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2016 (6) TMI 586 - ITAT CHENNAI

2016 (6) TMI 586 - ITAT CHENNAI - TMI - Disallowance u/s 14A - investment in tax-free securities - disallowance of 25% of the salary of Sr. Vice- President, Finance & VP Finance & Secretary - Held that:- In the return of income filed by the assessee, the assessee has not shown any expenditure incurred for earning the exempt income. Therefore, in accordance with the provisions of section 14A r.w. Rule 8D the Assessing Officer made the disallowance of expenditure for earning the exempt income. Eve .....

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l. The ld. CIT(A) has passed a detailed order, which is reproduced hereinabove.

In view of the above, we are unable to accept that only the expenditure of ₹.26,45,886/- would have incurred to handle the investment of huge magnitude of ₹. 338.98 crores. Under the above facts and circumstances, the Assessing Officer has rightly applied Rule 8D and worked out the expenditure relatable to earning of exempt income, which was confirmed by the ld. CIT(A) and we find no infirmity .....

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nvestments during the year was ₹.964.52 crores, which was higher by ₹.5.78 crores than purchase of investments of ₹.958.74 crores. There is no dispute on the free reserve and surplus funds available with the assessee of ₹.791.40 crores. When the assessee got its own fund and non-interest bearing funds more than the investment in tax-free securities, then there is no question of deeming that the assessee has used the borrowed funds for investment in tax-free securities. By .....

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disallowed under Rule 8D(2)(ii). No infirmity in the order passed by the ld. CIT(A) and thus, the ground raised by the Revenue stands dismissed.

Disallowance of expenses on dies and moulds - Held that:- As decided in assessee's own case for earlier AYs replacement of dies and mould was only "revenue expenditure" after distinguishing the facts of the assessee's case from that of the Hon'ble Supreme Court in the case of CIT v. Saravana Spinning Mills Pvt. Ltd (2007 (8) TMI 16 - SUPREME .....

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ls Ltd. [2007 (1) TMI 147 - MADRAS High Court] relied on by the ld. CIT(A) and against this decision, the Department has preferred SLP Before the Hon’ble Supreme Court. However, the ld. DR could not file any decision against the decision of the Hon’ble Jurisdictional High Court in the case of CIT v. Brilliant Tutorials Ltd. (supra). Until and unless the decision is reversed, the decision of the Hon’ble Jurisdictional High Court is having binding nature, therefore, we find no infirmity in the ord .....

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Faizan Shoes Pvt. Ltd. [2014 (8) TMI 170 - MADRAS HIGH COURT ] wherein held the services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of fees for technical services - Section 9 of the Act is not applicable to the case on hand and section 195 of the Act does not come into play – Decided against Revenue.

Set off of the loss of 80IC units against the income of other units - Held that .....

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:- 27-4-2016 - Shri Chandra Poojari, Accountant Member and Shri Duvvuru RL Reddy, Judicial Member For The Assessee : Shri R. Vijayaraghavan, Advocate For The Department : Shri Arun C. Bharat, CIT ORDER PER DUVVURU RL REDDY, JUDICIAL MEMBER: These cross appeals by the assessee and Revenue; respectively, are directed against the order of the Commissioner of Income Tax (Appeals) III, Chennai dated 29.06.2012 relevant to the assessment year 2008-09. The issues raised in the grounds of appeal of the .....

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heelers and parts thereof. The assessee has filed its return for the assessment year 2008-09 on 30.09.2008 admitting loss of ₹.59,67,82,166/-. Subsequently, the assessee has filed its revised return on 31.03.2010 revising the total loss of ₹.59,82,66,374/-. The return filed by the assessee was processed under section 143(1) of the Act. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Act was issued on 12.08.2009. Thereafter, fresh notice under .....

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before the ld. CIT(A) and raised various grounds. After considering the submissions and also by considering the facts of the case, the appeal filed by the assessee was partly allowed for statistical purposes. 4. Aggrieved, the assessee is in appeal before the Tribunal. 5. We have heard both sides, perused the materials on record and gone through the orders of authorities below. The assessee has challenged confirmation of disallowance under section 14A of the Act. In the assessment order, the Ass .....

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ntified the disallowance at ₹.3,66,11,461/- and added the same to the total income of the assessee. With regard to the above disallowance, the AR of the assessee has strongly contested before the ld. CIT(A). After examining the profit and loss account, balance-sheet and other details submitted by the AR of the assessee, the ld. CIT(A) has observed as under: 4.2 I have carefully considered the facts of the case and the submission of the ld. AR. I have also gone through the decisions relied .....

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31.3.2007 and 31.3.2008 respectively. Obviously, the returns from such investment would not attract any tax. The appellant has also debited interest of ₹ 11,47,62,163/- to the profit and loss account. It is, therefore, difficult to accept the contention of the ld.AR that conditions of rule 8D(1) are not satisfied. Investment of such huge magnitude of ₹ 338.96 crores would definitely involve the services of competent manpower as well as informed decision making by the top management a .....

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applied the provisions of rule 8D to the present case. 4.3 Regarding the quantification, the AO had calculated the disallowance at Rs. Nil, ₹ 1,95,18,961/- and ₹ 1,70,92,500/- under clauses (i), (ii) & (iii) of rule 8D (2) respectively. There is no dispute regarding the first component because it is Nil. With regard to the second component, being the expenditure by way of interest which is not directly attributable to any particular income or receipt, the AO has determined the am .....

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2008 was ₹ 338.96 crores. The sale proceeds of investments during the year was ₹ 964.52 crores, which was higher by ₹ 5.78 crores than purchase of investments of ₹ 958.74 crores. The free reserve and surplus were ₹ 791.40 crores. The Hon'ble ITAT, Mumbai, in the case of HDFC Ltd., v. DCIT (ITA No,4529,3650,3651, 4059,991/Mum dated 29.6.2011) has held that if assessee's own fund and non-interest bearing funds are more than the investment in tax-free securitie .....

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facts and the precedents, I am of the considered opinion that the appellant had sufficient interest-free funds of its own to make investment in tax-free territory and hence no interest can be disallowed under rule 8D(2)(ii). Hence, disallowance of interest of ₹ 1,95,18,961/- under rule 8D(2)(ii) is deleted. 4.4 As regards the contention of the appellant that the third limb being rule 8D(2)(iii) is also not applicable, I do not find substance in such argument. There is also no substance in .....

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ercent of the average value of the investments will be deemed to be expenditure incurred for the same. When the Act has specified a definite formula for working out the amount, restricting the same to an amount of ₹ 26,45,886/- as suggested by ld.AR will not be in accordance with law. If law fails, there is no question of any unjustness. Hence, the disallowance made by the AO of ₹ 1,70,92.500/-, being half per cent of the average investment yielding exempt income, is confirmed. In th .....

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at the disallowance may be restricted to 2% of the dividend income only on the ground that the notification of Rule 8D w.e.f. 24.03.2008 is prospective in operation. In this case, the assessment year under consideration is 2008-09 and with regard to application of Rule 8D, the Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT [(2010) 328 ITR 81] has held as under: ……. However, unless expressly or by necessary implication, a contrary provision is made .....

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t that the application of provisions of Rule 8D notified with effect from 24.03.2008 would apply with effect from assessment year 2008-09, which was not found to have been reversed by the Higher Court, the question of restriction of disallowance @ 2% as well as application of the above said notification whether from retrospectively or prospectively does not arise. Since the assessee has not excluded any expenditure relatable to earning exempt income of ₹.11,70,82,808/-, by invoking section .....

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certain administrative and establishment cost since the decision to make investments, track investments, sale of such investments and follow-up of the receipt of income, sale proceeds, etc. have to be undertaken which entails definite costs. During the course of appellate proceedings, the AR of the assessee has submitted that the assessee has agreed for disallowance of 25% of the salary of Sr. Vice-President, Finance & VP Finance & Secretary at ₹.26,45,886/- [₹.15,37,990 + & .....

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king section 14A of the Act, the Assessing Officer has rightly applied Rule 8D and worked out the expenditure relatable to earning of exempt income, which was confirmed by the ld. CIT(A). Therefore, the request for restricting the disallowance @ 2% of the dividend income as expenditure is not permissible under the Law. By following the above decision of the Hon ble Bombay High Court, in the case of Indian Bank v. ACIT for the assessment year 2008-09 in I.T.A. No. 1923/Md/2011 vide order dated 30 .....

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ns of the assessee, the ld. CIT(A) confirmed the disallowance made by the Assessing Officer by observing that the claim of the assessee that 2 per cent of exempt income can be taken as expenditure incurred to earn tax free income cannot be accepted. When the Act has prescribed a method for quantifying the disallowance where the Assessing officer has not satisfied with the disallowance made by the assessee, the same cannot be overlooked. In the assessee s case, the securities are held as stock-in .....

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e ld. CIT(A) and directed the Assessing Officer to work out the disallowance @ 2%. However, since Rule 8D is applicable from the assessment year 2008-09 onwards, the disallowance should be made based on the prescribed method quantified by the Act. Since the Assessing Officer has made the disallowance under section 14A and computed under Rule 8D, we confirm the disallowance made by the Assessing Officer. Accordingly, the ground raised by the assessee is dismissed. 9. Similarly, in the case of Ind .....

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;.5,17,68,002/- during the financial year 2007-08. It is also not disputed that the assessee has borrowed substantial amounts of funds during the financial year 2007-08 and interest amount paid on these borrowings stood at ₹.1,01,000/-. Further, it was also not disputed that the main activity of the assessee is manufacturing electronic ignition systems and in addition the assessee is also investing and trading in shares/mutual funds, but the assessee has not maintained any separate sets of .....

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income generated from the investment activity. The ld. CIT(A), by considering various decisions and submissions of the assessee, confirmed the disallowance made by the Assessing Officer. From the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd v. DCIT (320 ITR 81), it is very clear that the application of provisions of Rule 8D, which has been notified with effect from 24.03.2008, shall apply with effect from assessment year 2008-09 onwards. 8. The ass .....

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vidend income as expenses attributable for earning it. 9. In the present case, the assessment year under consideration is 2008-09 and in view of the decision in the case of Godrej & Boyce Mfg. Co. Ltd v. DCIT(supra), the application of provisions of Rule 8D, which has been notified with effect from 24.03.2008, shall apply with effect from assessment year 2008-09 onwards. Since the assessee has not maintained any separate sets of books for the investment activity and the manufacturing activit .....

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in the order of the ld. CIT(A) on this issue and thus, the ground raised by the assessee is dismissed. 10. In the return of income filed by the assessee, the assessee has not shown any expenditure incurred for earning the exempt income. Therefore, in accordance with the provisions of section 14A r.w. Rule 8D the Assessing Officer made the disallowance of expenditure for earning the exempt income. Even during the course of assessment proceedings, the assessee has not accepted any expenditure for .....

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ew of the above, we are unable to accept that only the expenditure of ₹.26,45,886/- would have incurred to handle the investment of huge magnitude of ₹. 338.98 crores. Under the above facts and circumstances, the Assessing Officer has rightly applied Rule 8D and worked out the expenditure relatable to earning of exempt income, which was confirmed by the ld. CIT(A) and we find no infirmity in the order passed by the ld. CIT(A). Thus, the ground raised by the assessee stands dismissed. .....

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directly attributable to any particular income or receipt, the Assessing Officer has determined the amount at ₹.1,95,18,961/-. The Assessing Officer has taken into account the interest expenditure of ₹.9,26,30,134/- for computing the above disallowance. 13. Before the ld. CIT(A), the AR of the assessee contended that no borrowed fund was utilized for making investment which yielded exempt income. After perusing the profit and loss account, balance-sheet and other details submitted by .....

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7;.5.78 crores than purchase of investments of ₹.958.74 crores. The free reserve and surplus were ₹.791.40 crores. Since the Mumbai Benches of ITAT in the case of HDFC Ltd., v. DCIT (ITA No.4529, 3650, 3651, 4059, 991/Mum dated 29.6.2011) has held that if assessee's own fund and non-interest bearing funds are more than the investment in tax-free securities, then there is no basis for deeming that the assessee has used the borrowed funds for investment in tax-free securities. Furt .....

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nvestment in tax-free territory and hence no interest can be disallowed under rule 8D(2)(ii). Hence, he deleted the disallowance of interest of ₹.1,95,18,961/- made under rule 8D(2)(ii). 13. Before us, the ld. DR has submitted that Rule 8D undertakes disallowance on a proportionate basis in the ratio of the average value of investments against the average value of total assets. It was further submitted that section 14A supersedes the principle of law that in the case of a composite busines .....

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ed over the quantum of investment made by the assessee to the extent of ₹.338.96 crores and receipt of exempt income amounting to ₹.11.70 crores. The value of investment was ₹.344.74 crores and ₹.338.96 crores as on 31.3.2007 and 31.3.2008 respectively. The investment as on 31.3.2008 was ₹ 338.96 crores. The sale proceeds of investments during the year was ₹.964.52 crores, which was higher by ₹.5.78 crores than purchase of investments of ₹.958.74 c .....

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non-interest bearing funds are more than the investment in tax-free securities, then there is no basis for deeming that the assessee has used the borrowed funds for investment in tax-free securities, the ld. CIT(A) has held that the assessee had sufficient interest-free funds of its own to make investment in tax-free territory and hence no interest can be disallowed under Rule 8D(2)(ii). The finding of the Mumbai Benches of the Tribunal in the case of HDFC Bank Ltd. v. DCIT (supra) was duly con .....

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n of disallowance of expenses on dies and moulds made to the tune of ₹.23,29,55,420/- only on the ground that the Department has preferred an appeal against the order of the Tribunal in assessee s own case in I.T.A. No. 893/Mds/2007 dated 22.05.2008 for the assessment year 2003-04, which was not accepted by the Department. 18. The brief facts of the case are that the assessee has claimed ₹.27,40,65,201/- towards revenue expenditure incurred in consumption of dies, jigs and moulds. Di .....

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-04. Though the ITAT has decided the issue in favour of the assessee, the same has not been accepted by the Department and the matter has not reached its finality. 19. Before the ld. CIT(A), the AR of the assessee has submitted that the ITAT "C" bench in ITA No. 792/Mds/2007 for the AY 2003-04 and the "D" bench in ITA No. 491/Mds/2008 for the AY 2004-05 in assessee s own case has held that replacement of dies and mould was only "revenue expenditure" after distinguis .....

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relied on assessee's own case for the assessment year 2007-08 In ITA No. 469/09-10/A-lll dated 21.02.2011 wherein the ground has been allowed. Under the above facts and circumstances, the ld. CIT(A) has held as under: 6.2 I have carefully considered the facts of the case and the submission of the Id. AR. I have also gone through the orders of the Hon'ble Tribunal in appellant's own case for AYs. 2003-04 and 2001- 02 & 2005-06 wherein the issue has been decided in favour of the ap .....

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ve orders, the ground is allowed. 20. Since the ld. DR could not file and decision of the higher Courts having modified or reversed the findings of the Tribunal, we find no infirmity in the order passed by the ld. CIT(A) and accordingly, the ground raised by the Revenue is dismissed. 21. The next ground relates to disallowance of product launch expenditure of ₹.41,28,15,721/-. The assessee has launched four new vehicles i.e., Star Sport, Apache RTR, Flame and Star 110 and has incurred an e .....

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ancial years. But for the purpose of income-tax the entire expenditure is claimed in the year in which it is incurred. The Assessing Officer has stated that the above expenses are mainly incurred for advertisement and brand building of new products and to promote sales in the Indian market. The Assessing Officer has observed that the differential treatment given by the assessee for book purposes and for income-tax purposes is not acceptable. The product launch expenses are incurred mainly toward .....

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n the form of preliminary expenses incurred to promote sale of the product. Hence, they fall in the category of expenses contemplated under section 35D of the Act. Since the assessee has chosen to amortise the expenditure over a period of three years for the book purposes, it should have claimed the expenses on the same basis for income-tax purposes also. Therefore the Assessing Officer has adopted the basis as considered by the assessee for the book purposes and allowed ₹. 9,79,41,441/- o .....

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ng various decisions, the ld. CIT(A) has observed that there is no dispute regarding the fact that the assessee had incurred expenditure of ₹.51,07,57,162/-. However, the Assessing Officer restricted the claim to ₹.9,79,41,411/- only as that amount was charged to the profit and loss account and disallowed the remaining expenses of ₹.41,28,15,721/- by holding that the differential treatment for books and income tax purpose is not acceptable. By relying various decisions, the ld. .....

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against this decision, the Department has preferred SLP Before the Hon ble Supreme Court. However, the ld. DR could not file any decision against the decision of the Hon ble Jurisdictional High Court in the case of CIT v. Brilliant Tutorials Ltd. (supra). Until and unless the decision is reversed, the decision of the Hon ble Jurisdictional High Court is having binding nature, therefore, we find no infirmity in the order passed by the ld. CIT(A) on this issue and accordingly, the ground raised by .....

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er that the services were rendered by the agents outside India and therefore TDS under section 195 of the Act is not applicable as per CBDT Circular No.786/2000. However, the Assessing Officer did not accept the contention of the assessee because the CBDT vide its Circular No. 7 dated 22.10.2009 has withdrawn both Circular No.23 of 1969 and 786 of 2000. In absence of the immunity for commission payments abroad to nonresidents, each individual payment is to be dealt with as per the provisions of .....

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ave been arisen in India. He further stated that tax is required to be deducted under section 195(1) of the Act if the sum paid is chargeable to tax. The assessee should have obtained certificate under section 195(2) of the Act from the Department if it felt that the said sum is not taxable in India. The Assessing Officer has also relied on the decision in the case of M/s. Transmission Corporation of Andhra Pradesh reported in 239 ITR 589 (SC). Thereafter, he applied provisions of sec 40(a)(i) o .....

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e and not retrospective. He also relied on the decision in assessee s own case for the assessment years 2005-06 and 2007-08 and pleaded that no tax need to be deducted at source and the disallowance made u/s 40(a)(i) was deleted. After considering the submissions of the assessee and also orders of the ld. CIT(A) in the assessment years 2005-06 and 2007-08, the ld. CIT(A) allowed the ground raised by the assessee by following the decision of the Tribunal in assessee s own case in ITA No.697, 757, .....

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of the Revenue, the Hon ble High Court has held as under: Held, dismissing the appeal, that on a reading of section 9(1)(vii), commission paid by the assessee to the non-resident agents would not come under the term "fees for technical services". For procuring orders for leather business from overseas buyers, wholesalers or retailers, as the case may be, the non-resident agent was paid 2.5 per cent commission on free on board basis. This was a commission simpliciter. What was the natur .....

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sessee in India. Therefore, the commission paid to the non-resident agents would not fall within the definition of 'Tees for technical services" and the assessee was not liable to deduct tax at source on payment of commission. 28. Respectfully following the above judgement of the Hon ble Jurisdictional High Court in the case of CIT v. Faizan Shoes Pvt. Ltd. (supra), the ground raised by the Revenue is dismissed. 29. The next issue raised in the appeal of the Revenue pertains to set off .....

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n view of the provisions contained in sub-section (7) of sec 80-IC of the Act. He held that the eligible income or loss derived by the Himachal unit is not eligible for set off with any other unit. The income or loss of the unit is to be treated as if it is the only source of income to the assessee which means that the income or loss of this unit cannot be clubbed with the income or loss from any other source from the same head. Therefore, set off of loss is not allowable as per section 70(1) of .....

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