TMI Blog2008 (12) TMI 770X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned that having regard to the word profits , used in the provision, there could be no justification for including negative profit, i.e., loss for the purpose of computation of the aforesaid deduction. It is further mentioned that the assessee was entitled to claim deduction in respect of export incentives at 90%, in proportionate to export turnover to the total turnover. It is also mentioned that the learned CIT(A) failed to consider the enhanced claim of deduction under this provision at ₹ 1,12,13,932/-, instead of the original claim of ₹ 1,07,04,666/-, made on 29.12.2003 in view of the provision contained in section 155(13), on further realization of foreign exchange. It is also mentioned that the learned CIT (Appeals) erred in not enhancing the deduction on account of various additions made to the income of the assessee. 2.1 These grounds were not pressed by the learned counsel in view of the decision of Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. vs. Dy. CIT (2004) 266 ITR 521, in which it was held that where there is a net loss from export of goods, in a situation where there is a profit from manufactured goods and loss from trading good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, the learned DR did not make any further argument in the matter, but merely relied on the orders of the authorities below. 3.2 We have considered the facts of the case and rival submissions. We find that the issue of valuation of closing stock on cost price or market price, whichever is lower, a method adopted by the assessee since assessment year 1995-96, has been accepted by the Tribunal in its earlier orders. Respectfully following these orders, the matter is decided in favour of the assessee and against the revenue. Therefore, these grounds are allowed. 4. Ground no. 11 is in relation to deduction of estimated liability of ₹ 1.94 lakh in respect of the leave encashment of the employees. Ground nos. 12, 13 and 14 are in relation to the method of taxation of income in respect of the bonds of M/s G E Capital Ltd. It is mentioned that the learned CIT (Appeals) erred in holding that the income from the bonds accrued from year to year. It is further mentioned that circular no. 2/2000 dated 15.2.2000 is prospective in nature and as per earlier circular the income could be assessed only at the time of maturity of the bonds. It is also mentioned that the investment was mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n deleting the addition of ₹ 95,52,136/- by way of interest, which was disallowed by the AO u/s 14A, by admitting additional evidence under Rule 46A of the Income-tax Rules, 1962. While doing so, he ignored the fact that the AO had given a clear opportunity to the assessee as per order-sheet entry dated 8.12.2003 to explain as to why apportionment of expenses may not be made u/s 14A to arrive at the expenditure incurred by the assessee in earning the aforesaid incomes, which do not form part of the total income under the Act. 6.1 In connection with these grounds, it is mentioned in the assessment order that vide order-sheet noting dated 8.12.2003, the assessee was required to explain as to why the expenses incurred by it may not be apportioned towards dividend income of ₹ 1,25,52,491/- and interest on tax-free bonds of ₹ 62,82,329/-. It was explained that the only activity required in relation to these incomes is to deposit cheques in the bank account, which also sometimes gets credited to the account by electronic clearance system (ECS). It can be seen from the profit and loss account that the expenditure debited therein does not have any direct nexus with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted before the AO. No interest had been paid on investments made in shares and bonds. The explanatory notes explaining the provision introduced by Finance Bill, 2001, stated that the expenditure incurred to the extent it is relatable to earning of taxable income is deductible in computing the total income. Since borrowed funds were not utilized for investment in the mutual funds, nothing could be disallowed out of the interest expenditure. It was also explained that in the preceding years, the income from units of the UTI was assessed under the residuary head and proportionate expenditure in relation to such income was not disallowed. It appears that the assessee filed additional evidence before the learned CIT (Appeals) in the form of two certificates from Maharashtra State Cooperative Bank Ltd. and Syndicate Bank stating that the interest charged by them was towards packing credit limit only. The case of the AO in this behalf was that it was nowhere mentioned in the certificates that the whole of the interest of ₹ 1.89 crore, debited to profit and loss account, was in relation to packing credit limit. Thus, it was not proved that the whole of the interest was towards th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion towards the findings of the AO, in which a sum of ₹ 1,02,33,809/- was disallowed from the interest and expenditure. It was pointed out that the computation in regard to disallowance of interest is not clear because it is not known how the AO arrived at the figure of ₹ 78,29,33,269/- in the numerator of the ratio applied by him for working out the disallowance. He also drew our attention towards the order of the learned CIT (Appeals) including the additional evidence admitted by him and his findings both on the admission of additional evidence and the disallowances. These issues have already been discussed by us while summarizing the order of the learned CIT (Appeals) and need not be repeated in the interest of brevity. He also referred to the certificates of the banks placed in the paper book on pages 419 and 420 to the effect that the interest was charged in respect of export credit limit or packing credit limit. He also drew our attention towards the remand report furnished by the AO in the course of appellate proceedings, which has been discussed by us earlier while summarizing the order of the learned CIT (Appeals). He also drew our attention towards the annua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal income under this Act. Thus, only such expenditure could be disallowed which is incurred in relation to the income, which is not includible in the total income. Therefore, it has to be proved in the first instance that any expenditure has been incurred in relation to such income. Rule 8D provides the mechanism for computing the amount not deductible under this section in computing the total income in a case where the AO, having regard to the accounts of the assessee, is not satisfied about the correctness of the claim made by the assessee. This rule is excessive utilization of subordinate legislation, not warranted by the statute. 8. We have considered the facts of the case and rival submissions. We find that the case of Daga Capital Management Pvt. Ltd., Caninvest Ltd. and Maxopp Investment Ltd. have been decided by the Special Bench of the Tribunal. The ratio of these cases is that:- (i) section 14A has been inserted for clarifying the legislative intent that no expenditure is deductible, which is incurred in respect of income not included in the total income, from the income which forms part of the total income; (ii) being a special provision, expenditure caught wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t context of computing the dividend income included in the gross total income, which would be deductible u/s 80M. However, we are of the considered view that the cumulative effect of section 14A read with section 10(33) is that only net dividend income will not be included in the gross total income. 8.1 Coming to the facts of this case, it is quite clear that no amount was borrowed at the beginning of the year and, thus, it cannot be said that any borrowed funds were used for investment in bonds or shares held at the beginning of the year. The borrowings amounted to ₹ 9,60,32,563/- at the end of the year. The case of the learned counsel was that this amount represented internal accruals by way of profits and also sale proceeds of similar investments. This case could not be rebutted by the learned DR. The finding of the learned CIT(A), on the basis of the certificates from the banks, was that no part of the interest could be said to be in relation to the dividend income or tax-free interest income as the whole of the interest was paid in relation to packing credit facility. This was certified by the banks. This finding also could not be displaced by the learned DR. It was h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance. While the learned counsel argued that the rule was in excess of the authority conferred by the statutory provision, he fairly conceded that such a question cannot be raised before the Tribunal. In view thereof, he wanted us to record his objection in the order, which we have done. The second argument was that the assessee will not be in a position to discharge the onus that the expenditure was not incurred towards the income, which is not includible in the total income. However, the finding of the Tribunal was that the onus on the assessee is to prove that whole of the expenditure was incurred in earning the income which is included in the total income. We have already held that the expenditure has been incurred for earning non-taxable income. Therefore, it is also held that the provisions contained in section 14A and Rule 8D will come into play. It may be pointed out that the appeals in those cases pertained to assessment year 2002-03 and will be equally applicable to in relation to assessment year 2001-02. Therefore, we are of the view that the disallowance should have been made in accordance with Rule 8D. Clause (iii) of sub-rule (2) of Rule 8D provides the mechanism for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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