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TMI Blog2016 (9) TMI 649X X X X Extracts X X X X X X X X Extracts X X X X ..... eemed income u/s 115JB of the Act. During the year under consideration, the assessee company was a member of National Stock Exchange and Bombay Stock Exchange and derived income from the sale and purchase of shares mostly on its own account. The assessment order was passed on 22/12/08 after making the following additions/disallowances: 1. Disallowance u/s 14A - Rs. 333,821/-; 2. Disallowance of loss u/s 94(7) - Rs. 1,295,487/-; 3. Addition on account of late payment of PF & ESI dues u/s 2(24)(x) - Rs. 6,255/-; 4. Addition on account of difference in valuation of closing stock - Rs. 200,099/-; 5. Disallowance of interest charges - Rs. 1,863,226/-; 6. Disallowance of excess claim of depreciation on computer peripherals/accessories - Rs. 863,806/-. Apart from this the AO also disallowed the claim of rebate u/s 88E on Rs. 6,383,106/- being brokerage income, interest income, interest on income tax refund and miscellaneous income. Further the deemed income us/ 115JB of the Act was worked out at Rs. 140,584,867/-. 3. Aggrieved the assessee preferred an appeal before the first appellate authority in which the ld. CIT (A) adjudicated the issues as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the AO on account of disallowance of interest expenses, completely ignoring the fact that the said disallowances related to interest on borrowed funds used for "donations", "investments" and "interest free loan to sister concern". 2. The ld. CIT (A) has erred on facts and in law in deleting the addition of Rs. 863806/- made by the AO on account of extra depreciation claimed on computer peripheral/accessories ignoring the fact that as per IT Rules only the computers and computer software are eligible for depreciation @ 60% and the same cannot be extended to computer accessories. 3. The ld. CIT (A) has erred on facts and in law in directing the AO to allow rebate u/s 88E to the assessee with respect to tax payable on brokerage income, interest income, interest on IT Refund and Miscellaneous income. 4. The ld. CIT (A) has erred on facts and in law in holding that provisions of sec. 115JB are not applicable in the case of the assessee ignoring the fact that specific category of assessee as per provisions of sub-section 6 of section 115JB does not mention "stock broker", therefore, assessee company cannot escape tax chargeable as per deeming provisions of the said section. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it was submitted that the AO be directed to adopt such value of opening stock of the succeeding year. 6.2 In respect of ground no 4 of the departmental appeal, it was submitted that the Assessing officer has grossly erred in computing the tax payable on book profit at Rs. 1,18,30,217/-. In doing so he has erred and failed to appreciate that there was no justification on his part, firstly in proceeding to compute the book profit for the purposes of section 115 JB of the Act, and secondly in not giving credit from such tax as had been determined, being the tax payable on deemed income u/s 115JB of the amount of Securities Transaction Tax (STT) paid by assessee company. 6.2.1 It was submitted that from the perusal of Page no. 19 of the order of assessment it would be seen that the AO has computed the total income of the assessee company at Rs. 54,66,59,030/-, whereas he has computed book profit at 14,05,84,869/-. It is thus evident that the tax payable on income computed under normal provisions of the Act is higher than the 7.5 % of book profit and thus the applicability of the provisions of section 115JB has been incorrectly applied. 6.2.2 It was further submitted that without p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le under the normal provisions of the Act, as such, assessee is not liable for the MAT. It was submitted that in the instant case, AO has committed gross error while computing the tax payable under the normal provisions of the Act as the word 'tax payable', in respect of 'income tax payable on the total income', does not mean the ultimate or net amount which is payable under the Act. The Ld. AR further submitted that for the purpose of the applicability of provisions of section 115JB of the Act, the income tax payable on the total income computed under the normal provisions of the Income Tax Act and is to be compared with 7.5 per cent of the book profits, and if the tax payable on the normal provisions of the Act is less than the 7.5% of the Book profits, then the assessee is liable to pay tax under section 115JB of the Act. The Ld. AR also submitted that the assessee seeks to place reliance on the following orders of the Tribunal wherein it has been held that tax payable under the normal provisions of the Act should be computed before reducing the rebate u/s 88E of the Act- - ITO vs Advent Stock Broking Pvt. Ltd in ITA No. 1276/Kol/2010 - DCIT vs E.Com Internet Services Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81,82,465/- 4,96,99,412/- 6.2.7 The Ld. AR submitted that in view of the aforesaid submissions, Ground no. 4 of the department's appeal ought to be dismissed. 6.3 With respect to ground no 3 of the departmental appeal, the Ld. AR submitted that in the aforesaid ground of appeal, grievance of the revenue is with regard to the allowance of rebate under section 88E of the Act in respect of tax payable on the brokerage income, interest income, interest on income tax refund and miscellaneous income. The Ld. AR submitted that the AO, in his order of assessment in para 9, has held that deduction under section 88E of the Act is not allowable on the income arising other than from income from taxable securities transaction and hence tax payable on the brokerage income, interest income, interest on income tax refund and miscellaneous income was not considered for the allowance of deduction u/s 88E of the Act. The Ld. AR submitted a chart extracted from pages 18 and 19 of the assessment order to demonstrate the working by the AO. The chart is reproduced as under on the next page - Asstt.Year 2006-07 (extracts from AO's order) & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30, 310/- has been earned represented margin money kept with stock exchanges in order to enable the assessee company to participate in the business of trading in shares. 6.3.3 It was submitted that it would be seen that there is no net income from (a) brokerage income, (b) miscellaneous income, (c) interest on refund (which is a negative sum) and thus, no such income has been included in the income of Rs. 56, 10, 20, 522/-. In fact, during the course of the assessment proceedings, assessee itself has conceded that rebate u/s 88E is not eligible for deduction in respect of tax payable on Brokerage Income, Misc. Income and Interest on Income Tax refund i.e. on Rs. 29,99,419/-, Rs. 6,54,380/-, Rs. 1,82,873/- aggregating to Rs. 38,36,672/- and, thus, the only question which remains is whether the assessee is entitled to claim a rebate of STT paid on the aforesaid income of Rs. 63, 83, 106/- which is from interest on FDR's from banks. The Ld. AR submitted that the learned CIT (A) was legally & factually justified in so holding that on the aforesaid income of Rs. 63,83,106/-, the assessee was eligible for the claim of rebate of STT paid. In fact the aforesaid income has a direct ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order in the department's appeal and supported the order of the Ld. CIT (A) in the case of assessee's appeal. 8. We have heard the rival submissions and have perused the material on record. As far as the issue of disallowance u/s 14A is concerned, it is true that the authorities below have erred in applying Rule 8D to the year under appeal i.e. AY 2006-07 whereas Rule 8D has been held by various judicial pronouncements to be applicable prospectively from AY 2008-09. Further, on a perusal of the orders of the authorities below, it is seen that the AO as well as the Ld. CIT (A) have not recorded any finding as to how the disallowance of Rs. 32,875/- made by the assessee was incorrect. The authorities below have also not pointed out the nexus between the investments and the expenditure incurred. The Assessing Officer has adopted the formula for estimating expenditure on the basis of investments but the justification for calculating the disallowance is missing. The Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. vs CIT (I.T.A. 687/2009) has opined in para 29 of the order as under:- "29. Sub-section (2) of Section 14 A of the said Act provides the manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same." 8.01 Similarly, the Hon'ble High Court of Punjab & Haryana in the case of CIT-II vs Hero Cycles Ltd. in I.T.A. No. 331 of 2009 (O&M) has held in para 4 of the judgment that, "the contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, cannot be accepted. Disallowance u/s 14A requires finding of incurring of expenditure. Where it is found that for earning exempted income, no expenditure has been incurred disallowance u/s 14A cannot stand." 8.02 Mumbai 'J' Bench of the ITAT has held in the case of Justice Sam P. Bharucha vs ACIT in I.T.A. No. 3889/Mum/2011 that no disallowance u/s 14A of the Act i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the submission of the appellant and it is found that the Share Capital and Free Reserves amounted to Rs. 78 crores and the income of the company for the current year as for revised return was in excess of Rs. 54 crores. There is nothing wrong in the making one donation out of various donations from the overdraft account. For all other donations, there was enough balance in the bank account of the appellant. Further, the advancing of loans to subsidiaries and sister concerns is stated to be out of commercial expediency, and the interest has been charged from M/s BLB Commodities (P) Ltd. @ 6.50% as has been paid to the promoter/directors of the company during the year as also in all the earlier years. Since the appellant company had share capital and free reserves amounting to Rs. 78 crores and current income of the company was Rs. 54 crores, it could not be said that the donations/loans had been given out of borrowed fund. Section 36(1)(iii) of the Act simply lays down that, if a loan has been taken for the purpose of the business, the deduction for payment of interest has to be allowed. No direct nexus has been established between the utilization of funds out of the borrowed amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te apart from the above, the release of the same was dependent on the satisfaction of certain conditions. Thus, the present case is not one where the assessee had made the deposit of surplus money lying idle with it in order to earn interest; On the contrary, the amount of interest was earned from fixed deposit which was kept in the Bank for furnishing the bank guarantee. It had an inextricable nexus with securing the contract. The view express by the Tribunal cannot be found fault with. The Tribunal was therefore, justified in holding that the interest earned by the assessee on the FDRs has intrinsic and inseggregable nexus with the work undertaken and, therefore, the interest earned by the assessee is capital in nature and shall go towards adjustment against the project expenditure and the same cannot be assessed as income from other sources." 9.2.1 Since the facts in the case of the assessee are identical, we are of the opinion that the ld. CIT has rightly adjudicated the issue by directing the AO to allow rebate u/s 88E of the Act and we find no reason to interfere with the same. 9.2.2 In the result, ground no. 3 of the Department's appeal is dismissed. 9.3 As far as ground ..... X X X X Extracts X X X X X X X X Extracts X X X X
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