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2016 (6) TMI 205 - ITAT PUNE

2016 (6) TMI 205 - ITAT PUNE - TMI - Disallowance u/s 14A - investment in shares/mutual funds/partnership firms, the income of which is tax free - disallowance of indirect expenditure for earning tax free dividend income - Held that:- Since the assessee in the instant case has conclusively proved that it s own capital and free reserves is far more than the investment in shares/mutual funds/partnership firms, the income of which is tax free, therefore, respectfully following the decision of the H .....

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uery raised by the AO to the assessee on this issue. At the same time, there is no suo moto disallowance made by the assessee on account of the expenditure attributable to earning of the exempt income other than the expenditure on account of IPO. Although the assessee has neither disallowed any expenditure on this account in the computation statement presumably on the ground that no expenditure has been incurred and although the AO has also not specifically discussed this issue in the body of th .....

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Y, JM For The Assessee : Shri Nikhil Pathak For The Revenue : Shri Aseem Sharma ORDER PER R.K.PANDA, AM : The above 2 appeals filed by the assessee are directed against the common order dated 31-03-2014 of the CIT(A)-II, Pune relating to Assessment Years 2008-09 and 2009-10 respectively. For the sake of convenience these were heard together and are being disposed of by this common order. ITA No.1656/PN/2014 (A.Y.2008-09) : 2. Facts of the case, in brief, are that the assessee is a Limited Compan .....

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ras it was prejudicial to the interest of the revenue with the following directions : (1) The Assessing Officer should cause necessary enquiries as per provisions of Section 14A r/w Rule 8D. (2) The Assessing Officer should verify the contentions of the assessee having regard to the accounts of the assessee. (3) The Assessing Officer should verify both direct as well as indirect expenditure for earning exempt income. (4) Where the expenditure incurred cannot be related to either taxable income o .....

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Officer should determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with Rule 8D of Income Tax Rules, 1962. 3. The AO, thereafter, issued notice u/s.143(2) and 142(1) and asked the assessee to justify the correctness of its claim in respect of disallowance u/s.14A r.w. Rule 8D. It was submitted by the assessee that as per the audited balance sheet of the company the share capital is ₹ 75,31,00,480/- and the free reserves .....

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tax. Thus, the net investment which may yield exempt income is only ₹ 278.07 crores which is much less than the total figure of share capital and free reserves available with the company. It was accordingly submitted that the assessee has surplus funds available which is much more than the investment made for earning the exempt income and therefore there is no question of making any disallowance of expenditure u/s.14A. 4. The assessee further submitted a chart giving the details of total i .....

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ll the expenditure incurred pertaining to IPO were disallowed by the assessee company suo-moto and not a single penny was claimed as allowable business expenditure, therefore, no disallowance u/s.14A r.w. Rule 8D is required to be made on account of such investments. 5. The assessee submitted that there are certain investments in the partnership firms where the assessee is a partner. Profit arising from the partnership firm is exempt in the hands of the partner. However, the partnership firm has .....

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borrowed interest bearing funds as on 31-03-2008 is ₹ 84.05 crores which is far less than the investments made by the assessee company. It was reiterated that the assessee has its own surplus free funds far more than the tax free investments made and therefore in absence of any nexus to prove that the borrowed funds are utilized for earning tax free income, there is no question of making any disallowance u/s.14A. It was accordingly argued that under no circumstances any disallowance u/s.1 .....

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) Net current assets 134.6 cr II) Net fixed assets 9.86 cr Total 424.05 cr. 7. From the above, it is clear that as against availability of ₹ 424.05 crores for making investments the assessee has made investment of ₹ 507.46 crores which is higher than the interest free funds available for such investment. Thus, it is apparent that the difference of ₹ 83.35 crores has been invested through loan bearing funds. During the year the total loan bearing funds is ₹ 84.05 crores wh .....

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ility of section 14A. Therefore, the said decision is not applicable to the facts of the present case. 9. He also rejected the contention of the assessee that amount of ₹ 424.05 crores was available for making investment which includes ₹ 275.54 crores received from the IPO. Relying on various decisions the AO held that tax free income earned from partnership firm is subject to disallowance u/s.14A. Since the assessee has made investment as capital contribution from loan bearing funds .....

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unds have been utilised for making tax free and taxable investment in current year and in preceding years also, therefore, the AO applying the provisions of section 14A r.w. Rule 8D (2) and 8D(3) made a disallowance of ₹ 2,70,46,829/-. 10. In appeal, the Ld.CIT(A) upheld the action of the AO for which the assessee is in appeal before us with the following grounds : The following grounds are taken without prejudice to each other - On facts and in law, 1] The learned CIT(A) erred in confirmi .....

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learned CIT(A) failed to appreciate that the satisfaction recorded by the learned A.O. was based on wrong presumptions and since the A.O. had not given any cogent reasons as to how the claim of the assessee was incorrect, the disallowance made u/s 14A was not justified at all. 3] Without prejudice to the above grounds, the assessee submits that the investments in shares of various group companies or capital contribution in partnership firms were made on account of business expediency and not wi .....

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) erred in holding that - a. There was a nexus between the interest bearing funds raised and making of tax free investments and hence, the proportionate interest attributable to tax free investments was rightly disallowed by the learned A.O. by applying the provisions of section 14A r.w.r. 8D(2)(ii). b. The assessee had not furnished any material to establish that the interest bearing funds were not utilised for making tax free investments and therefore, the disallowance of interest u/s 14A r.w. .....

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he above grounds, the assessee submits that whole of the investments in mutual funds were sourced out of owned funds raised through IPO of shares of the assessee company and this fact was also demonstrated by the assessee with proper evidences and hence, the investments made in mutual funds should have been excluded from the amount of tax free investments while computing the disallowance u/s 14A r.w.r. 8D(2)(ii). 4.4] Without prejudice to the above grounds, the assessee submits that substantial .....

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nditure in relation to earning exempt income without appreciating that the learned A.O. has not recorded any objective satisfaction as to how the claim of the assessee is not correct and hence, the disallowance made u/s 14A r.w.r. 8D(2)(iii) is not justified at all. 5.1] The learned CIT(A) failed to appreciate that the assessee had not claimed indirect expenditure incurred in relation to earning the exempt income in the form of dividend from mutual funds and share of profit in partnership firms .....

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disallowance u/s 14A r.w.r. 8D(2)(iii). 6] Without prejudice to the above grounds, the assessee submits that the disallowance u/s 14A is attracted only in cases where the assessee has earned exempt income and hence, if at all, any disallowance u/s 14A r.w.r. 8D is to be made in the case of the assessee, the investments on which no exempt income has been earned should have been excluded while computing the disallowance u/s 14A r.w.r. 8D. 7] Without prejudice to the above grounds, the assessee su .....

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ntially. 9] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal. 11. The Ld. Counsel for the assessee referring to page 46 of the paper book drew the attention of the Bench to the chart showing tax free investments held as on 31-03-2008 and submitted that the total investments can be categorised into 3 parts : a. Investment in subsidiary/associate Companies - Rs.117,85,71,206/- b. Investment in mutual funds - Rs.160,28,12,406/- c. Investment in partnershi .....

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no direct nexus between the borrowed funds and the investment in shares/debentures/mutual funds/investment in partnership firms, the income of which is tax free, the AO and the CIT(A) have not considered the same properly. He submitted that it was conclusively proved before the AO and CIT(A) that the assessee has raised funds from public issue which was kept in separate bank account maintained with HSBC and the said funds were temporarily utilised for investment in mutual funds which was redeeme .....

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ssee in its computation statement. Referring to page 24 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to the balance sheet of the assessee company and submitted that the share capital has been shown at ₹ 75,31,00,480/- and reserves and surplus at ₹ 493,26,64,916/-. However, the AO in the body of the assessment order has reduced the net current assets shown at ₹ 134.6 crores and net fixed assets at ₹ 9.86 crores and has determined the o .....

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ing to page 46 of the paper book the Ld. Counsel for the assessee submitted that the total investment in shares of subsidiary/associate companies, investment in mutual funds and investment in partnership forms are only to the tune of ₹ 334,79,88,547/-. However, the AO while computing the investment of ₹ 507.4 crores has included the investment in debentures etc. whose income is taxable. Since the own capital and free reserves of the assessee company at ₹ 568.58 crores is much m .....

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ubmitted that the investment in mutual funds are out of the proceeds of the IPO and there is no question of any diversion of interest bearing funds. Therefore, no disallowance on this amount is called for. So far as the investment in subsidiary/associate companies amounting to ₹ 117.86 crores is concerned he submitted that no dividend has been received from these companies. Referring to the decision of the Pune Bench of the Tribunal in the case of Goyal Ishwarchand Kishorilal vide ITA No.4 .....

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nt in tax free investments. 16. So far as the indirect expenses are concerned the Ld. Counsel for the assessee referring to the computation statement submitted that the assessee has already disallowed the public issue expenditure on account of the IPO in the computation statement. Therefore, no disallowance is called for. Further, no satisfaction has been recorded by the AO on account of incurring of indirect expenses for earning tax free dividend income. Referring to the decision of the Pune Be .....

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ed by the assessee should be allowed. 17. The Ld. Departmental Representative on the other hand heavily relied on the order of the AO and the CIT(A). He submitted that the assessee has earned huge exempt income and no disallowance has been made u/s.14A r.w. Rule 8D. He submitted that if the contention of the assessee that it has surplus funds for investment in shares/mutual funds/partnership firms is accepted, then there was no need to borrow funds. Referring to para 4.3 of the order of the CIT( .....

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e the AO has clearly mentioned that it is a fit case where provisions of section 14A are applicable and applying Rule 8D(2) he has calculated the disallowance u/s.14A. He accordingly submitted that the order of the CIT(A) be upheld. 19. The Ld. Counsel for the assessee in his rejoinder referring to the decision of the Hon ble Bombay High Court in the case of CIT Vs. Bombay Samachar Ltd. reported in 74 ITD 723 submitted that the Hon ble High Court in the said decision has held that the fact that .....

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not able to demonstrate that no borrowed funds have been utilised for investment in tax free investments, he submitted that the assessee has clearly demonstrated before the lower authorities that it has not utilised the borrowed funds for tax free investments. Therefore, the onus has shifted to the revenue authorities. Since they have not discharged the onus the assessee cannot be blamed for this. 21. As regards the recording of satisfaction is concerned he submitted that the AO in page 8 of the .....

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s of section14A(2) no disallowance is called for. It has been held in the said decision that the AO must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the AO is not satisfied with the correctness of the claim made by the assessee he must record reasons for his conclusion. There has to be specific objective satisfaction recorded by the AO which is one of the mandates of section 14(2). In absence of the same recourse t .....

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d. 22. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Ld.CIT in the instant case has directed the AO to cause necessary enquiries as per the provisions of section 14A r.w. Rule 8D and determine the disallowance in accordance with provision to sub-section (2) and (3) of Rule 8D. We find the AO in the assessment order .....

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e out of the proceeds of IPO which were kept in a separate bank account maintained with HSBC and were utilized for making investment in mutual funds. It is also the submission of the Ld. Counsel of the assessee that no dividend income has been received by the assessee from investment in shares of various group companies for which no disallowance can be made on account of investment in shares. It is also the argument of the Ld. Counsel for the assessee that the income of the partnership firm has .....

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to the balance sheet, which gives the details of investment and a copy of which is placed at page 28 of the paper book, we find the total investment of ₹ 507.46 crores includes investment in debentures and NSC the income of which is not tax free. Therefore, the AO is not justified in including the same in the category of investment, the income of which is tax free. From page 46 of the paper book we find the total investment in subsidiary/associate companies, investment in mutual funds and .....

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ich is tax free. Under these circumstances we have to see the applicability of provisions of section 14A r.w.r.8D. 25. We find merit in the submission of the Ld. Counsel for the assessee that when no dividend is received on investment in shares worth ₹ 117,85,71,206/- in subsidiary/associate companies no disallowance u/s.14A is called for. We find the Pune Bench of the Tribunal in the case of Goyal Ishwarchand Kishorilal (Supra) has held that when assessee has not received any dividend out .....

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12,406/ in mutual funds is concerned we find the assessee before the AO has made the following submission which has been reproduced by the AO at page 4 and 5 of the assessment order and which reads as under : 6. Secondly, the assessee is enclosing herewith the chart giving the details of the total investments made in various shares/securities/mutual funds. Now, it may kindly be noted that the assessee company had made a public issue of its shares in F.Y.2007-08 and had receive d ₹ 275.54 c .....

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Hence, the assessee submits that the entire investments in the mutual funds were out of the IPO funds. It is also to be noted that all the expenses incurred pertaining to the IPO were disallowed by the assessee company and not a single penny was claimed as allowable business expenditure. The computation of income for A.Y.2008-09 is enclosed herewith and from which it is clear that the expenditure incurred for the IPO has been disallowed while computing the income. 27. Nothing has been brought o .....

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n 14A on account of investment of ₹ 116.28 crores in mutual funds. 28. As regards the submission of the Ld. Departmental Representative that if the assessee had sufficient interest free funds, then there was no need to borrow is concerned we do not find any merit in the same. It is for the assessee to arrange its affairs and the revenue cannot direct the assessee to do its business in a particular manner. The Revenue has to see whether money borrowed has been utilized for the purpose of bu .....

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o why assessee should advance money to the sister concerns which inturn would earn income from interest there on while no interest accrued to the assessee on the large balances with it. He therefore disallowed a part of the interest expenditure. According to the AO since the amount of interest which the assessee would have got if he had charged interest on these amounts, far exceeded the amount of interest paid by it to outsiders in this year, therefore he disallowed the entire amount of interes .....

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ee. It appears to have been the view of the Income tax Officer that if the assessee had collected the outstandings which were due to it from others, it would have been able to reduce its indebtedness and thus save a part of the interest which it had to pay on its own borrowings. The assessee, therefore, was not justified in allowing its outstandings to remain without charging any interest thereon while it was paying interest on the amounts borrowed by it. To the extent, therefore, to which it wo .....

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i) are, firstly, that money must have been borrowed by the assessee ; secondly, it must have been borrowed for the purpose of business and, thirdly, the assessee must have paid interest on the said amount and claimed it as a deduction. It is not the requirement of the provision that the assessee must further show that the borrowing of the capital was necessary for the business so that if at the time of borrowing the assessee had sufficient amount of its own, the deduction could not be allowed. S .....

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tal Representative that if the assessee had sufficient interest free funds, there was no need to borrow from financial institutions. 29. As regards the argument of the Ld. Departmental Representative that assessee was not able to demonstrate that no borrowed funds have been utilized by the assessee towards the investment in shares/mutual funds/partnership firms, the income of which is tax free is concerned, we find the assessee before the AO had demonstrated that no borrowed funds have been util .....

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plus amount available with the assessee the AO has reduced the net fixed assets and net current assets from such free reserves and own capital which in our opinion is not justified in the light of various decisions including the decision of Hon ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (Supra) and HDFC Bank Ltd. (Supra). 30. We find the Hon ble Bombay High Court in the case of HDFC Bank Ltd. (Supra) at para 15 and 16 of the order has held as under : 15. It is clear t .....

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of this Court in HDFC Bank Ltd.(Supra) for the first time on 23rd July, 2014 has settled the issue by holding that the test of presumption as held by this Court in Reliance Utilities and Power Ltd. (Supra) while considering Section 36(1)(iii) of the Act would apply while considering the application of Section 14A of the Act. The aforesaid decision of this Court in HDFC Bank Ltd. (Supra) on the above issue has also been accepted by the Revenue inasmuch as even though they have filed an appeal to .....

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in HDFC Bank Ltd. (Supra). Thus, there is no conflict as sought to be made out by the impugned order. Thus, impugned order has proceeded on a fundamentally erroneous basis as the ratio decindi of the order in Godrej and Boyce manufacturing Co. Ltd. (Supra) had nothing to do with the rest of presumption canvassed by the petitioner before the Tribunal on the basis of the ratio of the decision of this Court in HDFC Bank Ltd. (Supra). 16. At the hearing Mr. Suresh Kumar, Learned Counsel for the Reve .....

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stand the above submission. The Assessing Officer passed the Assessment order on 22nd December, 2010 under section 143(3) of the Act. The CIT(A) passed an order on 21st November, 2011 dismissing the petitioner s appeal. On both the dates, when the orders were passed by the Assessing Officer and CIT(A), the authorities did not have the benefit of the order of this Court in HDFC Bank Ltd. (Supra) rendered on 23rd July, 2014. Once the issue is settled by the decision of this Court in HDFC Bank Ltd. .....

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Revenue. 31. Since the assessee in the instant case has conclusively proved that it s own capital and free reserves is far more than the investment in shares/mutual funds/partnership firms, the income of which is tax free, therefore, respectfully following the decision of the Hon ble Bombay High Court in the case of HDFC Bank Ltd.(Supra) we hold that no disallowance u/s.14A r.w. Rule 8D(2) is called for on account of disallowance of interest. 32. So far as the disallowance of indirect expenditur .....

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sessee has neither disallowed any expenditure on this account in the computation statement presumably on the ground that no expenditure has been incurred and although the AO has also not specifically discussed this issue in the body of the assessment order, however, it cannot be said that no expenditure has been incurred by the assessee for earning the tax free income. Considering the totality of the facts of the case, we are of the considered opinion that disallowance of ₹ 10 lakhs on adh .....

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the assessee had incurred the above expenditure for earning exempt income and hence, the same was not allowable as a deduction while computing the business income for this year. 2] The learned CIT(A) erred in holding that the learned A.O. had made the disallowance u/s 14A r.w.r. 8D after recording his satisfaction that the claim of the assessee was not correct and therefore, the disallowance was justified. 2.1] The learned CIT(A) failed to appreciate that the satisfaction recorded by the learned .....

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isallowance u/s 14A r.w.r. 8D in relation to such investments. 4] The learned CIT(A) erred in holding that the assessee had utilized interest bearing borrowed funds for making tax free investments and thereby confirming the disallowance of ₹ 1,62,11,508/- made on account of proportionate interest expenditure computed as per the provisions of rule 8D(2)(ii) of the Income Tax Rules, 1962. 4.1] The learned CIT(A) erred in holding that - a. There was a nexus between the interest bearing funds .....

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owned funds available with the assessee were far more than the amount of tax free investments and since there was no nexus between the interest bearing loans and making of tax free investments, there was no reason to hold that the assessee had utilized borrowed funds for making tax free investments and thus, the disallowance of interest to the extent of ₹ 1,62,11,508/- was not justified. 4.3] Without prejudice to the above grounds, the assessee submits that whole of the investments in mutu .....

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and this fact was duly demonstrated by the assessee and therefore, such investments made out of owned funds should have been excluded from the amount of tax free investments while computing the disallowance u/s 14A r.w.r. 8D(2)(ii). 5] The learned CIT(A) erred in confirming the disallowance of ₹ 1,01,21,875/- made by the learned A.O. u/s 14A r.w.r. 8D(2)(iii) on the ground that the assessee had incurred indirect expenditure in relation to earning exempt income without appreciating that the .....

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the facts of the case. 5.2] Without prejudice to the above grounds, the assessee submits that the whole of the investments in mutual funds were sourced out of funds raised through IPO of shares of the assessee company and no expenses in respect of the IPO issue have been claimed by the assessee and therefore, the investments in mutual funds should have been excluded from the amount of tax free investments while computing the disallowance u/s 14A r.w.r. 8D(2)(iii). 6] Without prejudice to the abo .....

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