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2016 (7) TMI 1011 - ITAT MUMBAI

2016 (7) TMI 1011 - ITAT MUMBAI - TMI - Processing fees for acquiring the term loans from the Banks - nature of expenditure - revenue or capital - Held that:- The assessee being an investment & finance company and a promoter of new companies and having interest in the business of these companies has made the investments for business purposes for having control over these subsidiary and associated companies, hence, in the light of the proposition of law laid down by the Hon’ble Bombay High court .....

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the issue is covered with the decision of the Hon’ble Supreme Court’ in the case of India Cements Ltd. v. CIT [1965 (12) TMI 22 - SUPREME Court] wherein the Supreme Court held that the expenditure in raising loans or issuing debentures would be revenue in nature, irrespective of whether the borrowing is a long term or short term one. This issue is accordingly decided in favour of the assessee. - Disallowance of expenditure in the shape of upfront fees and brokerage etc. paid for issuing the .....

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n asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained. This issue is accordingly decided in favour of the assessee. - Alowability of deduction under section 10A - Held that:- This issue is squarely covered with the decision of Hon’ble Bombay High Court in the case of “CIT vs. Black & Veatch Consulting Pvt. Ltd.” (2012 (4) TMI 450 - BOMBAY HIGH COURT .....

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on of the Hon’ble Bombay High Court. - Decided in favour of assessee - ITA No. 4894/Mum/ 2008 - Dated:- 20-7-2016 - Shri G. S. Pannu, Accoutant Member And Shri Sanjay Garg, Judicial Member For the Appellant : Shri Dinesh Vyas, AR For the Respondent : Shri Alok Johri, DR ORDER Per Sanjay Garg, Judicial Member This appeal is preferred by the assessee against the order of Commissioner of Income Tax (Appeals)-XXX, Mumbai [hereinafter referred to as the CIT (A)] passed in appeal No.CIT (A) -XXX/IT-11 .....

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establishment expenditure amounting to ₹ 1,31,97,494/- under the provisions of Section 14A of the Act, in the same proportion as the Dividend Income bears to th total receipts, for the purpose of computing income from Business or Profession and also for computing the Adjusted Book Profit u/s 115JB of the Act. 3. The CIT (A) erred in not considering the alternate contention of the Appellant of first reducing the gross establishment expenditure by the amount already disallowed by the Appell .....

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part of the expenses of the Appellant, including interest, be disallowed, the Appellant should be permitted to capitalize such expenses and enhance the cost of acquisition of the shares to which the said expenses relate. 5. The CIT (A) erred in confirming the disallowance of professional fees of ₹ 19,44,000/- paid for obtaining valuation reports of certain investments held by the Appellant, for the purpose of computing Income from Business or Profession. 6. The CIT (A) erred in confirming .....

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re Issue expenses be allowed in the following assessment year i.e. assessment year 2005-06. 9. The CIT (A) erred in confirming the disallowance of professional fees of ₹ 4,85,000/- paid for the Appellant s project related activities, for the purpose of computing Income from Business or Profession. 10. The CIT (A) erred in confirming no deduction of ₹ 9,00,00,000/-, being write back of provision for contingency, for the purpose of computing the Adjusted Book Profits u/s 115JB of the A .....

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rs. 13. Your Appellant carves leave to add to amend, alter, very, omit or substitute the aforesaid ground of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as they may be advised. 3. Apart from the above, the assessee has also raised the following additional grounds of appeal:- 1. The Appellant submits that the Assessing Officer erred in disallowing gross interest expenditure of ₹ 75,20,81,011/- claimed by the Appellant u/s 36(1 ( .....

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rest. The assessee claimed the deduction of such interest u/s. 36(1) (iii) of the Income Tax Act. The AO further noted that the assessee s balance sheet as on 31.03.2004 reflect total unsecured loan at ₹ 1062.8 crore, while the investment made in various shares was at ₹ 1727.83 crores. The profit and loss a/c. for F.Y 2003-04 reflect that assessee paid/claimed gross interest of about ₹ 75.21 crores, while it had received dividend of ₹ 6.16 crores which was claimed as exem .....

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ve function i. e. head office (HO) for investment and promoting new companies, Tata Strategic Manufacturing Group (TSMG) for consultancy services and Tata Interactive Services (TIS) for E-learning of computer software. The AO therefore observed that the entire dividend income was by the activity of head office (HO). The assessee explained that it held shares in the companies promoted by it. That the interest was paid on monies borrowed for the purchase of shares in Group Companies for the purpos .....

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st and allowability of interest u/s. 36(1)(iii) , the AO held that that the assessee had admitted the direct nexus between the borrowed fund of ₹ 1062.78 crores and investment of ₹ 1727.83 crores . From the above submissions and case laws relied upon by the assessee, the AO summed up the submissions of the assessee in following three points: (i) Interest paid on borrowed fund for acquiring controlling interest in promoted companies by purchasing shares is allowable expenditure;(ii) I .....

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allowable. The AO, thereafter discussed about the promulgation of sec.14A by the Finance Act, 2001 with retrospective effect and held that the ratio of Rajasthan State Warehousing Corporation (2000) 242 ITR 450(SC) was no more applicable. The AO further held that sec.14A does not seek to distinguish between the intention/purpose of the assessee for its activity resulting in exempt income and also incidental by product in the form of dividend. The AO discussed in detail the order of the co ordina .....

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ess activity of the assessee, the AO rejected it by relying on the decision of the Hon ble Bombay High Court judgment in the case of Amritaben R. Shah 238 ITR 777 and M/s. Macintosh Finance Pvt. Ltd. of Hon ble ITAT, Mumbai F Bench. The AO also rejected the alternative contention of assessee that dividend was received on the total value of investment of ₹ 93.73 crores, while there was no dividend received on investment of ₹ 1689 crores and therefore, interest disallowances should be .....

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d gross interest expenditure of ₹ 75.21 crores u/s. 14A of the Act both for the normal provision as well as for book profit u/s. 115JB Explanation f . The AO further disallowed from the total expenditure of Head office of ₹ 93.39 crores, an expenditure of ₹ 1.32 crores being 7.57% (the dividend receipt of ₹ 6.16 crores being 7.57% of total receipt of ₹ 81.33 crores) after excluding the interest already disallowed from the total expenditure. 7. Being aggrieved by the .....

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the assessee was not engaged in the activity of share trading and the investments made were not made for business purpose. Being aggrieved by the above order of the CIT (A), the assessee has come in further appeal before us. 8. We have heard the rival contentions of the Ld. Representatives of both the parties and have also gone through the record. The Ld. Counsel for the assessee, at the outset, has stated that the lower authorities have made disallowance u/s 14A only and no disallowance has be .....

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tments were made for business purposes for having control over subsidiary and associated companies. He, therefore, has contended that the interest expenditure incurred by the assessee is otherwise allowable as business expenditure u/s 36(1) (iii) of the Act. In the context of disallowance under the provisions of section 14A, the Ld. AR relying upon the decision of the Hon ble Delhi High Court in the case of Joint Investment Private Limited vs.CIT reported in 372 ITR 694 and of the Hon ble Punjab .....

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nder a mistake or misconception has over assessed itself in the return of income, the Tribunal can give relief to the assessee to the extent the assessee is over assessed and direct the lower authorities to tax the assessee as per the provisions of law. The ld. AR has also filed written submissions dated 21.6.2016 in support of the above contentions raised which for the sake of convenience are reproduced as under:- DISALLOWANCE IS ONLY UNDER SECTION 14A 1. (i) The entire interest expenditure is .....

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Appellant, has observed as follows: By virtue of Section 14A, such expenses are not allowable. It is seen that these decisions pertain to those assessment years when Section 14A was not inserted. Section 14A was inserted by the Finance Act, 2001 with retrospective effect from 01/04/1962. Also, most of the decisions quoted by the assessee in its support predate the said insertion of Section 14A. Without prejudice to the same, none of these decisions could consider the provisions of Section 14A. ( .....

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ncome under Chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to the income which does not form part of the total income. (v) The provisions of Section 14A are bodily lifted and reproduced in the Assessment Order at pages 3-4 and at page 11, since this was the provision which was interpreted and applied by the Assessing Officer. (vi) The disallowance of other expenses is also made only under Section 14A in paragraph 4 at page 12, the Heading .....

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para 4) 1,31,97,494 GROUND BEFORE CIT(A) AND HIS ORDER ARE ONLY ON SECTION 14A 2 (i) In view of the fact that the disallowance was made only under Section 14A, the Ground of Appeal preferred by the Appellant to the CIT (A) was also confined to Section 14A. This is clear from Ground 2 in the aforesaid Appeal which reads as under: 2.(a) The ITO erred in disallowing the entire interest expenditure of ₹ 75,20,81,011/- under the provisions of Section 14A, for the purpose of computing income fro .....

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his final adjudication in Para 8.1 at the end of page 12 in the following words Under these facts and circumstances of the case the assessing officer is justified in disallowing the entire interest expenses claimed by the appellant under Section 14A of the Income-tax Act, 1961. Accordingly this ground is decided against the appellant. With regard to th aforesaid Ground 2(b) he made similar observation in Para 10.1 at the end of page 16 by holding thus… Therefore ….. the disallowanc .....

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Section 14A of the Income-tax Act, 1961 ( the Act ), for the purpose of computing income from Business or Profession and also for computing the Adjusted Book Profit u/s 115JB of the Act. 2. The CIT(A) erred in confirming the disallowance of establishment expenditure amounting to ₹ 1,31,97,494/- under the provisions of Section 14A of the Act, in the same proportion as the Dividend Income bears to the total receipts, for the purpose of computing Income from Business or Profession and also fo .....

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vs. Empire Package - ITA No.415 of 2015 dt. 12/1/16 (P&H) Delhi High Court has unambiguously observed that the window for disallowance in Section 14A is only to the extent of expenditure incurred in relation to the tax exempt income. The Punjab & Haryana High Court dismissed the Departmental Appeal in the above case where the following question was raised by it. Whether in the facts and circumstances of the case, the Hon ble ITAT is justified in law to hold that the disallowance made und .....

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T IS BINDING ON TRIBUNAL IN ANOTHER STATE 5. The Appellate Tribunal is obliged to respect the law laid down by the High Court though of a different state, so long as there is no contrary decision of any other High Court on that question. In the absence of contrary High Court judgments, the above decisions of Delhi High Court (Joint Investments) and Punjab & Haryana High Court (Empire Package) should be followed. 1. Smt. Nirmalabai K 186 ITR 242 (Bom) 2. Smt. Godavaridevi Saraf 113 ITR 589 () .....

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he power to grant relief if it is found that a non-taxable item is taxed or a permissible deduction is denied and thus an assessed income can b lesser than the returned income. Hence, in the present case, it is permissible for the Hon ble Tribunal to confine the disallowance under Section 14A only to the exempt income of ₹ 6.16 Crores notwithstanding the Appellant having offered a disallowance under Section 14A in its return of income of ₹ 49 Crores which was calculated on the basis .....

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f a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item. (ii) DCIT vs. Maruti Udyog Ltd. (101 TTJ 760) (Delhi Tribunal) In this case, the Delhi Bench of the Tribunal (Shri K. C. Singhal and Shri G. S. Pannu .....

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out authority of law. (iv) Balmukund Acharya - 310 ITR 310 (Bombay High Court) In this case, the Bombay High Court applied the above decision of Nirmala L. Mehta and at page 318 in paragraph 32 observed as follows: Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconceptions or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected. (v) CIT vs. CIT .....

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an be less than the returned income under the provisions of the Income-tax Act and therefore a contrary CBDT Circular was not in accordance with law. (vii) Chandrashekhar Baharwani vs. ACIT (ITA Nos.7810/M/2010) (Mumbai Tribunal) In this case, the Mumbai Bench (Shri Sanjay Arora and Shri Sanjay Garg) followed the above decisions of the Bombay High Court and of the Gujarat High Court. The Tribunal granted a relief in respect of Capital Gains which were inadvertently included in the return. The Tr .....

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f the assessee. He has submitted that intention and purpose for inserting sec.14A of the Act is that there should be allowed no deduction for expenditure incurred in respect of exempt income. Deduction only of expenditure can be allowed which has been incurred for earning of taxable income. That the taxable net income is arrived at by deducting the expenditure out of the gross income. On the same analogy, the exemption is allowed in respect of the net income. Expenses incurred can be allowed onl .....

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h income which does not form part of the total income in accordance with such method as may be prescribed. However, the assessing officer is required to adopt the prescribed method if having regard to the accounts of assessee, he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income. The Ld. DR has further stated that the expenditure includes both direct and indirect expenditure incurred in .....

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or zero i. e. nil income. That the expenditure incurred in relation to earning of exempt income whether such activity yields positive income, nil or negative income (loss) is to be disallowed u/s 14A of the Act. He has further relied upon the provisions of section 115-O (5) of the Act wherein it has been provided, no deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub- section (1) or the .....

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iple of Accountancy i. e. that current income Vs. Current expenditure and in case exempt income - no expenditure to be allowed at all - whether direct or indirect - otherwise the matching principle gets disturbed. (a) As per the basic principle of taxation the disallowance u/s. 14A is both direct and indirect expenditure and if an assessee claims that he has incurred no indirect expenditure- then as per mandate of Sec.14A(2) and 14A(3) - he will have to demonstrate the same before A.O. who will .....

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section 115JB (1)(f) uses the same expression. 3.2 (a) There is fundamental difference between the Receipt and Income . The concept of matching principle as explained and found to be central spine of accounting standard of recording various transactions for computation of income is based on this difference. This concept has to be understood and applied in reference to Dividend and Income by way of dividend which is used in various provisions of the Act both prior to insertion of section 14A of .....

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s and deduction /relief out of receipt of dividend). Hon ble Apex Court traced, considered and explained the history of introduction of such provisions related to dividend in this landmark judgement. (c) The Hon ble Constitutional bench of Supreme Court while dealing with the construction of sec. 80M of the Act, overturned, its earlier decision of 3 Member Bench in the case of Cloth Traders ( P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 and observed that To perpetuate an error is no heroism. To rect .....

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as follow: We may, therefore, first examine the language of section 80M for arriving at its true interpretation. But before we do so, let us consider what is the object behind grant of relief under section 80M. It was common ground between the parties that the main object of the relief under section 80M is to avoid taxation once again in the hands of the receiving company of the amount which has already borne full tax in the hands of the paying company vide the written submission under the headi .....

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assessee either in its entirety or to a specified extent. But the amount by way of dividend which would otherwise suffer tax in the hands of the assessee, would be the amount computed in accordance with the provisions of the Act and not the full amount received from the paying company. Therefore, it is reasonable to assume that in enacting section 80M, the Legislature intended to grant relief with reference to the amount of dividend computed in accordance with the provisions of the Act and not .....

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d what is required for saving the amount of dividend from taxation once again in the hands of the assessee. Bearing in mind these prefatory observations in regard to the legislative object, we may now proceed to construe the language of section 80M. 15. Section 80M(1) opens with the words 'where the gross total income of an assessee ……. includes any income by way of dividends from a domestic company' and proceeds to say that in such a case, there shall be allowed in computi .....

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income of the assessee must include income by way of dividends from a domestic company. 'Gross total income' is defined in section 80B(5) to mean 'total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or under section 80-O.' Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deduc .....

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e gross total income of an assessee …….includes any income by way of dividends from a domestic company' in the opening part of sub- section (1) of section 80M refer only to the inclusion of the category of income and not to the quantum of such income and, therefore, the words 'such income by way of dividends' following upon the specification of this condition, cannot have reference to the quantum of the income included but must be held referable only to the category of .....

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provide that a particular category of income, namely, income by way of dividends from a domestic company should form a component part of gross total income, irrespective of what is the quantum of the income so included but it is difficult to see how the factor of quantum can altogether be excluded when we talk of any category of income included in gross total income. What is included in the gross total income in such a case is a particular quantum of income belonging to the specified category. T .....

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y, in order to determine what is 'such income by way of dividends', we have to ask the question : what is the income by way of dividends from a domestic company included the gross total income and that would obviously be the income by way of dividends computed in accordance with the provisions of the Act. It is difficult to appreciate how, when we are interpreting the words 'such income by way of dividends', we can make a dichotomy between the category of income by way of dividen .....

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s short of the words 'income by way of dividends from a domestic company' and does not go to the full length to which plain grammar must dictate us to go, namely 'income by way of dividends from a domestic Company included in the gross total income', [emphasis supplied] otherwise, we would not be giving to the word 'such its full meaning and effect. The word 'such' in the context in which it occurs can only mean that income by way of dividends from a domestic company .....

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l amount of dividend received by the assessee. This indication was also unfortunately lost sight of by the Supreme Court in Cloth Traders ( P.) Ltd.'s case (supra) presumably because it was not brought to the attention of the Supreme Court. The Supreme Court observed in Cloth Traders (P.) Ltd.'s case (supra )that the whole of the income by way of dividends from a domestic company or 60 per cent of such income, as the case may be, would be deductible from the gross total income for arrivi .....

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nds' of an amount equal to the whole or a specified percentage of such income. Now when in computing the total income of the assessee, a deduction has to be made from 'such income by way of dividends', it is elementary that 'such income by way of dividends' from which deduction has to be made must be part of the gross total income. It is difficult to see how the language of this part of sub-section (1) of section 80M can possibly fit in if 'such income by way of dividends .....

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dividend. The deduction required to be made for computing the total income from the gross total income can only be from the amount of dividend computed in accordance with the provisions of the Act which would be forming part of the gross total income. It is, therefore, clear that whatever might have been the interpretation placed on clause (iv) of sub-section (1) of section 99 and section 85A, the correctness of which is not in issue before us, so far as sub-section (1) of section 80M is concern .....

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da)(P) Ltd [(1985) 155 ITR 120] while adjudicating the issue of netting of interest for consideration u/s. 80HHC of the Act. Hon ble Supreme Court distinguished Hon ble Bombay High Court decision in the case of CIT V/s. Asian Star Co. Ltd. (2010) 326 ITR 56 and overruled CIT V/s. Kalpataru Colours and Chemicals (2010) 192 Taxaman 435. At para 11 of that order Hon ble Apex Court considered the difference between income and receipt following the ratio of Distributors (Baroda) Pvt. Ltd. (Supra). It .....

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f the Act, and if any quantum of the rent or interest of the assessee is allowable as an expense in accordance with Sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to Section 80HHC. In other words, ninety per cent of not the gross rent .....

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of the Act as how the same is applicable for sec.14A of the Act. (i) Section 2(22) of the Act define dividend as inclusive definition being distribution of accumulated profits in cash or kind. (ii) Section 4 of the Act is the charge of income tax on Total income . (iii) The section 2(45) of the Act provide an exhaustive definition of total income as Total amount of income referred to in sec.5, computed in the manner laid down in this Act. (iv) Sec.5 of the Act defines the scope of Total income .....

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hapter III of the Act has the heading Income which do not form part of total income . It is therefore, first we have to compute the income following the matching principle which says receipt minus expenditure/outgoing before taking a decision whether such income is excludable or not forming part of Total income (viii) Section 14 of the Act under Chapter IV with the title Computation of total income provides various heads of income. The section can be understood by breaking it as follows • S .....

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nder Chapter VII though there is no income tax payable is to separate out such income from the Chapter III of the Act. However, sec.68, 69, 69A, 69B, 69C, 69D of the Act are deemed income where entire sum is treated as income without following /applying matching principle (ix) Sec. 14A though included in the Chapter IV of the Act i.e computation of total income but it is having heading as expenditure incurred in relation to income not includable in total income . It is therefore to understand th .....

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; computing • the total income • under this chapter(i.e under various head) • No deduction • shall be allowed • in respect of • expenditure incurred • by the assessee • in relation to • income • which does not from • part of the total income under this Act. The provisions, therefore, clearly envisaged that following the matching principle for various receipts from various resources an assessee has to compute income under various head. It is .....

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t which may result into loss i. e. negative income or nil income. There can be a receipt (sec.66 r. w. Chapter VII) the income resulting there from though includable but no income tax is charged resulting into non application of sec.14A of the Act. There can be dividend which is not referable u/s. 115-O of the Act i.e on which no dividend distribution tax (DDT) is paid and therefore, for receipt of such dividend, income under the head income from other source is required to be computed where exp .....

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e scope for prohibiting the dual benefit which were permissible prior to insertion of 14A of the Act by not only claiming exempt income on one hand and by reducing taxable income with the claim of expenditure relatable to exempt income on other hand is required to be considered. The prohibition u/s. 115-O (5) of the Act is unambiguous and clear with following words no deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which h .....

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e insertion of sec.14A with retrospective effect reflects 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. The Supreme Court also clearly held that in the case of an income like dividend income which does not form part of the total income, any expenditure/deduction relatable to such (exempt or non- taxable) in .....

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st other taxable income. The Supreme Court made it very clear that the permissible deduction enumerated in sec.15 to 59 are now to be allowed only with reference to income which is brought under one of the heads of income and is chargeable to tax. [Note: The above observation and ratio were duly considered by Hon ble Delhi High Court in the case of Maxopp Investment Ltd V/s.CIT - (2011) 15 Taxmann.com 390 (Delhi)]. b) The AO relied on the decision of Hon ble ITAT Delhi in the case of Everplus Se .....

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r provisions of this Act is to give the provisions of section 115-O(1) in case of conflict, an overriding effect over any other provisions of the IT Act, 1961. It is thus clear that section 115-O(1) is a specific provision overriding in case of conflict, the general provisions. The sub-section (5) of section 115-O has made it clear that no deduction under any other provisions of Income-tax Act shall be allowed to the company or a shareholder in respect of dividend income which has been charged t .....

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(ii) Regarding the claim for deduction of interest paid on monies borrowed for purchase of shares held as investment, we may observe that before insertion of sections 10(33) and 115-O of the Act, the deduction for interest paid on monies borrowed for acquiring the shares held as investments could have been normally claimed under section 57(iii) of the Act against dividend income. It cannot be claimed so now due to the explicit provisions of sub- section (5) of section 115-O read with section 14A .....

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s clarified as a result of insertion of section 14A and the decisions of various courts not allowing the apportionment of interest against dividend income are of no help to the assessee. The purpose of inserting section 14A is to nullify the decision, in Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 4501. (SC) to the extent it relates to the cases of indivisible business. (iv) The Appellate Tribunal also observed that it is common knowledge that no dividend could be earned without mak .....

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33) is to be allowed. c) Hon ble ITAT Mumbai in the case of Kankhal Investment & Trading Co. P. Ltd. V/s. ACIT - (2009) 116 ITD 492 (Mum) dealt with similar facts. (i) Hon ble ITAT in this order at para 8 & 9 considered following facts; 8. In the course of hearing, a query was raised from the Bench as to how the deduction could be allowed under the head Profits & Gains from Business/Profession particularly when neither of the receipts from such business was assessable under such head .....

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ted that the assessee cannot lose the statutory deduction which is otherwise allowable under section 36(1)(iii) merely because receipts from such business are not assessable under the head Profits & Gains from Business/Profession . Reliance was placed on the judgment of Hon ble Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 wherein it was held that deduction under section 57 was allowable even where there was no dividend income. Proceeding further, it was submit .....

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ons 30 to 43D can be allowed as the receipts are chargeable to tax either under the head Capital Gains or under the head Income from Other Sources . Proceeding further, it was submitted that even assuming that the assessee was in the business of holding of investment then dividend income arising from such business is exempt under section 10(33) of the Act and, therefore, expenditure related to such income cannot be allowed under section 14A of the Act. (iii) Hon ble ITAT considered Hon ble Apex .....

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res, if investment in shares is disposed off then income therefrom has to be computed only under the specific head Capital Gains and this legal position is not even disputed by the assessee s counsel and the assessee itself has also declared the income under the head Capital Gains . Further dividend income is also to be computed under the specific head Income from other Sources if such income is taxable. Since dividend income is exempt under section 10(33) of the Act, the question of computing s .....

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head. The interest paid on the borrowed funds, at the most, could be allowed against the dividend income if investment is made to earn the dividend income. The contention of the assessee is that investment was not made to earn dividend income. Therefore, such deduction could not be allowed even against the dividend income. Even otherwise, such income being exempt the question of deduction against dividend income becomes academic. The interest paid as per the contention of the ld. counsel for th .....

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nterest cost also. No separate deduction is allowable under this head in respect of interest paid on borrowed funds. Thus, in our opinion, no deduction is allowable to the assessee in respect of interest paid on borrowed funds. 20. It has been contended by the ld. counsel for the assessee that the assessee should not lose the statutory deductions under section 36(1)(iii) merely because its income is to be computed under other heads. We are unable to accept such contention. What is to be computed .....

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D provide that deduction shall be allowed in respect of the expenditure or allowance mentioned therein. The deduction pre-supposes the existence of receipts chargeable under this head. If the receipts are to be considered under other heads then, question of deduction under the head Profits & gains from business or profession would not arise. As already pointed out receipts and expenditure must go together. We may clarify that the receipt may be actual or to be received in future. The receipt .....

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Profits or gains from business or profession does not arise. Hence, the contention of the assessee is rejected . d) A larger bench of Hon ble supreme court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd ( 1997 ) 227 ITR 172 considered the issue of computation of income under various heads. e) Hon ble HIGH COURT OF MYSORE in the case of United Breweries ([1973] 89 ITR 17) held It is well-settled that the mere fact that a man holds all the shares in a company does not make the bu .....

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each case to be decided whether the subsidiary was carrying on the business as the company s business or as its own. The business of a subsidiary company can be regarded as the business of the parent-company if in addition to the capitalist control; it has functional control over its subsidiary. In the case of appellant, the question of business carried on by the group companies with that of appellant s own business is required to be considered if the claim of interest is to be allowed u/s 36 ( .....

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Limited for the purchase of Shares from borrowed fund not for the trading but to obtain controlling interest for the TATA group. Hon ble ITAT rejected the claim of the interest u/s 57 (iii) of the act considering the fact that the assessee withdrawn its claim deduction u/s 36 (1) (iii) and also that the intention of making investment for acquiring controlling interest was even not to earn any receipt taxable under the head INCOME FROM OTHER SOURCES hence no deduction u/s 57 (iii) of the act. Ra .....

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from tax. Therefore, the expenditure incurred in relation to such investment is required to be disallowed under section 14 A of the act. However, interest relating to the borrowings used in the purchase of trading shares from which dividend had been received is required to be excluded from such disallowance. In reference to allowability of interest, Hon ble ITAT at para 5.5 held that We have carefully considered the various aspects of the matter. The ld. AR for the assessee has argued that tradi .....

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interest in companies was not the business of the assessee as the assessee had not acquired controlling interest in any company with a view to managing the same. The assessee is an investment arm of the Zee group who has the management control over the companies. Advancing money interest free is also not the business of the assessee. Therefore, acquiring shares in the group companies for maintaining the controlling interest does not promote the business of the assessee and is only helpful to th .....

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has also been placed on the judgment of the Hon'ble Supreme Court in the case of Core Health Care Ltd. (298 ITR 194) (supra), in which it has been held that once the capital has been borrowed for the purpose of business, interest has to be allowed irrespective of the fact whether the borrowed fund has been used for acquisition of capital assets or for revenue assets. The said judgment is not applicable as advancing interest free fund to the group companies is not the business of the assessee .....

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has to be considered for disallowance . h) The Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. V/s. DCIT 328 ITR 81, adjudicated following substantial question of law. • (A)Whether on the facts and in the circumstances of the case, the Tribunal ought to have held that as the limited issue raised by respondent No. 1 in the assessment order was as to the quantum of the exemption under section 10(33) that was available and not to disallow any part of the expenditure c .....

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in directing respondent No. 1 to apply rule 8D of the Rules for computing the amount of disallowance under section 14A of the Act. • The assessee has, in addition, filed a Petition under Article 226 of the Constitution in order to challenge the constitutional validity of the provisions of section 14A and of rule 8D Hon ble Jurisdictional High Court held that Section 14A ensures that the shareholder, whose income from dividend is not included in the total income of a previous year, shall no .....

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annot be said that an absurdity would result on the application of the literal interpretation of section 14A [Para 45] . i) The CBDT vide circular no.5/2013 dt.11.02.14 through a clarification in respect of disallowance of expenses under Rule 14 A of the Act clarified as follows: SECTION 14A OF THE INCOME-TAX ACT, 1961, READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 - EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME - CLARIFICATION ON DISALLOWANCE OF EXPENSES UNDER SECT .....

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assessee which has been claimed as exempt during the financial year. 3. The matter has been examined in the Board. It is pertinent to mention that section 14A of the Act was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A with retrospective effect since inception of the Act was clarified vide Circular No. 14 of 2001 as under: "Certain incomes are not includible while computing the total income, as these are exempt un .....

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e, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income". Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective 6f the fact whether any such income has been earned during t .....

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tes that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. 5. The above position is further substantiated by a language used in Rule 8D(2)(ii) & 8D(2)(iii) of I.T. Rules which are extracted below: "(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt of amo .....

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the assessee, on the first day and the last day of the previous year." (Emphasis added) 6. Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. 7. This may be brought to the notice of all concerned. The ratio of the above judgements emphasises that for .....

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ad under which income has to be computed. The shift of nature of receipt i.e. investment converted into stock in trade, has to be limited for shifting of head from that year only. It is therefore difference between receipt and income is to be considered with the scheme of various heads. There is difference between receipt of dividend and income from dividend. Similarly it is the income which does not form part of total income which is required to be considered u/s 14 A of the IT Act. In sec 10(3 .....

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ceipt in the hands of shareholder. Sec 115-O (5) of the act restrict any deduction under any other provision of the act to be allowed to shareholder in respect of such dividend receipt. It is therefore for computing income by way of dividend from the dividend receipt so to claim exempt u/s 10(34) of the act, no expenditure can be allowed under any provision. With due regards to ratio of various case laws relied on by appellant, such proposition were never considered by the respective court or Ho .....

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h Court or Hon ble ITAT, Mumbai. Rather the ratios of Hon ble ITAT are in favour of revenue preposition. (4) The ld. CIT(A) order dt. 02.05.2008 a) At para 8 page 10,Ld.CIT(A) considered following undisputed facts i. total loan fund of ₹ 1062.8 crs. ii. Interest paid on borrowed capital and claimed in P&L A/c. is ₹ 75.20 crs. iii. Investment as per the balance sheet as on 31.03.2004 is of ₹ 1727.82 crs. iv Dividend receipt is of ₹ 6.16 crs. v. The assessee in its comp .....

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siness activity of controlling interest in the group companies by purchase of shares hence the same is allowable u/s.36(1)(iii). viii. The assessee place reliance on various case laws which were prior to the insertion of sec.14A of the Act. All these cases were distinguished by the assessing officer. ix. The AO placed reliance on the case of Everplus Securities & Finance Ltd. V/s. DCIT 101 ITD 15 (Delhi) and its ratio was considered as applicable in the case of assessee considering the simil .....

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able to earning of dividend income which is exempt u/s. 10(34) of the I.T. Act, 1961, the action of the AO in disallowing the same is justified. v. Ratio of Hon ble ITAT order in the case of M/s. Everplus Securities and Finance Ltd. (SUPRA) is squarely applicable in the facts and circumstances of the assessee s case. vi. Even the claim of the appellant that net interest expenditure of ₹ 67.93 crs. Claimed as allowable u/s. 36(1)(iii) should be allowed is also baseless. The assessee has not .....

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nexus approximate in relation to the earning of tax free income. iii. The amendment brought to sec,14A by the Finance Act 2006 w.e.f 1.4.2007 conferred such disallowances for the first time from 1.4.2007. iv. The ratio of ITAT Cochin in the case of Dhanlaxmi Bank Ltd. V/s. ACIT -12 SOT 625 does not permit such disallowances in the absence of any method which was subsequently provided by sec.40A (2) of the Act. v. The assessee vide its letter dt.18.2.2008 submitted before the LD.CIT(A) about comp .....

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₹ 13197494/. d) The Ld. CIT(A) at para 10 page 15 held that i. The appellant has merely contended that the disallowance purely on conjectures and surmises without establishes any nexus between the expenditure and head office and the tax free income cannot be made and sustained. However, the appellant has not denied that parts of these expenses are also related to the investment. ii. In reference to reliance on Vimco Seedling Ltd., the amendment brought in the sec.14A by Finance Act, 2006, .....

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uch cases were also relied on to hold that such disallowances are justified even in the case where common fund accounting system is maintained. 10. We have considered the rival contentions. So far as the issue of allowance or disallowance of interest expenditure u/s 36(1) (iii) in relation to the strategic investments in group Companies is concerned, admittedly, the lower authorities have made no addition on account of any disallowance under section 36(1)(iii) of the Act. However in the body of .....

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1)(iii), yet this issue being discussed by the lower authorities, for the sake of completeness, we deem it fit to adjudicate this issue also so that no issue may be left unaddressed. 11. The Ld. DR, in this respect, has placed strong reliance on the observations of the lower authorities and also on his written submissions as reproduced above. The ld. AR, however, in this respect, has reiterated his submissions that the assessee is an investment & finance company and a promoter of new compani .....

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tment & finance company and a promoter of new companies in hi-tech field. As a business activity, the assessee holds investment in the share capital of the companies promoted by it as controlling interest and therefore, takes active interest in the business of these companies. The entire investments were made for business purposes for having control over subsidiary and associated companies. 12. We find that the above issue is now squarely covered by the decision of the Jurisdictional Hon ble .....

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ourt in the case of Eicher Goodearth Ltd. vs. CIT (2015) 60 taxman.com 268 (Del.) has held that if the expenditure is incurred for the purpose of promotion of business- more specifically to retain control or as part of his strategic investment of the assessee company, such expenses by way of interest out go would have to be treated as allowable under section 36(1)(iii) of the Act. The Ld. DR has also placed reliance on the decision of the Tribunal in the case of Kankhal Investment & Trading .....

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he head Profits & Gains from Business/Profession but were assessable either under the head Income from other sources or under the head Capital Gains . However, we find that the above contentions have been duly discussed by the Hon ble Delhi High Court in the case of Eicher Goodearth Ltd. vs. CIT has discussed the above issue and has held as under: The judgments in Cocanada Radhaswami Bank (supra) and United Commercial Bank (supra) and the subsequent judgments in Western States Trading (P) Lt .....

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rt, would squarely apply. If indeed the assessee had invested and subscribed to the rights issue in order to retain the control it originally did in Eicher Tractors Ltd, it can still be said that the expenditure was towards promotion of business and, therefore, properly entitled to be treated as such under Section 36 (1) (iii). At the same time, we are also of the opinion that there has been inadequate consideration and discussion on this aspect before the lower authorities, particularly the AO .....

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acts of this case to retain control or as part of a strategic investment of the assessee/company, such expenses - by way of interest outgo would have to be treated under Section 36 (1) (iii) and not under Section 57. The matter is, therefore, remitted to the AO for full appraisal of the fact situation and findings in the light of our conclusions. If, as a result of the AO's determination, it is found that such expenditure is incurred, the net expenditure is obviously to be taken into conside .....

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hether the expenditure incurred for borrowing money for purchasing shares for acquiring controlling interest in a company can be held to be an expenditure incurred wholly or exclusively for earning income from dividend. The Hon ble High court held that Section 57 sets out the deductions which are permissible in the computation of the income chargeable under the head "Income from other sources". Clause (iii) of Section 57 provides that in computing income under the head "Income fro .....

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cannot be held to be an expenditure incurred wholly and exclusively for the purpose of earning income by way of dividends, and, therefore, it would not be allowable as a deduction under Section 57(iii) of the Act. However, the Hon ble Bombay High Court in para 4 of the judgement (supra) has observed as under: 4. It may be pertinent to mention the distinction in the language used by the Legislature in Sections 37(1) of the Act and 57(iii) of the Act. Section 37 provides for deduction of expendit .....

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sible under Section 57(iii) it is necessary that the primary motive of incurring it is directly to earn income falling under the head "Income from other sources". That is not so under Section 37 which allows deduction of expenditure "incurred wholly and exclusively for the purposes of the business". Under Section 57(iii), deduction will not be allowed if the expenditure is not incurred for the purpose of earning income falling under the head "Income from other sources&qu .....

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the case of the assessee, admittedly, the strategic investments were made for business purposes. The assessee being an investment & finance company and a promoter of new companies, as a business activity, holds investment in the share capital of the companies promoted by it as controlling interest and therefore, takes active interest in the business of these companies. 16. The Hon ble Supreme Court in the case of S.A. Builders vs. CIT (supra) has held that no disallowance of interest expend .....

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ression for the purpose of business includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also gets benefitted thereby. The Hon ble Supreme Court further explained the expression commercial expediency as under: The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obliga .....

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self), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point b .....

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nstance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company a .....

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ed not necessarily be the business of the assessee itself. What is to be seen is that the transfer of borrowed funds to a sister concern was out of commercial expediency. The Hon ble Supreme Court thereafter wished to make it clear that the order of the Hon ble Supreme Court should not be interpreted as that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends upon the facts and circumstances of the respective case. The two con .....

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y was out of commercial expediency. 19. Though, in the case in hand, issue is not regarding the interest free advance to the sister concerns, yet, the proposition of law laid down by the Hon ble Supreme court can be very well applied in this case as the assessee being an investment & finance company and a promoter of new companies and having interest in the business of these companies has made the investments for business purposes for having control over these subsidiary and associated compa .....

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) but have finally not made any such disallowance u/s 36(iii). The disallowance on this issue has been made only under the provisions of section 14A of the Act. 21. Now, coming to the merit of disallowance made u/s 14A of the Act, there is no dispute has been raised by the assessee in this case as regards to the proposition of law laid down by the Hon ble Supreme Court in the case of Walfort Share & Stock Brokers Pvt. Ltd. (Supra) as well as of the Hon ble Bombay High Court in the case of Go .....

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net dividend income can be allowed to be exempted from tax and not the gross dividend receipts. The Ld. AR has also not advanced any arguments regarding the applicability of the provisions of section 115-O of the Act. 22. Since the assessee has not contested the applicability of section 14A of the Act in relation to the exempt dividend income received by it, hence we do not deem it necessary to deliberate on the contentions raised by the Ld. DR regarding the purpose and object of insertion of se .....

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wance u/s 14A of the Act. Under the circumstances, it is undisputed that certain disallowance of expenditure is attracted in relation to exempt dividend income earned by the assessee during the year. Now, the question before us as to what should be the quantum of such a disallowance and what method should be adopted to calculate the expenditure incurred in relation to exempt income for the purpose of disallowance. 23. The contention of the Ld. DR in this respect is that since the entire investme .....

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rt in the case of PCIT vs. Empire Package Pvt. Ltd. [(supra)] to contend that disallowance u/s 14 A cannot exceed the exempt income earned during the year. 25. We have heard the learned representatives of both the parties and have also gone through the records on this issue. It is pertinent to mention here that assessment year involved in this case is AY- 2004-05. Sub-section (2) of section 14A stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation t .....

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at Rule 8D is not retrospective and applies from A.Y. 2008-09. For the years for which Rule 8D is not applicable and in the event of that the AO is not satisfied with the explanation/working given by the assessee, disallowance under section 14A has to be made on a reasonable basis. Almost similar view has been expressed by Hon'ble Delhi High Court in the case of 'Maxopp Investment Ltd. & Others' vs. CIT (247 ITR 162). Hence, the rule 8 D of the Income Tax Rules is not applicable .....

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#8377; 6.16 Crores during the year. Even otherwise, it is also not the case of the Revenue that the exempt income earned by the assessee is very less or negligible. It is also not disputed by the AO that the assessee being an investment & finance company and a promoter of new companies and having interest in the business of these companies has made the investments for business purposes for having control over these subsidiary and associated companies. Under such circumstances the different c .....

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ven otherwise, the entire interest expenditure can not be attributed to earning of exempt dividend income only. Even an investor normally does not invest merely for earning of dividends. It also takes into consideration the possibility of rise in price of shares which may result into taxable capital gains also. The Hon ble Delhi High Court in the case of Joint Investment Private Limited (supra) has held that section 14 of the Act or rule 8D cannot be interpreted so as to mean that the entire tax .....

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ourt in the case of M/s Cheminvest Ltd. vs. CIT (2015) 61 taxman.com 118, wherein also the assessee had made strategic investments in subsidiaries/Group Companies for retaining control over them but has not received any dividend income from such investments, has held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year and that the expression does not form part of the total income , in section 14A of the Act envisages that there should b .....

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24.03.2014 and by the Hon ble Bombay High Court in the case of CIT vs. M/s. Delite Enterprises in ITA No.110 of 2009 vide order dated 26.02.09. 28. The ld. DR has not pointed out any contrary decision to the above proposition. 29. In view of the overall facts and circumstances of the case, as discussed above, and in the light of the above decisions of the higher courts, which are otherwise binding on this Tribunal, we are of the view that disallowance u/s 14 A in this case cannot exceed than the .....

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the assessee is over assessed and direct the lower authorities to tax the assessee as per the provisions of law. We find that in the case of National Thermal Power Co. Ltd. vs. CIT 229 ITR 383, the facts before the Hon ble Supreme Court were that the assessee in that case offered the interest amount for taxation and the assessment was completed on that basis. Before the Ld. CIT (A), the assessee though had taken a number of grounds of appeal; however, the inclusion of the said amount of interes .....

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uthorities) which bears on the tax liability of the assessee, whether the Tribunal has jurisdiction to examine the same? The Hon ble Supreme Court while answering the said question observed that under section 254 of the Income Tax Act, the power of the Tribunal in dealing with the appeals is expressed in the widest possible terms; the power of the Tribunal under section 254 is not restricted only to decide the grounds which arise from the order of the Commissioner of Income Tax (Appeals); that b .....

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essee. The full bench of the Hon ble Bombay High Court in the cases of Ahmedabad Electricity Company Ltd. vs. CIT and Godavari Sugar Mills Ltd. vs. CIT by way of a common order dated 30.04.1992 (1993) 199 ITR 351 has observed that the basic purpose of an appeal procedure in an income tax matter is to ascertain the correct tax liability of the assessee in accordance with law. Therefore, at both the stages, either by the Appellate Assistant Commissioner or before the Appellate Tribunal, the appell .....

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ve jurisdiction to deal not merely with additional grounds, which became available on account of change of circumstances or law, but with additional grounds which were available when the return was filed. The words could not have been raised must be construed liberally and not strictly. There may be several factors justifying the raising of a new plea in an appeal and each case must be considered on its own facts. The co-ordinate bench of the Tribunal in the case of Shri Chandrashekhar Bahirwani .....

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f the Hon ble Gujarat High Court in the case of Gujarat Gas Ltd. vs. JCIT (2000) 245 ITR 84. In the said case, the words of the Circular No.549, para 5.12, dt. 31st October, 1989, providing that the assessed income under section 143(3) shall not be less than the returned income was considered by the Hon ble High Court and it was held that as per proviso to section 119 of the Act, the Board cannot issue instructions to the Income Tax Authority to make a particular assessment or to dispose of a pa .....

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of Pruthvi Brokers & Shareholders Pvt. Ltd. ITA No.3908 of 2010 decided on 21.06.12, while relying upon the various decisions of the Hon ble Supreme Court and other Hon ble High Courts has held that even if a claim is not made before the AO, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim is not barred. The Hon ble High Court has further observed that the decision of the Hon ble Supreme Court in the case of Goetze (Indi .....

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is, otherwise, entitled to a claim of deduction but due to his ignorance or for some other reason could not claim the same in the return of income, but has raised his claim before the appellate authority, the appellate authority should have looked into the same. The assessee cannot be burdened with the taxes which he otherwise is not liable to pay under the law. Even a duty has also been cast upon the Income Tax Authorities to charge the legitimate tax from the tax payers. They are not there to .....

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s 14A to the extent of exempt income earned by the assessee during the year. 32. Grounds No. 4 & 5: The Ld. Counsel for the assessee has stated at the Bar that he does not press Grounds No 4 & 5. Theses grounds are therefore dismissed as not pressed. 33. Ground No. 6: During the year under consideration, the assessee had paid processing fees for acquiring the term loans from the Banks. The assessee claimed the said fees as business expenditure. The AO however, held that the loan funds we .....

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investments for business purposes for having control over these subsidiary and associated companies, hence, in the light of the proposition of law laid down by the Hon ble Bombay High court in the case of CIT, Panaji, Goa vs. Phil Corpn. Ltd. (supra), Hon ble Delhi High Court in the case of Eicher Goodearth Ltd. vs. CIT (supra) and the Hon ble Supreme Court in S.A. Builders vs. CIT (supra), no interest disallowance is attracted u/s 36(iii) of the Act. On the same analogy, the processing fees pai .....

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No. 7 relates to the issue of disallowance of expenditure in the shape of upfront fees and brokerage etc. paid for issuing the non-convertible debentures. The AO concluded that since the term of the debentures was spread over two years, hence benefit arrived at by the assessee was of enduring nature spread over two years. The AO therefore calculated the expenses pertaining to the year under consideration and disallowed the remaining expenses. 36. We find that this issue is also covered with the .....

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ney for a certain period and it was irrelevant to consider the object with which the loan was obtained. This issue is accordingly decided in favour of the assessee. 37. Grounds No. 8 has not been pressed by the assessee being taken as alternative ground to ground No. 7. This Ground is therefore dismissed as not pressed. 38. Ground No. 9 has also not been pressed by the ld. AR owing to the smallness of the amount involved. This ground is therefore, dismissed as not pressed. 39. Ground No. 10 is a .....

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