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2016 (8) TMI 51 - ITAT HYDERABAD

2016 (8) TMI 51 - ITAT HYDERABAD - TMI - Disallowance u/s. 14A - whether disallowance can be made under Rule 8D? - Held that:- Following the principles laid down by the Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd., [2009 (1) TMI 4 - BOMBAY HIGH COURT] we are of the opinion that no part of the interest paid on the borrowed funds can be disallowed under Rule 8D(2)(ii). Moreover, if at all there is any diversion of funds that should trigger disallowance u/s. 36(1 .....

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investment, Rule 8D(2) (iii) specifies that an amount equal to % of the average value of investment, income from which does not or shall not form part of the total income, as appear in the balance sheet of assessee on the first day and the last day of the previous year has to be attributed. Working has to be made on the investment as specified, without segregating them on income yielding or non-income yielding during the year. The investment in Bill Roth Hospitals Ltd., has potential to earn di .....

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Commissioner of Income Tax (Appeals)-5, Hyderabad, dated 16-11-2015 on the issue of disallowance u/s. 14A of the Income Tax Act [Act]. 2. Briefly stated, assessee is in health care business. In addition to earning its regular income from the maintenance of hospital, it also earned dividend from mutual funds and UTI amount to ₹ 42,37,790/- and claimed exemption. Assessing Officer (AO) invoked the provisions of Section 14A r.w.r. 8D and made a disallowance of ₹ 11,70,865/- calculated .....

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penditure on certain secured loans obtained to an extent of ₹ 11,49,176/- and also 0.5% of average value of investments and ₹ 21,189/- under Rule 8D(2)(iii). Assessee contested the same before the CIT(A) to submit that there is no satisfaction recorded by the AO while invoking Section 14A and further all the borrowals are for specific purposes and no part of the borrowed amount was diverted to investments and questioned the disallowance. It was contended that AO cannot disallow expen .....

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eports, incomes earned and dividend, Fixed Deposits made in earlier year but withdrawn during the year and the amount of reserves and surplus available submitted that assessee s annual income declared during the year itself is to the tune of ₹ 40.68 Crores, whereas investments made are only 10.45 Crores and reserves and surplus of ₹ 56.12 Crores. It was submitted that assessee has its own funds for investing in the mutual funds and sister-companies. It is also submitted that the term .....

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015. 4. Ld. DR however, relied on the detailed order of the CIT(A). 5. We have examined the rival contentions and perused the contentions. There is no dispute with reference to invoking of Rule 14A which, assessee has not contested before us, consequently, the issue is only whether disallowance can be made under Rule 8D? There is no direct expenditure which can be disallowed under Rule 8D(2)(i). As far as the expenditure incurred by way of interest, Rule 8D(ii) can be invoked only in a case wher .....

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corporate loans and term loans with SBM IF Branch. No finding was given by the AO that these funds are utilised for the investments. As seen from the balance sheet also, an amount of ₹ 4,96,00,000/- was invested in earlier year in Bill Roth Hospitals Ltd., and an amount of ₹ 75,96,688/- in the shares of Dr. Reddy Labs. The shares of Dr. Reddy Labs were sold during the year. An amount of ₹ 5.49 Crores was invested in Birla Sunlife Mutual fund during the year and as explained by .....

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can be disallowed under Rule 8D(2)(ii). Moreover, if at all there is any diversion of funds that should trigger disallowance u/s. 36(1)(iii) i.e., for diversion of funds from the business. AO has not disallowed any amount u/s. 36(1)(iii). In view of this, we are of the opinion that the interest paid on term loans obtained cannot be considered as interest which is not directly attributable to any particular income or receipt under Rule 8D(2)(ii). In view of this, disallowance of ₹ 11,49,176 .....

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ii) specifies that an amount equal to ½% of the average value of investment, income from which does not or shall not form part of the total income, as appear in the balance sheet of assessee on the first day and the last day of the previous year has to be attributed. Working has to be made on the investment as specified, without segregating them on income yielding or non-income yielding during the year. The investment in Bill Roth Hospitals Ltd., has potential to earn dividend in a later .....

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ther contention that dividend income cannot be considered as exempt income as it is subjected to dividend distribution Tax u/s 115J and 115-O of the Act, in our view, it is not acceptable simply because of the fact that the assessee itself recognizing the fact that it has incurred expenditure towards earning of exempt income has disallowed expenditure to the tune of ₹ 35,65,860/- u/s 14A read with Rule 8D(2) of the Act. Therefore, assessee s challenge with regard to applicability of sectio .....

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whether any income is earned or not during the year. Before going into the merits of assessee s contentions, it is deemed necessary to look into the provisions contained under rule 8D(2) which is relevant for our purpose. The same is extracted hereunder for the sake of convenience: 8D. (1) xxxxxxxxxxx (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :- (i) the amount of expenditure directly relating to inco .....

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does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the .....

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urs expenditure by way of interest which is not directly attributable to any particular income or receipt. The third part as provided under Sub-Rule 8D(2)(iii) is an artificial figure i.e. one-half per cent of the average investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. Aggregate of these three components would constitute expenditure in relation to exempt in .....

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such expenditure under the provisions of section 14A as it speaks about expenditure in relation to income which does not form part of the total income. He was of the view that even if no income was received, expenditure incurred can be disallowed u/s 14A. However, Rule 8D(2)(i) speaks of expenditure directly relating to income which does not form part of total income . The term total income has not been defined either u/s 14A or under Rule 8D. Therefore, one has to look to the definition of tota .....

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by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or (c) accrues or arises 57 to him outside India during such year : Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6)* of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to t .....

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the fact that it is taken into account in a balance sheet prepared in India. Explanation 2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India. 7.2 As can be seen, definition of total income u/s 2(45) refers to section 5 which envisages sco .....

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ferred to in rule 8D(2)(i) cannot be in abstract. It must relate to a previous year income of which is sought to be assessed. Therefore, as a natural corollary it follows that only expenditure directly relating to income which is earned either on receipt basis or on accrual basis and which does not form part of total income of a particular assessment year can be disallowed under clause (i) of Rule 8D(2). Rule 8D(2)(i) does not refer to the investment made by the assessee. On a conjoint reading o .....

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sallowance of expenditure under clause (i) is related to income earned which does not form part of total income, clause (iii) relates to the average of the value of investment appearing in the balance sheet. On a plain reading of Rule 8D(2) as a whole the legislative intent becomes clear that the disallowance of expenditure contemplated under sub-rule(i) must relate to the income which does not form part of the total income of that year. Therefore, investment, which has not resulted in any incom .....

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