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M/s Pepsico India Holdings Pvt. Ltd. Versus ACIT, Circle 14 (1) , New Delhi

Disallowance under section 14A - Held that:- Coming to the facts of the instant appeal, it is seen that the year under consideration is assessment year 2006-07. Rule 8D was introduced by virtue of notification no.45/2008 dated 24.03.2008 and the Hon'ble Delhi High Court has held it to be prospective in operation in the case of Maxopp Investment Ltd. vs CIT (2011 (11) TMI 267 - Delhi High Court ). The Assessing Officer calculated the disallowance u/s 14A by adopting the procedure given in Rule 8D .....

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nt year 2006-07. We also concur with the contention of the Ld. AR that the disallowance in any case cannot exceed the exempt income. Therefore, on the facts of the case and respectfully following the ratio laid down by the Hon’ble Delhi High Court in Maxopp Investment Ltd. vs. CIT (supra), we set aside the order of the Ld. CIT (A) and direct the Assessing Officer to re-compute the disallowance restricting it to the amount of dividend earned during the year. The issue is restored to the file of t .....

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against the order dated 28.03.2013 passed by the Ld. CIT(A)-XVII, New Delhi for assessment year 2006-07. 2. The facts of the case are that the assessee, a company incorporated under the Companies Act, 1956 on 28.01.1994, is engaged in the business of production and sale of aerated and non-aerated soft drink beverages, snack food products, export of traded and manufactured goods. One of the objects of the assessee was to provide loans and also to hold shares of the companies involved in the busin .....

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d as exempt under section 10(34) of the Act. The AO, however, disallowed an amount of ₹ 6,04,09,910 under section 14A of the Act. The findings of the AO are stated in para 16 of the assessment order which for the sake of convenience is extracted herein below: 16. In view of the above, assessee s contention that no expenditure was incurred in respect if exempt income in rejected and expenses disallowable in this regard is computed as under as per procedure given in Rule 8D of the Income Tax .....

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n respect of such income which was not includible in the total income and thus no expenditure as debited in the profit and loss account is disallowable under section 14A of the Act. It was also submitted that neither any direct expense was incurred nor any indirect expense was incurred by the assessee on the investments yielding dividend income. The Ld. AR drew our attention to a chart which shows the dividend income earned during the year. The chart is reproduced as under:- S. No. Name of the i .....

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M/s Gujarat Bottling Company Private Limited ( GBCPL ) which company was eventually amalgamated with the Appellant. It was submitted that aforesaid investments were acquired by GBCPL in the financial year 1995 out of their own funds. Subsequently, on December 20, 2002, the aforesaid company was amalgamated with Aradhana Beverages and Foods Company Private Limited ( ABFL ) which in turn got amalgamated with the assessee. Thus, in pursuance of the amalgamation of GBCPL with ABFL and subsequent ama .....

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rusal of schedule 5 of the Audited Balance Sheet it would be seen that the assessee has also made investment of ₹ 2,37,79,77,000 in the shares of the subsidiaries and companies involved in the business of manufacture of soft drink beverage and ₹ 1,00,000/- in the shares of other companies on which no dividend income was earned during the year. 5. The Ld. AR further submitted that while making the aforesaid disallowance, the Assessing Officer has held that in view of Rule 8D of the Ru .....

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nditure was incurred to earn the income which does not form part of the total income. 6. The Ld. AR submitted that on appeal, the Ld. CIT(A) granted partial relief to the assessee but upheld the disallowance made by the AO under rule 8D(2)(iii) of the Rules amounting to ₹ 1,18,04,860. He submitted that the Ld. CIT (A) has grossly erred in firstly failing to appreciate that there was absolutely no basis to hold that the assessee had incurred any expenditure in relation to an income which wa .....

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of ₹ 34,562 had been received. It was submitted that the Ld. CIT (A) has erred in holding that any expenditure was disallowable when no such expenditure had been incurred. In fact, there was no nexus between the expenditure incurred and investments made, more so when it is admitted fact that the assessee has not borrowed fund for making any investment in the subsidiaries. In this regard, reliance is placed on the decision of the Gujarat High Court in the case of CIT vs Gujarat Narmada Val .....

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the assessment years prior thereto as held in case of Maxopp Investment Ltd. vs. CIT (347 ITR 272) (Del). It is submitted that since the instant assessment year is AY 2006-07, as such, disallowance made of ₹ 1,18,04,860 per-se is untenable and unsustainable in law. It was further submitted that before invoking the provisions of section 14A of the Act, the AO has to record a satisfaction vis a vis books of accounts of the assessee that expenditure debited in the books of the assessee are in .....

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CPL. As stated above, all the remaining investments of ₹ 237,79,77,000 has been made out of own funds (interest free) in the subsidiary companies and bottler companies and on such investments, no dividend income has been earned. It was submitted that since the aforesaid investments have not been made with an intention to earn dividend but have been made only to acquire the controlling interest in such companies as such, such investments were outside the purview of section 14A of the Act. R .....

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d unless dividend income is earned, such investments cannot be considered for making the disallowance. 8. The Ld. AR also sought to place heavy reliance on the judgment in case of REI Agro Ltd vs DCIT (2014) (160 TTJ 107) (Kol) and affirmed by Hon ble Calcutta High Court in GA 3022 of 2013 of ITAT 161 of 2013 in its judgment December 23, 2013 wherein even in respect of disallowance to be made under Rule 8D (2)(iii), it has been held as under: 8. In respect of provisions of rule 8D (2)(iii), whic .....

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in rule 8D(2)(ii) of the Act. 8.1 Thus, not all investments become the subjectmatter 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 .....

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only. Alternatively, it was submitted that the dividend income (exempt income) earned during the year was only ₹ 34,562/- and the disallowance in any case could not have exceeded the exempt income. It was the submission of the Ld. AR that the disallowance sustained by the CIT (A) deserves to be deleted both while computing the total income and the book profit u/s 115JB of the Act. 10. The Ld. DR relied on the order of the AO and the findings of the Ld. CIT (A). . 11. We have heard the riv .....

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the entire law and they are reproduced under for a ready reference:- 32. While examining the legislative history of Section 14A and Rule 8D, we have already noted that Section 14A, as introduced by virtue of the Finance Act, 2001, was with retrospective effect from 01.04.1962. The proviso was inserted by virtue of the Finance Act, 2002 and it was made clear that nothing in Section 14A empowered the Assessing Officer to either re-assess under Section 147 or pass an order enhancing the assessment .....

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etrospective with effect from 01.04.1962 are now encapsulated in sub-section (1) of Section 14A. It is also clear that sub-sections (2) and (3) of Section 14A were introduced subsequently by virtue of the Finance Act, 2006 and were introduced with effect from 01.04.2007. However, although sub-sections (2) and (3) had been introduced with effect from 01.04.2007, they remained empty shells inasmuch as the expression such method as may be prescribed got meaning only by the introduction of Rule 8D b .....

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ower to make rules conferred on the Central Board of Direct Taxes included the power to give retrospective effect, from a date not earlier than the date of the commencement of the said Act, to the rules or any of them and, unless the contrary was permitted (whether expressly or by necessary implication), no retrospective effect was to be given to any rule so as to prejudicially affect the interests of the assessees. He further submitted that Rule 8D was inserted in the said rules, but the Centra .....

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roduced with retrospective effect from 01.04.1962, the principles of Section 14A would have to be considered as having always been a part of the said Act and, therefore, sub-sections (2) and (3) of Section 14 A and Rule 8D of the said Rules were only machinery provisions and ought to be read retrospectively so as to give meaning to Section 14A(1). 35. We are of the view that Rule 8D would operate prospectively. We agree with the submissions made by Dr Rakesh Gupta that if the said Rule were to h .....

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rtue of the Notification No.45/2008 dated 24.03.2008, was prospective in operation and cannot be regarded as being retrospective. We may also point out that we have had the benefit of the decision of the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd v DCIT: (2010) 328 ITR 81 (Bom), wherein it has, inter alia, been held that the provisions of Rule 8D of the said Rules has prospective effect and shall apply with effect from assessment year 2008-09 onwards. 36. Insofar as sub-sections (2) and .....

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cordingly, apply in relation to the assessment year 2007-08 and subsequent years. 37. Furthermore, in the Memorandum explaining the provisions in the Finance Bill, 2006 [281 ITR (ST) at pages 281-281], it is once again stated with reference to clause 7 which pertains to the amendment to Section 14A of the said Act that:- This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years. 38. We may also refer to the C .....

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, therefore, clear that sub-sections (2) and (3) of Section 14A were introduced with prospective effect from the assessment year 2007- 08 onwards. However, sub-section (2) of Section 14A remained an empty shell until the introduction of Rule 8D on 24.03.2008 which gave content to the expression such method as may be prescribed appearing in Section 14A(2) of the said Act. 40. From the above discussion, it is clear that, in effect, the provisions of subsections (2) and (3) of Section 14A would be .....

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only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 1 .....

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that, the assessing was free to adopt any reasonable and acceptable method. 42. Thus, the fact that we have held that subsections (2) & (3) of section 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. .....

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een now widened under section 14A. So, even for the pre-Rule 8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing offic .....

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cer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of appor .....

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