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2016 (8) TMI 643 - ITAT MUMBAI

2016 (8) TMI 643 - ITAT MUMBAI - TMI - Addition made on account of claiming of interest expense u/s 57(iii) - CIT(A) deleted the addition - whether there was no direct nexus between the loan borrowed by the assessee and the interest bearing loan advanced by the assessee? - Held that:- . We find that the assessee has advanced money out of the funds borrowed from the bank and therefore there is direct nexus between money raised and money lent. We are in agreement with findings of the ld.CIT(A) tha .....

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7(iii) of the Act against the interest income liable to be assessed u/s 56 of the Act. In our opinion the CIT(A) has passed a very reasoned order which requires no interference on our part. - Decided in favour of assessee. - Nature of expenses - revenue or capital - Held that:- On perusal of the records including the orders of authorities below, we find that the expenses incurred by the assessee under various heads as has been mentioned herein above are more of revenue in nature than the cap .....

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and maintenance of plant and machinery for purchase of software - allowable revenue expenditure. - Addition made by the AO towards Stamp Duty and Registration Fee - Held that:- We find that the ld. CIT(A) after going into the matter and facts of the case came to the conclusion that these expenses were of revenue nature which were incurred for the purpose of lease transactions and not for the purchase of capital assets . The ld. CIT(A), decided the issue in favor of the assessee by following .....

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) and accordingly upheld the same by dismissing the appeal of the revenue. - Addition u/s 14A - Held that:- From the record before us, we find that the assessee has made huge investments as stated above on which it has not received any exempt income by way of dividend during the year. Similarly from the record, we observe that the investments were made in the subsidiary companies with a motive to gain control over these subsidiaries companies and not for the purposes of earning tax free inco .....

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DRA KUMAR YADAV, JM AND SHRI RAJESH KUMAR, AM For The Revenue : Shri Javed Akhatar For The Assessee : S/Shri Jitendra Sangvi and Amit Khatiwalla ORDER PER RAJESH KUMAR, A. M: There are three appeals under consideration, out of which one appeal by the revenue for assessment year 2008-09 is directed against the order dated 20.12.2013 of ld.CIT(A) and remaining two appeals are the cross-appeals directed against order of ld.CIT(A) dated 11.7.2014 for the assessment year 2010-11. Since, the appeals b .....

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u/s 57(iii) without appreciating the fact that the was no direct nexus between the loan borrowed by the assessee and the interest bearing loan advanced by the assessee. 4. Brief facts of the case are that the assessee filed its return of income for the assessment year 2010-11 on 4.10.2010 declaring total loss of ₹ 2,51,33,965/-. The return was processed under section 143(1) of the Income tax Act, 1961. Thereafter the case of the assessee was selected for scrutiny and the statutory notices .....

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wing deduction as claimed u/s 57(iii). The subject matter of the present appeal by the revenue is deletion of disallowance u/s 57(iii) of the Act against the interest income. Aggrieved by the order of the AO, the assessee has preferred an appeal before the ld. CIT(A), who allowed the appeal of the assessee by observing and holding as under (para 5.3.10): 5.3.10 Having regard to facts and circumstances of the case and in view of the above, the A.O. is directed to verify the linkage between the lo .....

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ore ground of appeal no. 2 is allowed subject to verification of facts from the original assessment records. 5. The ld. DR submitted before us that the assessee has not disclosed the interest income of ₹ 51,89,984/- by claiming deduction u/s 57(iii) of the Act. The ld. DR further argued that the assessee was engaged in the business of development, sale and purchase of infrastructure and real estate projects. The assessee had borrowed money for these projects purposes and capitalised the in .....

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rowed funds were clearly meant for projects of the assessee and therefore the plea of the AR that the interest on borrowed funds from the banks was out of the interest receipt from lending from other companies was totally wrong and against the provisions of Act. Finally, the ld. DR submitted that the order of ld. CIT(A) was wrong and therefore deserved to be quashed by restoring the order of the AO. 6. On the contrary, the ld. Counsel brought to our notice that there was direct nexus between the .....

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urred wholly and exclusively for the purpose of making or earning such income and thus, existence of nexus between the activity producing the income and the expenditure incurred is the sole criteria for claiming deduction u/s 57(iii) of the Act. The ld. AR strongly supported the order of ld. CIT(A) who has rightly appreciated the facts that there was a nexus between the earning of income and incurring the expenditure for earning such income and therefore prayed that the order of ld. CIT(A) be up .....

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eived income from such lending. 8. Now, the issue before us is whether the interest paid to the bank on the borrowed funds is admissible under section 57(iii) of the Act or not as being wholly and exclusively expended for the purposes of earning such interest income. We find that the assessee has advanced money out of the funds borrowed from the bank and therefore there is direct nexus between money raised and money lent. We are in agreement with findings of the ld.CIT(A) that the interest to ba .....

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ainst the interest income liable to be assessed u/s 56 of the Act. In our opinion the CIT(A) has passed a very reasoned order which requires no interference on our part. Accordingly the same is upheld. 9. Appeal of the revenue stands dismissed. 10. Now, we will deal with the appeal bearing ITA No.1165/M/2014 11. Grounds of appeal No.1 and 2 relate to deletion of addition of ₹ 2,34,98,339/- by ld. CIT(A) comprising ₹ 1,50,37,135/- on brand building, marketing expenses, ₹ 19,28,5 .....

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see filed its return of income for the assessment year 2008-09 on 27.9.2008 declaring total loss of ₹ 110,90,93,410/-. The return was processed under section 143(1) of the Income tax Act, 1961. Thereafter the case of the assessee was selected for scrutiny and the statutory notices u/s 143(2) and 142(1) were issued and served upon the assessee. The assessment was framed by the AO, after considering the submissions of the assessee as made from time to time during the assessment proceedings v .....

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ket research expenses Rs.19,28,589/- Visual display and signage expenses Rs.65,32,615/- Total Rs.2,34,98,339/- The AO came to the conclusion that the above said expenditures were of capital in nature and were wrongly claimed by the assessee and hence issued show cause notice to the assessee to show cause as to why these expenses should not be disallowed and added to the total income of the assessee. The AO after considering the reply of the assessee dated 19.11.2010 treated the same as capital e .....

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d that these expenses are giving long-lasting benefit to the business of the assessee, the appellant was asked to furnish the bills pertaining to such expenses. Same were produced. I have looked into the same and noted that under the head advertisement, the expenses were incurred for making payment towards advertisement published in newspapers, through hoardings, by printing logo on various items of day to day use like mugs, Tshirts ,saris and others and the bills are raised by the parties who d .....

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-to-day promotion and giving impetus to the existing business for generating more and more revenue are revenue expenses, as the decision given in the case of Monte ,Motors Ltd. ,in ITA No. 978/2011 and again in case of CIT V/s Orient Ceramics and Industries Ltd (ITA No.65 and 66 of 2011) by Hon ble High Court Delhi. In view of this the place taken by the appellant that expenses incurred under the head marketing research, brand building, advertisement and sales promotion are revenue expenses as s .....

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submitting that the AO has rightly disallowed the expenditure being capital in nature as the assessee purposively suppressed the income by charging off the capital expenditure as revenue. The ld. DR prayed that the order of the ld. CIT(A) be set aside and that of AO be restored. 16. On the other hand, the ld.AR while strongly objecting the arguments of the ld. DR submitted that these are routing revenue expenses incurred on brand building marketing expenses (Rs.1,50,37,135/-), Market research e .....

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e assessee had very few branded materials. They needed newly designed, fashion oriented dress materials, sari, and many other format with latest trends. In order to meet the demands, the assessee had set up its own designing team to get these dress made from various manufacturers. These dress materials had its own name as brand and the assessee had spent lot of money to sell these products by offering more and more benefits upon buying these branded goods rather than other goods. Such expenses, .....

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e and new technology, new fashion, new foods habit, new entertainments were to be followed well in advance. This was being carried out by the recognised research surveyors in the field and constituted day to day expenses keeping in view, the display of products at windows, stores inside and outside will make lots of difference to make the sale. Lots of efforts are being made to make the right kind of product display for every brand, every season, every category, every design. The latest design w .....

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IT(A) who after considering the submissions of the assessee has rightly deleted the addition and hence observations and findings of the ld.CIT(A) be upheld by dismissing the appeal of the revenue. 17. After going through the contentions of both sides and on perusal of the records including the orders of authorities below, we find that the expenses incurred by the assessee under various heads as has been mentioned herein above are more of revenue in nature than the capital ones. The AO without go .....

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ue raised in the grounds no.3 and 4 are that the AO during the course of assessment proceedings found that the assessee has debited a sum of ₹ 4,91,14,857/- under the head repairs and maintenance of plant and machinery for purchase of software as per details mentioned at pages 3 and 4 of the assessment order which are as under : 1 R&M-IT software-used Prod.Tool Rs.12,59,345 2 R&M-IT software-business appl. Rs.1,68,358 3 R&M-IT software-communication Rs.1,20,52,611 4 R&M-IT .....

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e of 25% on ₹ 4,91,14,857 thereby adding remaining amount of ₹ 3,68,36,143/- to the total income of the assessee. The assessee preferred an appeal before the ld. CIT(A) challenging the action of the AO. Before the first appellate authority, the assessee submitted that the assessee had incurred expenses on purchase of various computer softwares installed in various locations for the purpose of day to day running of its business. The ld.CIT(A) deleted the addition made by the AO by obs .....

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um/2008 by Hon ble ITAT, Mumbai again. In view of this the amount spent on these software for running the business efficiently by the appellant have to be allowed. Accordingly the addition made of ₹ 3,68,36,143 (total purchase amount of ₹ 4,91,14,857/- less depreciation of ₹ 1,22,78,714) being not sustainable is deleted herewith. The ground No.2 is allowed . Aggrieved by the order of ld.CIT(A), the revenue is in appeal before the Tribunal. 19. Before us the ld. DR submitted tha .....

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are were of revenue nature. The ld.AR submitted that the purchase of software were required in order to run and operate the business of the assessee at various locations and these were routing expense. In defence of his arguments the ld.AR relied in the number of decisions viz. M/s Glenmark Pharmaceutical Ltd, in ITA No.1110/Mum/07 and Brics Securities Ltd in ITA No.4514/Mum/2008 and finally prayed that the order of ld.CIT(A) being reasoned and deserved to be upheld in view of the ratio laid dow .....

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the various outlets of the assessee company and smooth working of the organisation. Besides, the case of the assessee is squarely covered by the decision of the Mumbai Tribunal in the case of M/s Glenmark Pharmaceutical Ltd, ITA No.1110/Mum/07, wherein it has been held as under : 15. We have heard the learned representatives of the parties, records perused and gone through the decisions cited. The assessee purchases the software called as SAP. The assessee claimed the expenditure incurred on th .....

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eration in respect of which the expenditure incurred. To know the nature of activities for which expenditures incurred we would like to refer written submissions of the assessee filed before CIT (A) of which copy placed in paper book at page numbers 80 to 117. The relevant part of Para 42 of the said letter reproduce as under:- "It is relevant to note the concept of ERP in brief in order to understand the correct nature of said expenditure. There are number of different systems in a large c .....

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where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on applicat .....

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pplied blindly and mechanically without regard to the particular facts and circumstances of a given case. What is capital expenditure and what is revenue are not eternal verities but must be flexible so as to respond to the changing economic realities of business. The expression 'asset or advantage of an enduring nature' was evolved to emphasise the element of a sufficient degree of durability appropriate to the context. The concept of enduring benefit must respond to the changing econom .....

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title in and to all intellectual property rights, including patent, trademark, service mark, copyright and trade secret rights, in the SAP Proprietary information are and shall remain in SAP and its Licensors. Licensee acquires only the right to use the Software under the terms and conditions of this Agreement and does not acquire any ownership rights or title in or to the SAP Proprietary information and that of SAP's licensors. (a) Licensee shall not copy, translate, disassemble, or decompi .....

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cation and Extensions to the Software and Documentation shall be considered part of the Software and Documentation for purposes of this Section 6." 17 We find from the clauses of the agreement that the agreement itself could have been terminated by any party before the expiry of the term on any of the grounds stated in the agreement and amount will not be refunded. The relevant clauses of the agreement are reproduced as under:- "5. TERMS AND TERMINATION" "5.1 Term. This agree .....

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e by Licensee." 18 The expenses incurred for a software packages in the present computer world, which revolves on the modern communication technology, enables the assessee to carry on its business operations effectively, efficiently, smoothly and profitably. Such software enhances the efficiency of the operation. It is an aid in the business administration/ process rather than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit, does no .....

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he modern administrative technology for day to-day administration of business activity to enable the assessee to carry on its business operations effectively, efficiently, smoothly and profitably. Such software enhances efficiency of such business operation. Therefore, acquiring such software in the present scenario of style of business, it cannot be held as a capital asset. 19 One of the aspects of the AO for disallowance of assessee's claim is that the expenditures were technical know - ho .....

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essee neither purchased any software nor the expenditure is incurred related to manufacturing operation, therefore, we do not agree with this reason of the A.O. for disallowing the assessee's case. 20 In the light of discussions, we allow the claim of the assessee as revenue expenditures and the AO is directed accordingly .The AO further directed that if depreciation if any has been allowed same be withdrawn. In the case of Brics Securities Ltd, the Tribunal has held as under : 6. We have he .....

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ng. A sum of ₹ 10000 had been paid to Shri Manish D. Shah for development of equity stock management system software. A sum of ₹ 7500 was paid for availing span software for BSE derivative margin conclusion. ₹ 62,900 was paid for purchase of new licence CD for Windows XP. From the nature of the expenditure incurred as aforesaid it is clear that the software in question were basically to help the assessee in carrying on its business more efficiently and effectively. We are of th .....

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he ratio laid down in the above mentioned decisions of the Tribunal, we are of the view that the order passed by the ld. CIT(A) squarely covered by the above mentioned decisions of the Tribunal. Respectfully following the same, we uphold the order of ld.CIT(A) and accordingly, reject the ground taken by the revenue on this issue. 23. Ground No.5 taken by the revenue relates to deletion of addition of ₹ 27,32,096/- by the ld.CIT(A) as made by the AO towards Stamp Duty and Registration Fee b .....

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roceedings allowed the claim of the assessee by observing and holding as under : 5. Under the head "rates and taxes" the assessee has debited inter alia following expenses which are capital in nature. I. Stamp duty ₹ 21, 95, 247 2. License fee ₹ 5, 36, 849 Rs.27. 32. 096 The above expenses being of capital in nature, are hereby disallowed and added in the income of the assessee 5. During the appellate proceedings the appellant has submitted that stamp duty was paid for leas .....

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cannot be disallowed. Accordingly the addition made of ₹ 27,32,096/- being not sustainable is deleted herewith. The ground No.3 is allowed 25. The ld. DR while heavily supporting the order of AO submitted that the stamp duty and licence fee incurred by the assessee by debiting to rates and taxes were of capital nature and therefore the AO has rightly treated the same as capital expenditure. The ld. DR further submitted that these expenses were incurred for the purpose of enduring Long Term .....

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h were of revenue nature as capital expenditure. The ld. AR further submitted that the AO has not given finding of facts or reasons for making such disallowance and the disallowance has made in the summary manner and without giving any reason or justification and hence deserved to be deleted. 27. We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below on the issue. We find that the ld. CIT(A) after going into the matt .....

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has not disputed the fact that the lease is Long term lease/licence and is not of recurring in nature. In view of these facts and the ratio laid down in the above said decision, we find no infirmity in the order of ld. CIT(A) and accordingly upheld the same by dismissing the appeal of the revenue. 28. Now we shall take up the appeal bearing ITA No.5732/Mum/2014 filed by the assessee. 29. At the time of hearing, the ld.AR did not press ground no.4 and therefore same is dismissed as not pressed. .....

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y way of dividend on the said investments. The AO found that the assessee has not disallowed any expenses under section 14A r.w.rule 8D of the Income Tax Rules, 1962 and finally worked out the disallowance at ₹ 21,19,699/- under rule 8D 2(iii) by considering and rejecting the reply of the assessee as incorporated in para 5.3 of the assessment order. Aggrieved by the order of the AO, assessee preferred an appeal before the ld.CIT(A). The ld. CIT (A) after considering the detailed reply of t .....

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of the Hon ble ITAT Delhi Special Bench decision cited above and in the light of th e CBDT circular no. 5/2014 dated 11.2.2014 issued vide F No.225/182/2013-ITA.II Ground of appeal No.1 is not allowed 32. The ld.AR vehemently submitted before us that very basis on which the ld. CIT(A) by relying on the decision of Special Bench Delhi in the case of Cheminvest Ltd(supra) has founded his decision to dismiss the appeal of the assessee has now been reversed by Delhi High Court as reported in (2015) .....

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f the Act can be made in respect of investments which have not yielded any dividend income during the year : 1 Cheminvest Ltd. vs. CIT 61 taxmann.com 118 Delhi HC 2 CIT vs. Shivam Motors (P.) Ltd 55 taxmann.com 262 Alla. HC 3 ACIT vs. Mr. M. Baskaran 50 taxmann.com 138 ITAT 4 Siva Industries and Holdings Ltd vs. ACIT 11 taxmann.com 404 ITAT 5. CIT vs.Delite Enterprises ITA No. 110 of 2009 Bombay HC 6 REI Agro Ltd. vs. DCIT 35 taxmann.com 404 I TAT 7 Avshesh Mercantile P. Ltd. vs. DCIT 26 taxmann .....

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18 ITAT 5. U P Electronics Corporation Lt V DCIT ITA No. 538/LKW/2012 ITAT 6 ITO V/s Piuoneer Radio Training Services P L ITA No.4448/Del/2013 ITAT 7 Baroda Industries P L V/s ITO ITA No.4213/Mum/2013 ITAT 8 Provogue (India) Limited V/s DCIT ITA No.2155/Mum/2013 9 CIT V/s Raymond Apparel Ltd ITA No.255 and 720/Mum/2012 ITAT 10. EIH Associated Hotels Limited V/s DCIT ITA No.1503/Mds/2012 11 ACIT V/s Spray Engineering Devices 23 Taxmann.com 267 ITAT 33. On the other hand, the ld.DR relied heavily .....

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including the orders of authorities below and the case laws relied by the parties. From the record before us, we find that the assessee has made huge investments as stated above on which it has not received any exempt income by way of dividend during the year. Similarly from the record, we observe that the investments were made in the subsidiary companies with a motive to gain control over these subsidiaries companies and not for the purposes of earning tax free income or dividend. Having regar .....

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in the case of Cheminvest Ltd vs. ITO (supra) in which the Special Bench held that the disallowance u/s 14A r.w.r 8D were to be made even where the assessee has not earned exempt income during the year. The said findings of the Special Bench of the Delhi Tribunal has been reversed by the Hon ble Delhi High Court vide order dated 2.9.2015, wherein the Hon ble High Court held that where the investment are of strategic nature and no exempt income is earned by the assessee in the relevant assessmen .....

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h investment. The interest expenditure incurred by the assessee is in relation to such investments which gives rise to income which does not form part of total income. [Para 18] In light of the clear exposition of the law in CIT v. Holcim India (P.) Ltd. [2015] 57 taxmann.com 28 (Delhi) and in view of the admitted factual position in this case that the assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the assessee in the relevant assessment .....

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s year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year. [Para 23] Consequently, the impugned order of the Tribunal is set aside and the appeal is allowed in the above terms. This Court should not be understood to have expressed any opinion on the issue of whether for the assessment year in question the interest expenditure incurred by .....

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ed off by grant of a loan from NIT to assessee - Under said agreement loan was provided to assessee by NIT on an interest of 12 per cent per annum - However, assessee disputed said amount consistently and no interest was paid - Eventually, it was only on execution of a supplementary agreement, in current year, liability to pay interest at rate of 6 per cent per annum was agreed upon and in pursuance thereof, assessee debited an amount towards interest in current year - Whether since it was not a .....

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ssment year 2008-09 - Whether in absence of any tax free income earned by assessee, disallowance under section 14A could not be made - Held, yes [Para 10] [In favour of assessee] In the case of ACIT V/s Mr.M.Baskaran the Tribunal has held as under : 11. In the case of CIT v. Winsome Textiler Industries Ltd. [2009] 319 ITR 204, the Hon'ble Punjab & Haryana High Court held that when there is no claim for exemption of income in such situation section 14A has no application. Respectfully fol .....

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(supra) which has been confirmed by the Hon ble Delhi High Court vide decision dated 15.01.2013 in para 6.3 as under:- '6.3 We have carefully considered the submissions and perused the records. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that only interest of ₹ 2,96,731/- was paid on funds utilized for making investments on which exempted income was receivable. Further, Ld. Commissioner of Income Tax (Appeals) has observed that in respect of investment of .....

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these contracts and therefore no expense and interest attributable to the investments made by the appellant in the PSVs can be disallowed u/s 14A LW. Rule 8D because it cannot be termed as expense/ interest incurred for earning exempted income. Under the circumstances, Ld. Commissioner of Income Tax (Appeals) is correct in holding that disallowance of a further sum ₹ 40,556/- calculated@2%ofthedividend earned is sufficient. Under the circumstances, we do not find any infirmity in the orde .....

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