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2016 (6) TMI 639 - ITAT MUMBAI

2016 (6) TMI 639 - ITAT MUMBAI - TMI - Addition u/s 14A - Held that:- There is a reasonable disallowance to be made u/s 14A of the Act for administrative and other indirect expenses incurred by the assessee company for earning exempt income having regards to the accounts of the assessee company as laid down u/s 14A(2) of the Act. So, far as the contentions of the assessee company are concerned with respect to the investment of ₹ 1,10,30,000/- made in foreign subsidiary company, we are in a .....

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company regarding other investments in shares and mutual funds, in our considered view, the same shall be included for computing disallowance u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act . The contentions of the assessee company that the investments are made in subsidiaries companies and hence no disallowance of indirect expenditure be made under Section 14A of the Act cannot be accepted. It is also a matter of fact as emerging f .....

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t whereby the AO shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act having regards to the accounts of the assessee as contemplated u/s 14A(2) of the Act and hence the matter is to be decided on the facts of each case

Addition being PMS Management Fee - Held that:- Respectfully following the orders of the Mumbai Tribunal in the case of Captain Avinash Chander Batra v. DCIT [2016 (5) TMI 155 - ITAT MUM .....

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to be set aside and remitted back to the file of the AO for denovo determination of the issue after making necessary enquiries and verifications with both the parties who have supposedly given interest to the assessee company as to the grant of interest in favour of the asssessee company as reflected in the AIR information database ITS.

Disallowance u/s 14A - Held that:- Strategic investment in group concerns for the purpose of control and not for earning dividend attract disallowanc .....

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AO for de-novo determination and quantification of disallowance u/s 14A of the Act of the indirect expenses incurred by the assessee company in relation to such income which does not form part of the total income having regards to the accounts of the assessee company as provided u/s 14A(2) of the Act and also keeping in view Rule 8D(2)(iii) of Income Tax Rules, 1962. - I. T. A. No. 7273 -74 / Mum/2012 - Dated:- 6-6-2016 - Shri Saktijit Dey, Judicial Member And Shri Ramit Kochar, Accountant Memb .....

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learned CIT(A) arising from the assessment orders dated 26-10-2009 and 25-03-2011 passed by the learned Assessing Officer (hereinafter called the AO ) u/s 143(3) of the Income Tax Act,1961 (Hereinafter called the Act ) for the assessment years 2007-08 and 2009-10 respectively. 2. First we shall dispose of appeal for the assessment year 2007-08 in ITA no. 7273/Mum/2012. The grounds of appeal raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai .....

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Your appellant prays that the same be deleted.. 3. The brief facts of the case are that the assessee company is engaged in business of manufacturing of low ash metallurgical coke. 4. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, the assessee company was asked by the AO to give details of expenses incurred for earning exempt income and also asked by the AO that why expenses incurred and claimed in respect of exempt income should not be disallowed as p .....

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e which does not form part of the total income. The AO relied upon the decision of the ITAT, Mumbai in the case of Gherzi Eastern Limited in ITA no 6562/Bom/94 dated 23-09-2002 wherein the ITAT held that it cannot be denied that some administrative expenditure was definitely attributable towards earning of this dividend income and that had to be deducted while allowing deduction u/s 80M of the Act. The reliance was also placed by the AO on the decision of Hon ble Supreme Court in the case of Dis .....

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O worked out disallowance under Rule 8D of Income Tax Rules, 1962 as under: i) Expenditure directly related to exempt income = NIL ii) Interest Paid A X B/C = X A = Interest = ₹ 22,97,73,171/- B = Average value of Investment = ₹ 24,93,62,667/- C = Average of Total Investment = ₹ 533,96,54,603/- = ₹ 1,07,30,441/- iii) ½% of average value of investments ½% of ₹ 24,93,62,667 = ₹ 12,46,813 Aggregate of (i),(ii) and(iii)= 0+10730441+1246813 = ₹ .....

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t the assessee company has claimed an expenses of ₹ 11,55,354/- in its accounts as portfolio management services fee and income arising from portfolio management is offered as capital gains. The assessee company has paid money to the service provider to invest money on behalf of the assessee company in the stock market for which portfolio management fee has been charged by the service provider. It was further observed by the AO that the tax has not been deducted at source on these payments .....

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pital gains. The expenditure is incurred in respect of service charges collected by the portfolio management service provider for doing transaction on behalf of the assessee company and maintaining the portfolio of the assessee company . The AO held that there is no provision in the Act to allow the deductions for PMS management fee under the head capital gains . The AO disallowed the expenses on this ground as well on the ground that tax was not deducted at source on these payment, vide assessm .....

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35) of the Act. The AO has erred in invoking Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962. The AO erred in relying on the decision of Special Bench of the ITAT, Mumbai in the case of Daga Capital Management Private Limited (supra) whereby the Special Bench of the ITAT has held that Rule 8D of Income Tax Rules, 1962 is retrospective, while Hon ble Bombay High Court has disapproved the afore-said decision of the Special Bench of ITAT, Mumbai, in the case of Godrej and Boyce M .....

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bay High Court had laid down the proposition that all expenditure incurred in relation to income which does not form part of the total income under the provisions of the Act has to be disallowed u/s 14A of the Act. Thus, no deduction of the expenditure can be allowed incurred by the tax-payer in relation to the income which does not part form of the total income under the Act. It was held by Hon ble Bombay High Court that even for the assessment years prior to 2008-09, the AO must adopt a reason .....

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f the total income as contemplated u/s 14A of the Act for which the AO can adopt a reasonable basis for effecting the apportionment. The assessee company submitted that AO erred in making disallowance of ₹ 1,19,77,254/- u/s 14A of the Act. The AO erred in assuming that part of the interest of ₹ 22.98 crores has been paid to Banks on term loans, CC limit was relating to the acquisition of the investment in shares and mutual funds. The assessee company submitted that no borrowed funds .....

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0 crores is in shares of foreign company, dividend from which is liable to tax under the provisions of the Act and hence the dividend income from these foreign shareholding is not exempt income under the provisions of the Act. Further, ₹ 6 crores is invested in shares of subsidiary companies which is an investment made not for earning dividend , but to enable the assessee company to carry on business in a more efficient manner. Thus, the investment in shares of other companies and mutual f .....

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c) G.D.Metsteel Private Limited v. ACIT 47 SOT 62(Mum.) d) CIT v. Winsome Textiles Industries Limited 319 ITR 204(P&H HC) e) CIT v. Hero Cycles 323 ITR 518(P&H) f) Voltas Limited v. JCIT 125 TTJ 601(Mum.) g) K.J.Arora v. DCIT 180 Taxman 131(Del.) h) Dishman Pharmaceuticals & Chemicals Limited v. DCIT 45 SOT 37(Ahd.) i) ACIT v. Delite Enterprises Private Limited 135 TTJ 663(Mum.) j) Godrej and Boyce Manufacturing Company Limited 328 ITR 81 (Bom.) The assessee company further submitte .....

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strative expenses. It was submitted that none of these expenses can be considered to be incurred for earning dividend income . The total revenue of the assessee company is ₹ 314.32 crores which include dividend income of ₹ 8.93 lacs which form 0.03% of total revenue. Thus, the assessee company submitted that disallowance of 0.03% of the indirect expenditure which comes to ₹ 16,621/- should be made. It was submitted that ₹ 17,000/- be considered for disallowance as expense .....

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income in accordance with the decision of Hon ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited(supra). The AO was directed by learned CIT(A) to verify the sources of investment in all such assets, which generate exempt income vis-à-vis the borrowed funds of the assessee company. The learned CIT(A) directed the AO to verify the cash flow statement of the assessee company to ascertain the expenditure in relation to the exempt income in accordance with the .....

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tfolio management services. The assessee company paid ₹ 11,55,354/- for the above PMS services. The assessee company submitted that portfolio managers used to purchase shares/units and sell the same and render the account for the same to the assessee company. The portfolio managers used to deduct their fees out of service on sale of shares/units of mutual funds and balance was remitted to the assessee company. The assessee company submitted that above expenditure of ₹ 11,55,354/- is .....

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ia) of the Act are invoked for the purposes of disallowance on the grounds that tax was not deducted at source on PMS charges paid by the assessee company while provisions of Section 40(a)(ia) of the Act are not applicable to cost of acquisition u/s. 48 of the Act and the said Section 40(a)(ia) of the Act can be invoked for computing disallowance under the head Income from business or profession and no disallowance can be made for computation of income under the head Capital Gains . The learned .....

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ate orders dated 26-09-2012. 7. Aggrieved by the appellate orders dated 26-09-2012 passed by the learned CIT(A) , the assessee company filed second appeal with the Tribunal. 8. The learned counsel for the assessee company reiterated its submissions before the Tribunal as were made before the authorities below, which are not repeated for sake of brevity. The learned counsel for the assessee company submitted that the assessee company has paid up capital and reserves of ₹ 58,35,86,981/- as a .....

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t 31-03-2007 are more than sufficient to cover the investments of ₹ 7.53 crores made by the assessee company as at 31-03-2007 and hence there is a presumption that the investments are made by the assessee company out of the net owned funds of the assessee company and no borrowed funds were utilized by the assessee company for making investment of ₹ 7.53 crores, relying on the decision of Hon ble Bombay High Court in the case of CIT v .Reliance Utilities and Power Limited , (2009) 313 .....

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for the financial year 2006-07 to contend that ₹ 1,10,30,000/- is investment of the assessee company in its foreign subsidiary company namely Saurashtra World Holdings Private Limited whereby the assessee company hold 2,50,000 shares @ USD 1/- each. He further drew our attention to the same schedule to content that the assessee company holds shares of ₹ 1.98 crores in its Indian subsidiary Saurashtra Ferrous Private Limited whereby the objective is not to earn exempt income. Similar .....

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in subsidiary companies which are strategic investments. The learned counsel stated before that in any case no borrowed funds are utilized for making any investments in shares and mutual funds and hence there is no question of disallowance of interest expenditure under provisions of Section 14A of the Act. The learned counsel relied upon the following decisions : 1. CIT v. Oriental Structures Engineers Private Limited , 35 taxmann.com 210 (Del. HC) 2. Garware Wall Ropes Limited v. ACIT 65 SOT 8 .....

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written submissions filed before the Tribunal which we have gone through and taken note of while deciding this appeal. The learned counsel for the assessee company relied upon decision of Pune Tribunal KRA Holdings and Trading Private Limited (2012) 54 SOT 493-(Pune Trib.) to contend that the PMS management fee expenses are allowable while computing capital gains chargeable to tax. It was also submitted that Section 40 of the Act is not applicable for computing income chargeable to tax under th .....

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on the orders of learned CIT(A). 10. We have heard the rival contentions and perused the material on record including case laws relied upon by both the parties. We have observed that the assessee company has made investments of ₹ 7.53 crores in shares of companies and units of Mutual Fund as at 31-03-2007, while the assessee company has net owned funds of ₹ 58.36 crores as at 31-03-2007 and ₹ 77.16 crores as at 31-03-2006 which is appearing in the audited Balance Sheet of the a .....

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evenue on account of the interest expenditure as there is a presumption that the assessee company has utilized net owned funds for the purposes of making investments in shares and mutual fund , as the net owned funds are in far excess of the investments made by the assessee company in the shares and mutual funds. Thus, keeping in view the factual matrix of the instant case as emerging from the records before us , in our considered view , no disallowance u/s 14A of the Act is warranted towards in .....

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aving regards to the accounts of the assessee company as laid down u/s 14A(2) of the Act. So, far as the contentions of the assessee company are concerned with respect to the investment of ₹ 1,10,30,000/- made in foreign subsidiary company, we are in agreement with the assessee company that such investments in foreign subsidiaries shall not be included for computing disallowance u/s 14A of the Act, as the income by way of dividend is chargeable to tax and is not an exempt income under the .....

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of the Act . The contentions of the assessee company that the investments are made in subsidiaries companies and hence no disallowance of indirect expenditure be made under Section 14A of the Act cannot be accepted. It is also a matter of fact as emerging from paper book/page 11 from Schedule F of audited financial statements that investments as at 31-3-2006 was ₹ 4.23 crores while investments as at 31-03-2007 was ₹ 7.53 crores, i.e. ₹ 3.30 crores net investments were made in .....

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hence the matter is to be decided on the facts of each case. We have duly considered the judicial decisions relied upon by the assessee company. Reference is drawn to the decision of Tribunal , Mumbai in the case of Uma Polymers Limited v. ACIT in ITA No 5366/Mum/2013 for the assessment year 2009-10, which was authored by one of us(Accountant Member) whereby Tribunal held as under: 12. We have considered the rival submissions and perused the material on record and case laws relied upon by the a .....

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sidiary company. 13. Coming to the submission of assessee that these are strategic investments and no disallowance made towards the administrative expenses. We would like to mention that under normal circumstances strategic investment are made for the purposes of doing business with a long term horizon and in that case no doubt that the objective is to earn profits/returns from the investment but normally the said profit / returns will come by way of dividend(s) when the companies come into prof .....

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gularly and periodically to ensure that these strategic investments are turned viable and profitable. These Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. Besides, investment decisions are generally taken in the meetings of the Board of Direc .....

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ew is fortified by the following decisions : 1. The observation made by Hon'ble Supreme Court in the case of CIT v. Walfort Share & Stock Brokers Pvt. Ltd. (2010) 326 ITR 1(SC) defining the scope of Section 14A of the Act incorporated retrospectively wef 1st April 1962. The relevant observations are reproduced as under: "The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure inc .....

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he expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not i .....

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penditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of section 14A. Insection 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, "in relation to income which does not form part of total income u .....

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ble to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargea .....

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08 ITD 457 has negated the contention of the assessee that it had incurred no expenditure for earning high dividends as under: "It is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that the only expenses involved in earning the dividend income are those incurred on collection of dividend or on encashing a few dividend w .....

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ions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. This aspect of the matter has also received careful attention of Chennai Bench of this Tribunal in Southern Petro Chemical Industries v. Dy. CIT (2005) 3 SOT 157 (Chennai- Trib). After comprehensive consideration of all the relevant aspects of the case including the provisio .....

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ares yielding such dividend cannot be allowed deduction by operation of section 14A. In Dy. CIT v. SG Investments &Industries Ltd. (2004) 89 ITD 44 (Cal.), the Calcutta Bench of this Tribunal has laid down two propositions: one, in view of section 14A inserted in the Income Tax Act with retrospective effect from 1-4-1962, pro rata expenses on account of interest relatable to investment in shares for earning exempt income from dividend are to be disallowed against taxable income and only the .....

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e Tribunal has also held that the interest paid by the assessee being attributable to the money borrowed for the purpose of making the investment which yielded the dividend and other expenses incurred in connection with or for making or earning the dividend income can be regarded as expenditure incurred in relation to dividend income. In Everplus Securities & Finance Ltd. v. Dy. CIT (2006) 101 ITD 151 (Del), the Delhi Bench of this Tribunal has held that merely because the assessee did not e .....

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The ITAT, Chennai Bench has held in the case of Southern Petro Chemicals Industries v. DCIT(2005) 3 SOT 157 as under: " We have considered the rival submissions and perused the records of the case. Admittedly, these investments in shares were made during the course of the carrying on of business and as is evident from the records, substantial investments had been made by the assessee in earlier years, and during the current year as well the assessee made an investment of ₹ 19 crores. .....

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having been regularly received by the assessee. This activity itself calls for considerable management attention and cannot be left to a junior clerk. The Hon'ble Supreme Court in the case of United General Trust Ltd. (supra), applying the decision oi Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India (1985) 47 CTR (SC) 349: (1985) 155 ITR 120 (SC), reversed the decision of the Hon'ble Bombay High Court in CIT v. United General Trust (P) Ltd. (supra .....

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e deduction of the proportionate management expenses ?" Thus, when the decision of the Honble Bombay High Court has been reversed, the proportionate management expenses are required to be deducted while computing the dividend income. In the decision of the Hon'ble Calcutta High Court, relied upon by the learned counsel for the assessee, Mr. Dastur, in the case of CIT v. United Collieries Ltd. (supra), it has been held that if the facts of a particular case so warrant, the allocation can .....

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ITAT, Kolkatta Bench in recent reported judgment in Coal India Limited v. ACIT 2015 Tax Pub(DT)2496 in ITA No 1032/Kol/2012 pronounced recently on 13th May 2015 has categorically held that even strategic investment in group concerns for the purpose of control and not for earning dividend attract disallowance u/s 14A of the Act read with rule 8D of the Income Tax Rules, 1962. Since the assessee company had claimed that no expenditure was incurred, the assessing authorities were correct to estimat .....

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77; 7,22,027/- towards administrative and other indirect expenses which was affirmed by the CIT(A ) and the same is also hereby affirm by us as we have found no infirmity in the orders of the authorities below. We order accordingly. The assessee company has relied upon following decisions to contend that no disallowance should be made u/s 14A of the Act with respect to strategic investment / controlling interest investments made by the assessee company: 1. CIT v. Oriental Structures Engineers Pr .....

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r from these contracts awarded by SPV in its Profit and Loss Account and hence it was held by the Tribunal on the facts of the case that no interest can be disallowed u/s 14A read with rule 8D of Income Tax Rules, 1962 because it can not be held that expenses/interest were incurred for earning exempted income. The Hon ble Delhi High Court held that it is a question of fact and no question of law much less substantial question of law arises and the appeal was dismissed . In the instant case, it i .....

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did not incur any expenditure for earning income which does not form part of the total income and hence disallowance was deleted. In the instant appeal, the assessee company did made investments in the subsidiary company during the previous year relevant to the assessment year and further no finding of fact has been brought on record that the assesseee company did not incur any expenditure for earning exempt income. Hence, we are setting aside the matter to the file of AO to determine whether t .....

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by us. 3. JM Financial Limited v. ACIT (ITA no. 4521/Mum/2012)-In this case, the tax-payer made out a case to show that no expenditure has been incurred for maintaining the investment in subsidiary companies and therefore in the absence of finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the AO was held to be not justified by the Tribunal. However, in the instant case this facts that no expenditure has been incurred by the assessee company ha .....

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t a reasonable basis for effecting the apportionment, excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us. 4. Sh Jigar P. Shah v. ACIT in ITA no 4366/Mum/2014 dated 24-02-2016)-In this case also there is a finding of fact that the tax-payer has made investments which were old investments and that no new investments were made during the year. . In the instant appeal, the assessee company did made investments in the subsidiary .....

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ng regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act for which the AO can adopt a reasonable basis for effecting the apportionment, excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us. 5. Daga Global Chemicals Private Limited v. ACIT in ITA No. 5592/Mum/2012 - The Tribunal has decided this appeal based on the facts of the case whereby it was established by the tax-payer that all the investm .....

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pany has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income as contemplated u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act for which the AO can adopt a reasonable basis for effecting the apportionment, excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us. Respectf .....

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hold that the investment made by the assessee company in shares and units of mutual funds( excluding investment of ₹ 1,10,30,000/- in foreign subsidiary) shall attract disallowance u/s 14A of the Act .The Hon ble Bombay High Court in Godrej and Boyce Manufacturing Company Limited(supra) remanded the proceedings for assessment year 2007-08 to the AO to determine whether the tax-payer has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual fun .....

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total income as contemplated u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act for which the AO can adopt a reasonable basis for effecting the apportionment, excluding the interest expenditure incurred by the assessee company which shall not be disallowed as discussed above by us. We order accordingly. PMS Management fee We have observed that the assessee company has incurred PMS management fee of ₹ 11,55,354/- being paid to por .....

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ITA no 7407/Mum2011 vide orders dated 30-03-2016 ( (2016) 68 taxmann.com 366(Mum.Trib.)) ,which is authored by one of us (the Accountant Member) in which the decision of the Pune Bench of the ITAT in K.R.A. Holdings and Trading Private Limited(supra) was duly discussed. The order of the Mumbai Tribunal in the case of Captain Avinash Chander Batra v. DCIT in ITA no 7407/Mum2011 is reproduced hereunder: 9. We have considered the rival contentions and also perused the material available on record .....

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d by the authorities below , except to the tune of ₹ 2,59,879/- which was allowed by the CIT(A) towards PMS charges on sale of shares on which short term capital gains has been earned and the Revenue has challenged the same before the Tribunal, while the assessee is in appeal for the disallowance by the CIT(A) of the rest of the PMS expenses of ₹ 20,04,393/- vide this appeal . It is an un-disputed and admitted position between the rival parties that the assessee has earned capital ga .....

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r the provisions of Section 45 to 55A of the Act. The provisions of Section 48 of the Act stipulates as under : Section 48 [Mode of computation. 48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :- (i) expenditure incurred wholly and exclusively in connection with such transfer (ii) the cost of acquisition of .....

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,64,272/- paid by the assessee can be allowed as deduction from the full value of consideration received or accruing to the assesse as a result of transfer of the capital asset being shares , provided the said PMS charges are either expenditure incurred wholly and exclusively in connection with the transfer of shares or PMS charges is a cost of acquisition or the cost of any improvement thereto of the capital asset being shares as per mandate of Section 48 of the Act. The assessee to support his .....

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assessee is allowable as deduction as per provisions of Section 48 of the Act, we must analyze the statutory and legal framework within which portfolio managers carry on their activities in India and their roles and responsibilities in discharging their duties. The business activities of portfolio managers in India are regulated by Securities and Exchange Board of India Act,1992(15 of 1992) (in short SEBI Act,1992 ) . The SEBI Act,1992 provide s for an establishment of the Board (Hereinafter ca .....

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es as it thinks fit. Section 11(2)(b) of SEBI Act,1992 provides , inter-alia, that such measures to achieve the objects of SEBI Act,1992 , the Board may require registering and regulating the working of portfolio managers. It is provided , inter-alia, in Chapter V u/s 12(1) of SEBI Act,1992 that no portfolio manager who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with , the conditions of certificate of registration obtained from .....

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iness of portfolio managers in India by promulgating Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 which were amended from time to time . Under clause 2(cb) of Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 , the portfolio manager is defined as under: (cb) portfolio manager means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfol .....

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r portfolio of securities on behalf of a client, enter into an agreement in writing with such client clearly defining the inter se relationship, and setting out their mutual rights, liabilities and obligations relating to management of funds or portfolio of securities containing the details as specified in Schedule IV. (b) The agreement between the portfolio manager and the client shall, inter alia, contain: (i) the investment objectives and the services to be provided; (ii) areas of investment .....

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tions; (ix) procedure of settling client's account including form of repayment on maturity or early termination of contract; (x) fees payable to the portfolio manager; (xi) the quantum and manner of fees payable by the client for each activity for which service is rendered by the portfolio manager directly or indirectly (where such service is out sourced); (xii) custody of securities; (xiii) in case of a discretionary portfolio manager a condition that the liability of a client shall not exc .....

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lio manager shall individually and independently manage the funds of each client in accordance with the needs of the client in a manner which does not partake character of a Mutual Fund, whereas the non-discretionary portfolio manager shall manage the funds in accordance with the directions of the client. [(1A) The portfolio manager shall not accept from the client, funds or securities worth less than five lacs rupees.] (2) The portfolio manager shall act in a fiduciary capacity with regard to t .....

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curities under the provisions of the Reserve Bank of India Act, 1934 (2 of 1934). (4) The portfolio manager shall not derive any direct or indirect benefit out of the client's funds or securities. [(4A) The portfolio manager shall not borrow funds or securities on behalf of the client.] [(5) The portfolio manager shall not lend securities held on behalf of clients to a third person except as provided under these regulations.] (6) The portfolio manager shall ensure proper and timely handling .....

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993: (i) in regulation 2, clause (d) shall be substituted with the following, namely: (d) principal officer means an employee of the portfolio manager who has been designated as such by the portfolio manager; (ii) in regulation 6, in sub-regulation (2), clause (c) shall be substituted with the following, namely: (c) the principal officer of the applicant has either - (i) a professional qualification in finance, law, accountancy or business management from a university or an institution recognise .....

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ing to any person; (cb) portfolio manager means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be; The perusal of SEBI Act,1992 and regulations made there-to clearly reveals that business of portfolio managers in India is a regulated and controlled busines .....

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he roles and responsibilities of portfolio managers covers a vast spectrum of activities provided to clients for fee ranging from providing advises , or direct or undertake on behalf of client the management or administration of a portfolio of securities or funds of the client meaning thereby that the portfolio managers does not act merely as a stock-broker to buy and sell shares of the clients in execution of the instructions of the client s for a brokerage/commission , but portfolio manager re .....

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and skill services are rendered by these qualified and experienced portfolio managers on continuous basis to clients in a highly volatile and complex securities market with an objective of wealth creation and maximizing gains for the investor s clients and are not rendering merely services connected with the transfer of shares nor are they connected with cost of acquisition or sale of shares even if these PMS charges are paid based and calculated on purchases and sales of shares or even if thes .....

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er these fee paid to portfolio managers are calculated based on purchases or sales of securities, or a return based fee etc. is not relevant and material but the fact of the matter is that these PMS charges are not paid towards cost of acquisition of the capital assets or for improvement of the capital asset nor are these fees being expenditure incurred wholly and exclusively in connection with transfer of the capital asset and hence the same cannot be allowed as deduction u/s. 48 of the Act fro .....

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thari(supra) on identical issue are as under: 12. We have considered the rival submissions and also perused the relevant material on record. It is observed that the profit arising to the assessee on sale of shares and securities chargeable to tax under the head "capital gains" and this position is not in dispute. The only dispute is whether the fees paid by the assessee for PMS can be allowed as deduction in computing such income or not. In this regard, it is observed that the charge o .....

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espective heads of income section 45 to section 55A falling under Chapter IV-E deal with assessment of income under the head 'capital gains' and section 48 in particular prescribes the mode of computation of capital gains. As provided in section 48, expenditure incurred wholly and exclusively in connection with transfer and the cost of acquisition of the asset and cost of any improvement thereto are deductible from the full value of the consideration received or accruing to the assessee .....

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holly and exclusively in connection with sale of shares and securities. On the other hand, the basis on which the said fees was paid by the assessee show that it had no direct nexus with the purchase and sale of shares and as rightly contended by the Ld. DR, the said fees was payable by the assessee going by the basis thereof even without there being any purchase or sale of shares in a particular period. As a matter of fact, when the ld. CIT(A) required the assessee to allocate the fees paid for .....

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expenditure incurred wholly and exclusively in connection with such sale or the cost of acquisition/improvement of the shares and securities so as to be eligible for deduction in computing capital gains under section 48. 14. As regards the case laws cited by the Ld. Counsel for the assessee in support of the assessee's case on the point under consideration, it is observed that the facts involved therein were altogether different in as much as the relevant amounts claimed by the assessee as .....

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nd the interest paid thereon thus was held to the forming part of the cost of acquisition of the land. In other cases also, the brokerage expenses incurred by the assessee were in respect of particular sale of capital assets and the same therefore were held to be deductable while computing capital gain being expenditure incurred wholly and exclusively in connection with such transfer/sale. 15. At the time of hearing before us, the Ld, Counsel for the assessee has raised an alternative contention .....

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see which was chargeable to tax under the head "capital gains". In this regard, we may observe that even though the assessee was under an obligation to pay the fees for PMS, the mere existence of such obligation to pay the said amount was not enough for the application of the rule of diversion of income by an overriding title. The true test for applicability of the said rule is whether such obligation is in the nature of a charge on source i.e. the profit earning apparatus itself and o .....

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it is the nature of the obligation which is the decisive fact. Explaining, further, it was observed by the Hon'ble Supreme Court that there is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation, income is diverted before it reaches to the assessee, it is deductible, but where the income is required to be applied to discharge a .....

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me at the point when it reached or accrued to the assessee. The fee for PMS on the other hand was paid separately by the assessee to discharge his contractual liability. It was thus a case of an obligation to apply income which had accrued or arisen to the assessee and the same amounted to a mere application of income. We, therefore, have not hesitation to hold that the payment of fees by the assessee for PMS did not amount to diversion of income by overriding title and the contentions raised by .....

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it was held by the Hon'ble Supreme Court in the similar context that what is not permissible in law as deduction under any of the heads cannot be allowed as a deduction on the principle of real income theory. 19. For the reasons given above, we find no merit in the arguments raised by the Ld. Counsel for the assessee in support of the assessee's case on the issue under consideration and rejecting the same, we hold that the fees paid by the assessee for PMS was not deductible in computing .....

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ase of Pradeep Kumar Harlalka(supra ) as under:- 13. Coming to the decision of Pune Bench of the Tribunal in the case of KRA Holding & Trading (P.) Ltd. (supra), after perusing the judgment very carefully we find that in that decision the decision of co-ordinate Bench of Mumbai Tribunal in the case of Devendra Motilal Kothari (supra) was distinguished mainly on the basis of decision of Hon'ble Bombay High Court in the case of Smt. Shakuntala Kantilal (supra). The Pune Bench referred to v .....

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s been observed as under: "As regards the decisions of this court in the case of CIT v. Shakuntala Kantilal [1991] 190 ITR 56 followed in the case of Abrar Alvi [2001] 247 ITR 312] and the decision of the Kerala High Court in the case of Smt. Thressiamma Abraham (No. 1) [2001] 227 ITR 802which are strongly relied upon by the counsel for the assessee, we are of the opinion that the said decisions are no longer good law in the light of the subsequent decisions of the apex court referred to he .....

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this order, we hold that these PMS expenses of ₹ 20,04,393/- paid to portfolio managers being management expenses incurred with respect to securities / funds of the assesse being managed by portfolio managers , being disallowed by the AO and confirmed by the CIT(A), are not allowable as deduction u/s 48 of the Act from the full value of consideration on sale of securities received or accruing to the assessee . Accordingly, we dismiss this appeal filed by the assessee. We order accordingly .....

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eal filed by the assessee company in ITA N0. 7273/Mum/2012 for the assessment year 2007-08 is partly allowed. ITA No. 7274/Mum/2012-Assessee s Appeal for assessment year 2009-10 12. Now, we will take up assessee company s appeal in ITA No. 7274/Mum/2012 for the assessment year 2009-10 13. The grounds of appeal raised by the assessee company in Memo of appeal filed with the Tribunal read as under: 1. On the facts & in the circumstances of the case and in law the learned CIT(A) has erred in co .....

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company that the assessee company failed to reconcile the ITS details vide AIR information with books of accounts of the assessee company and there was difference as under: S.No. Name of Party from whom sum received as per ITS details Nature of Party As per AIR As per Assessee s A/c Difference 1. Sunflag Iron and Steels Ltd. Interest 7532586 7310869 221717 2. SAL Steel Ltd. Interest 137590 100892 36698 Total 258415 The assessee company was asked by the AO to explain the difference and the asses .....

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with its books of accounts, vide appellate orders dated 26-09-2012 passed by learned CIT(A). On second appeal filed by the assessee company before the Tribunal , the learned counsel for the assessee company submitted that the AO may call these parties and verify the contentions of the assessee company that the assessee company has not received any income from these parties in excess of what is declared by the assessee company in its books of accounts , and the AIR details as per ITS database is .....

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any vide ITS database of the Revenue and the books of accounts of the assessee company needs to be set aside and remitted back to the file of the AO for denovo determination of the issue after making necessary enquiries and verifications with both the parties who have supposedly given interest to the assessee company as to the grant of interest in favour of the asssessee company as reflected in the AIR information database ITS. Needless to say the AO shall grant proper and adequate opportunity o .....

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ment year 2009-10 and Rule 8D of Income Tax Rules, 1962 is applicable w.e.f. 2008-09 , while the appeal in ITA No. 7273/Mum/2012 was for assessment year 2007-08 whereby Rule 8D of Income Tax Rules, 1962 was not applicable. We are not repeating the facts for the sake of brevity which are para materia except the assessment year being 2009-10. The investment as made by the assessee company as at 31-03-2009 was ₹ 37.45 crores while the investment were at ₹ 11.09 crores as at 31- 03-2008 .....

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higher than the investments in shares and mutual funds made by the assessee company. Thus, as held by Hon ble Bombay High Court in the case of Reliance Utilities and Power Limited (supra) and two decisions in HDFC Bank Limited (supra), we are of considered view that no disallowance can be made by the Revenue on account of the interest expenditure as there will be presumption that the assessee company has utilized its net owned funds which are in far excess of the investments made by the assessee .....

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nder Section 14A of the Act is concerned as no disallowance of interest expenditure of ₹ 86,72,298/- as made by the AO and confirmed by learned CIT(A) is warranted based on facts and circumstances of the case. The AO has not made any disallowance under Section 14A read Rule 8D(2)(i) of Income Tax Rules, 1962 in his impugned assessment order passed u/s 143(3) of the Act , which has also attained finality. We have noted the same. However. The AO has made disallowance of 0.5% of the average v .....

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Rule 8D(2)(iii) of Income Tax Rules, 1962 , as the income by way of dividend is chargeable to tax and is not exempt from tax. Thus , the said investments of ₹ 1,10,30,000/- in foreign subsidiary shall not be included for computing disallowance of indirect expenditure under Rule 8D(2)(iii) of Income Tax Rules, 1962 read with Section 14A of the Act. However, with respect to the contentions of the assessee company regarding other investments in shares and mutual funds, in our considered view, .....

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ection 14A of the Act be made cannot be accepted.It is a matter of fact as borne out from the Schedule F to the audited financial statements (paper book /page 8) that the investments as at 31-03-2008 were to the tune of ₹ 11.09 crores while the investments as at 31-03-2009 were ₹ 37.45 crores, thereby the assessee company made net investments of ₹ 26.36 crores during the previous year relevant to the instant assessment year. We have observed that there are divergent view of the .....

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ssee company. Reference is drawn to the decision of Tribunal , Mumbai in the case of Uma Polymers Limited v. ACIT in ITA No 5366/Mum/2013 for the assessment year 2009-10, which was authored by one of us(Accountant Member) whereby Tribunal held as under: 12. We have considered the rival submissions and perused the material on record and case laws relied upon by the assesee company. We find that Section 14A of the Act read with Rule 8D(2)(iii) of the Income Tax Rules,1962 is applicable from the as .....

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dministrative expenses. We would like to mention that under normal circumstances strategic investment are made for the purposes of doing business with a long term horizon and in that case no doubt that the objective is to earn profits/returns from the investment but normally the said profit / returns will come by way of dividend(s) when the companies come into profit and declare dividend to the shareholders . Such dividends in the hands of shareholders shall be exempt from tax. No doubt , the re .....

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very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. Besides, investment decisions are generally taken in the meetings of the Board of Directors / Shareholders for which administrative and management expenses are incurred and in some businesses regulatory approvals are req .....

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& Stock Brokers Pvt. Ltd. (2010) 326 ITR 1(SC) defining the scope of Section 14A of the Act incorporated retrospectively wef 1st April 1962. The relevant observations are reproduced as under: "The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (s .....

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desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in .....

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taxable income. This is the purport of section 14A. Insection 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit .....

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rought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under .....

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It is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that the only expenses involved in earning the dividend income are those incurred on collection of dividend or on encashing a few dividend warrants. A company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. They r .....

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t correct to say that dividend income can be earned by incurring no or nominal expenditure. This aspect of the matter has also received careful attention of Chennai Bench of this Tribunal in Southern Petro Chemical Industries v. Dy. CIT (2005) 3 SOT 157 (Chennai- Trib). After comprehensive consideration of all the relevant aspects of the case including the provisions of law, the Chennai Bench has held that investment decisions are very strategic decisions in which top management is involved and .....

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. (2004) 89 ITD 44 (Cal.), the Calcutta Bench of this Tribunal has laid down two propositions: one, in view of section 14A inserted in the Income Tax Act with retrospective effect from 1-4-1962, pro rata expenses on account of interest relatable to investment in shares for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses; and two, the expression "expenditure incurred by th .....

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e investment which yielded the dividend and other expenses incurred in connection with or for making or earning the dividend income can be regarded as expenditure incurred in relation to dividend income. In Everplus Securities & Finance Ltd. v. Dy. CIT (2006) 101 ITD 151 (Del), the Delhi Bench of this Tribunal has held that merely because the assessee did not earn the dividend out of investment in certain shares does not imply that the provisions of section 14A would not apply to that extent .....

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considered the rival submissions and perused the records of the case. Admittedly, these investments in shares were made during the course of the carrying on of business and as is evident from the records, substantial investments had been made by the assessee in earlier years, and during the current year as well the assessee made an investment of ₹ 19 crores. Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which .....

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o a junior clerk. The Hon'ble Supreme Court in the case of United General Trust Ltd. (supra), applying the decision oi Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India (1985) 47 CTR (SC) 349: (1985) 155 ITR 120 (SC), reversed the decision of the Hon'ble Bombay High Court in CIT v. United General Trust (P) Ltd. (supra), wherein the question was as under: "Whether, on the facts and in the circumstances of the case and in law, the Tribunal was j .....

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d, the proportionate management expenses are required to be deducted while computing the dividend income. In the decision of the Hon'ble Calcutta High Court, relied upon by the learned counsel for the assessee, Mr. Dastur, in the case of CIT v. United Collieries Ltd. (supra), it has been held that if the facts of a particular case so warrant, the allocation can be made towards expenses. In view of the aforementioned discussion and keeping in view the submissions of the learned Departmental R .....

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d recently on 13th May 2015 has categorically held that even strategic investment in group concerns for the purpose of control and not for earning dividend attract disallowance u/s 14A of the Act read with rule 8D of the Income Tax Rules, 1962. Since the assessee company had claimed that no expenditure was incurred, the assessing authorities were correct to estimate the incurring of such expenditure under section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules,1962. The assessing of .....

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m by us as we have found no infirmity in the orders of the authorities below. We order accordingly. The assessee company has relied upon following decisions to contend that no disallowance should be made u/s 14A of the Act with respect of strategic investment / controlling interest investments made by the assessee company: 1. CIT v. Oriental Structures Engineers Private Limited , 35 taxmann.com 210 (Del. HC) - This case was decided by Hon ble Delhi High Court on facts.The Tribunal gave finding t .....

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sallowed u/s 14A read with rule 8D of Income Tax Rules, 1962 because it cannot be held that expenses/interest incurred for earning exempted income. The Hon ble Delhi High Court held that it is a question of fact and no question of law much less substantial question of law arises and the appeal was dismissed . In the instant case, it is not the case of the assessee company that it has got any business contracts from its strategic investments/subsidiary companies in which controlling interest were .....

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id made investments in the subsidiary company during the previous year relevant to the assessment year and further no finding of fact has been brought on record that the assesseee company did not incur any expenditure for earning exempt income. Hence, we are setting aside the matter to the file of AO to determine whether the assessee company has incurred any expenditure (direct or indirect) in relation to the dividend income /income from mutual funds which does not form part of the total income .....

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y companies and therefore in the absence of finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the AO was held to be not justified by the Tribunal. However, in the instant case this facts has not been brought on record having regards to the accounts of the assessee company and hence we are setting aside this appeal to the file of the AO to determine whether the assessee company has incurred any expenditure (direct or indirect) in relation to th .....

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g of fact that the tax-payer has made investments which were old investments and that no new investments were made during the year. . In the instant appeal, the assessee company did made investments in the subsidiary company during the previous year relevant to the assessment year and further no finding of fact has been brought on record that the assesseee company did not incur any expenditure for earning exempt income. Hence, we are setting aside the matter to the file of AO to determine whethe .....

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Chemicals Private Limited v. ACIT in ITA No. 5592/Mum/2012 - The Tribunal has decided this appeal based on the facts of the case whereby it was established by the tax-payer that all the investments were made in the earlier years out of own funds and no expenditure was incurred and claimed by the tax-payer . In the instant appeal, the assessee company did made investments in the subsidiary company during the previous year relevant to the assessment year and further no finding of fact has been br .....

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18-7-2017 CE

18-7-2017 GST CESS Rate

15-7-2017 Kerala SGST

14-7-2017 Andhra Pradesh SGST

14-7-2017 Cus (NT)

14-7-2017 Cus

13-7-2017 Co. Law

13-7-2017 Co. Law

13-7-2017 ADD

13-7-2017 ADD

12-7-2017 Jammu & Kashmir SGST

12-7-2017 Gujarat SGST

12-7-2017 Gujarat SGST

12-7-2017 CGST Rate

12-7-2017 UTGST Rate

12-7-2017 UTGST Rate

12-7-2017 IGST Rate

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Latest Circulars:

19-7-2017 Income Tax

18-7-2017 Customs

17-7-2017 Customs

14-7-2017 Income Tax

13-7-2017 Central Excise

13-7-2017 Customs

13-7-2017 Central Excise

13-7-2017 Customs

7-7-2017 Income Tax

7-7-2017 Goods and Services Tax

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