no expenditure was incurred for earning of dividend income. The Company further submits t .....

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ividend income and no disallowance u/s. 14 A is warranted, we wish to submit that the company allocates the interest expenses (other than interest on loan from HDFC) to its group companies and recovers the same in the service charges billed to the group companies. Hence clause (ii) of Rule 8D would not apply to the company. In the present case, the company has only term loans which are sanctioned by the banks only for specific purposes and cannot be utilized for investments. Further, the company .....

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o.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, wheth .....

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ertinent here to mention the decision of Hon b(e ITAT Delhi (Special Bench) in the case of Cheminvest Ltd Vs. Income Tax Officer 124 TTJ 577 (DeL) (SB) in the context that even if there is no exempt income earned during a particular year still disallowance can be made u/s 14A read with Rule 8D. The controversy before the special bench, in this case, was whether disallowance u/s 14A could be made whether no dividend is received in the year under consideration. In this case the assessee had borrow .....

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. When prior to introduction of section 14A, an expenditure both under section 36 and 57 was allowable to an assessee without such requirement of earning or receipt of income, such condition cannot be imported when it comes for disallowance of the same expenditure u/s. 14A. In coming to this conclusion, the bench relied on the decision of the Hon ble Supreme Court in the case of CIT Vs. Rajendra Prasad Moody 115 ITR 519 SC. Reliance was also placed in the decision of the Hon ble Supreme Court in .....

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ficer applied the provisions of Sec.14A and arrived at expenditure incurred in relation to earning of income not forming part of total income hence the same was not allowed. The Assessing Officer has dealt elaborately on this issue 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 th .....

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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 observation that the copies of invoices pertaining to the year under consider .....

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o as to avoid the interest paid being hit by Rule 8D. I am in agreement with the decision taken by the Assessing Officer that the assessee has failed to substantiate that it has began to allocate the interest by failing to submit evidences in this regard and accordingly, disallowance u/s 14A read with Rule 8D and worked out correctly an amount of ₹ 2,46,85,2571- for disallowance and accordingly the same is confirmed, dismissing all the grounds of appeal on this issue. 4. Before us Ld. A.R. .....

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s available on record. On the identical issue as pointed out 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:- 6. We have heard rival .....

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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-ordinat .....

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of 14A(2) would also apply where the assessee makes a claim that there is no expenditure incurred. This is because if the assessee does not make a disallowance under section 14A in its computation of total income, when filing the return, then if subsection (3) was not available, the AO might not be able to make a disallowance under section 14A. Thus, where the assessee makes a claim that only a particular amount is to be disallowed under section 14A or where the assessee does not make a disallow .....

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its of the issue. A perusal of the provision of section 14A(1) clearly shows the wordings, in relation to the income which does not form part of the total income under this Act . In the present case, this income, which does not form part of the total income under the Act, is the dividend income of ₹ 1,32,638/-. Therefore, if any disallowance is to be made in respect of expenditure incurred, it should be in relation to this dividend income of ₹ 1,32,638/-. If an assessee has invested .....

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(i) deals with the amount of expenditure directly relating to the income which does not form part of the total income. That issue is not in dispute here and therefore, we do not go into it in this case. In second sub-part i.e.(ii), it is a computation provided in respect of expenditure incurred by the assessee by way of interest during the previous year which is not directly attributable to any particular income or receipt. This clearly means that if there is any interest expenditure, which is .....

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tributable . 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 .....

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nt Year: 2008-09 statement and other details to show the utilization of the loans. No bank would permit the loan given for one purpose to be used for making any investment in shares. The ld. CIT(A), it is noticed that after considering these facts that the assessee had not used any of its borrowings for purchasing the shares, has deleted the disallowance. On this ground itself, the deletion as made by the ld. CIT(A) is liable to be confirmed and we do so. 7.1 In any case, the working of the disa .....

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has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. This is why the question of satisfaction is provided in section 14A and rule 8D(1), that relates to the accounts of the assessee. Thus, it is not the total investment at the beginning of the year and at the end of the year, which is to be considered but it is the average of the .....

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utable to any particular income, the findings 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 ½ percentage of the average value of investment the income from which does not or shall not form part of the t .....

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f 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 section 14A read with rule 8D(2)(iii), which is issue in the assessee s appeal, is restored to the file of the AO for recomputation in line with the direction given above. No disallowance under section 14A read with rule 8D(2)(i) and (ii) can be made in this cas .....

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ts as well in favour of the assessee i.e. computation under Rule 8D of the Rules. However, since we are remitting the matter back on legality aspect itself, we do not consider it appropriate to advert to the computation aspect of the case. Further, on the identical issue various Benches of the Tribunal and the Hon ble Bombay High Court have held as follows:- i) Garware wall Ropes Ltd., Vs. ACIT reported in (2014) 65 SOT 086 (Mum.) held as follows:- When assessee has prima facie brought out case .....

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e 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 has to be excluded for purpose of arriving at disallowance under Rule 8D(iii). iii) M/s.JM Financial Ltd., Vs. ACIT reported in 2014-TIOL-202- ITAT-MUM held as follows: …the d .....

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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. .....

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ments 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 assessee to promote subsidiary company into the hotel industry. The assessee is not into the business of investment and the investments made by the assessee are on account of business ex .....

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n 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 consider the decision of the Tribunal in the case M/s Agile Electric Sub Assembly Pvt. Ltd. cited supra wherein it was held as follows:- 7.2 In regard to applicability of Section 14A of .....

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