TMI Blog2016 (11) TMI 256X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, dismissed Disallowance under Rule 8D(2)(ii) in respect of shares and mutual funds - Held that:- The assessee has demonstrated that the interest paid was to the specific loans utilized towards purchase of car, purchase of machinery, working capital etc. The Assessing Officer has not been able to establish that the interest was towards loans for non-specific purpose, which could be attributed to the investment in shares on proportionate basis. No investment in shares/mutual funds have been made out of the borrowed funds and, therefore, no disallowance under Rule 8D2(ii) of the Rules could be made for interest on proportionate basis towards investment in shares/mutual funds which could earn exempted income. Inclusion of amount of capital of EOU for the purpose of disallowance under section 14A - Held that:- no borrowed funds were utilized for the purpose of EOU. The profits earned by the EOU contributed to the reserves & surplus. Thus, the entire amount of ₹ 15,45,31,633/- as on 31.03.2009 is out of capital and profit earned over the year. The Assessing Officer has in the assessment order not provided any basis to show that the investment in the EOU has been mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance is called for since all the investments are in subsidiary companies and there is no change during the year (except a small change in the valuation of mutual funds). (iii) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that interest on borrowed funds on which interest has been paid, have been utilized for specific purpose and there is direct nexus between the loan and its utilization. 5(i) On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming the action of the Assessing Officer in computing administrative expenses at the rate of 0.5% despite the fact that no expenses were required for managing the mutual fund. (ii) On the facts and circumstances of the case, the disallowance sustained by the learned Commissioner of Income Tax (Appeals) is bad in the absence of any linkage or finding about any particular expenditure having been incurred for such investments. 6. That the appellant craves leave to add, amend or alter any of the grounds of appeal. 2. The grounds ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the assessee under Rule 8D(2)(ii), amounting to ₹ 53,75,318/- (ii) one half percent of the average value of investment, income from which does not or shall not form part of the total income of the assessee under Rule 8D(2)(iii), amounting ₹ 10,10,140/- 3.1 Before the learned Commissioner of Income-tax(Appeals), the assessee challenged the investment made in the unit covered under section 10B of the Act for the purpose of disallowance under section 14A of the Act. According to the assessee, the section 10B provides for deduction and not exemption and, therefore, provisions of section 14A of the Act were not applicable for investment made in Export Oriented Unit (EOU). The assessee relied upon the judgment of the Tribunal in the case of Maditap Specialities Private Limited Vs. Additional CIT in ITA No. 6835/Mum/2010 and decision of the Hon ble Bombay High Court in the case of Hindustan Unilever Vs. DCIT, reported in (2010) 325 ITR 102 (Bom.), however, the learned Commissioner of Income-tax (Appeals) relied on the decision of the jurisdictional High Court in the case of CIT Vs. TEI Technologies Private Limited in ITA 347/2011 2067/2010, wherein, the secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mumbai in ITA No. 6835/Mum/2010. (ii) Decision of the Tribunal, Ahmedabad Bench dated 10/06/2011 in the case of CIT Vs. Net Square Solution in ITA No. 3145 and 3146/Ahd/2010. (iii) Decision of the Hon ble Bombay High Court in the case of Hindustan Unilever Ltd. Vs. DCIT reported in (2010) 325 ITR 102. (iv) Decision of the Tribunal, Pune Bench in the case of Opus software solutions private limited versus ACIT, in ITA No. 584/Pune/2011 5.2 On the other hand, the learned Sr. Departmental Representative relied on the order of the learned Commissioner of Income Tax (Appeals) and submitted that section 10B falls under the Chapter-III of the Act, heading of which clearly says that under the Chapter provisions related to income, which does not form part of the total income, have been legislated and, therefore, the order of the learned Commissioner of Income Tax (Appeals) on the issue in dispute might be upheld. 5.3 We have heard the rival submissions and perused the material on record. We find that the Tribunal in the case of Maditap Specialties Private Limited (supra), Net Square Solution (supra), Opus Software Private Limited (supra) held that section 10A/10B ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and gains specified therein and it is no longer a provision which provides for excluding an income from the total income of an assessee. Therefore, there is weight in the plea set up by the assessee that in so far as the nature of section 10A with effect from 1-4-2001 is concerned, it is a section which seeks to allow a deduction of the prescribed profits while computing total income of the assessee and not a provision which provides for an exemption or to exclude certain income from the total income of the assessee or set off where such loss relates to any of the relevant assessment years ending before 1-4-2001. Therefore, the view of the Assessing Officer that the provisions of section 10A as it stood with effect from 1-4-2001 continued to be a provision for exemption cannot be subscribed to. Furthermore, section 10A(6)(ii) clearly provides that no loss which relates to the business of the undertaking shall be carried forward or set off where such loss relates to any of the relevant assessment years ending before 1-4-2001. Unabsorbed depreciation loss suffered by on EOU unit can be carried forward from assessment year 2001-02 Quite clearly, losses w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ides for a deduction. Section 10B was substituted by the Finance Act of 2000 with effect from 1-4-2001. Prior to the substitution of the provision, the earlier provision stipulated that any profits and gains derived by an assessee from a hundred per cent Export Oriented Undertaking, to which the section applies shall not be included in the total income of the assessee . The provision, therefore, as it earlier stood was in the nature of an exemption. After the substitution of section 10B by the Finance Act of 2000, the provision as it now stands provides for a deduction of such profits and gains as are derived by a hundred per cent Export Oriented Undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. Consequently, it is evident that the basis on which the assessment has sought to be reopened is belied by a plain reading of the provision. The Assessing Officer was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four units of the assessee we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have attempted to outline the difference between the two kinds of provisions in the light of the authorities cited above. The matter is not altogether free from difficulty. However, as S. Ranganathan, J. (as he then was) has pointed out in CIT v. Dalmia Cement (Bharat) Ltd. (supra): - In the process of judicial assessment of such conflicting interpretations, there is no sensitive balance with which to weigh the pros and cons and determine with scientific accuracy which side is the weightier and, perhaps in the drawing of the ultimate inference one way or the other, the subjective element is not altogether excluded. 30. With this caution or disclaimer in mind we are inclined to hold that Section 10A is a provision exempting a particular kind of income even in its present form, that is to say, even after being amended by the Finance Act, 2000 w.e.f. 01.04.2001. We are inclined, with respect, to agree with the view taken by the Karnataka High Court in the case of CIT v. Yokogava (supra). As noticed, the Bombay High Court reached in the case of CIT v. Yokogava (supra), in its judgments in Hindustan Unilever Ltd. (supra) and CIT v. Black Veatch Consulting Pvt. Ltd. (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , were utilized for specific purpose and there was direct nexus between the loan and its utilization. 6.2 Referring to page 21 of the paper book, the learned Authorized Representative submitted that company had introduced capital of ₹ 15,01,00,200/- in the financial year 2006-07 and during that year, it earned a profit of ₹ 14,31,35,118/- (PB page-22) and out of these funds, a small investment of ₹ 12,49,980 (PB Page-21) was made in the shares. He further submitted that in the financial year 2007-08, the assessee company earned profit of ₹ 10,12,63,956/- (PB page 37). Its capital as on 31st of March, 2008 was ₹ 15,01,00,200/-, its accumulated profit was ₹ 20,67,80,239/- (PB page 36) and the assessee made a further investment of ₹ 4,35,61,398/- in shares/mutual funds during the year, thus, making the total investment at the end of year to ₹ 2,04,48,11,378/-(PB page 36). He further submitted that in financial year 2008-09, the assessee company earned a profit of ₹ 7,96,56,513/- (PB page 4). Its capital as on 31/03/2009 stood at ₹ 15,01,00,200/-, accumulated profit was of ₹ 29,76,51,796/- (PB page 3) and the total in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok of the assessee. The issue in dispute before us is whether any borrowed funds have been utilized towards the investment in shares/mutual funds by the assessee. The learned Authorized Representative has demonstrated before us that as on 31/03/2007, investment in shares was of only ₹ 12,49,980/-, which was out of the owned capital of ₹ 15,01,00,200/- and profit of ₹ 14,31,35,118/-. During that year, the assessee also took unsecured loan of ₹ 10,21,65,762/- from Directors and Shareholders. These facts clearly demonstrate that the unsecured loan raised from the Directors and Shareholders were not utilized towards investment in shares/mutual funds. In the subsequent year i.e. financial year 2007-08, the investment in shares gone up from ₹ 12,49,980/- to ₹ 4,48,11,378/- but the assessee has not taken any unsecured loan during the year, which goes to establish that investment came out of the profit earned by the assessee company to the extent of ₹ 10,12,63,956/- during the year. The assessee has demonstrated that the interest paid was to the specific loans utilized towards purchase of car, purchase of machinery, working capital etc. The Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of opening investment at ₹ 16,04,07,523/- and the closing investment at ₹ 15,45,31,633/-. To explain that no borrowed funds have been invested in EOU, the learned Authorized Representative submitted as under: (i) That the assessee company was having a capital of ₹ 1,00,200/- as on 31/03/2006 ( PB Page No. 21). (ii) In financial year 2006-07, the assessee introduced a capital of ₹ 15 crore and out of which an amount of ₹ 7,67,14,975/- was invested in EOU. In financial year 2006-07, the EOU, earned a profit of ₹ 5,18,85,665/-and thus making the capital of the EOU at ₹ 12,86,00,636/-. (PB Page 28) (iii) In financial year 2007-08, the EOU, further earned a profit of ₹ 2,49,76,052/- (PB Page No. 44). It further received a sum of ₹ 68,30,836/- from the head office and the capital of the EOU, became ₹ 16,04,07,523/- (PB Page 43). This amount of ₹ 68,30,836/-was received out of the profit earned by the head office during the financial year 2007-08. In the financial year 2006- 07, the head office earned a profit of ₹ 14,32,18,159/- (PB page- 22) . Thus, this opening balance of ₹ 16,04,07,523/- , consis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose have been utilized towards those purposes only. In such circumstances, no disallowance could be made under Rule 8D2(ii) of the Rules. 9.6 We find that the learned Commissioner of Income-tax (Appeals) has also allowed relief to the assessee with following observations: (ii) Whether disallowance under Section 14A is to be made on investments made by the head office in the EOU. The appellant has claimed that the investment in EOU has been assumed by the Assessing Officer to be out of borrowed funds. However, during Financial Year 2006-07, a capital of ₹ 15 crores was introduced out of which ₹ 7,67,14,975/- was contributed towards the EOU. Thus no borrowed funds were utilized for the purpose of EOU. The profits earned by the EOU contributed to the reserves surplus. Thus, the entire amount of ₹ 15,45,31,633/- as on 31.03.2009 is out of capital and profit earned over the year. The Assessing Officer has in the assessment order not provided any basis to show that the investment in the EOU has been made out of borrowed funds. The Unit has on its own taken some loans on which interst is being paid and is being debited to its Profit Loss Account for the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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