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2016 (11) TMI 256 - ITAT DELHI

2016 (11) TMI 256 - ITAT DELHI - TMI - Disallowance u/s 14A - whether section 10B is a deduction or an exemption provision? - Held that:- The language of the heading of Chapter III, it is clear that income as contemplated under section 10B is outside the scope of ‘total income’ and has no relevance with the gross total income. It is, therefore, a section which provides for exemption of income and not for deduction. - It is further important to note that provisions of section 14A are applicab .....

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e, not accepted. This ground of appeal is, therefore, 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 b .....

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urplus. 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 purpose of computing its profit. The Assessing Officer has not brought anything on record to sh .....

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essee by Sh. Ved Jain, Advocate, Sh. Ashish Goel, CA and Sh. Ashish Chadha, CA Department by Sh. F.R. Meena, Sr. DR ORDER Per O. P. Kant, A. M. These cross appeals by the assessee and Revenue respectively are directed against the order dated 26/04/2013 of the learned Commissioner of Income-tax (Appeals)-XVIII, New Delhi for assessment year 2009-10. Since both the appeals have emanated from the same order, both are heard together and disposed of by this consolidated order. The grounds raised in t .....

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d both on facts and in law in rejecting the contention of the assessee that provisions of Section 14A are not applicable to investment made in EOU covered under the provisions of Section 10B of the Act. 4(i)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 the computation of disallowance under Rule 8D read with Section 14A is bad in law. (ii)On the facts and circumstances of the case, the learned CIT .....

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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 Commi .....

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the Act. 2. The Ld. CIT(A) has erred in law and on facts of the case in not appreciating the fact that the assessee debited a total amount of ₹ 2.81 core in profit A loss account under the head of 'interest paid to bank loan' whereas total amount of bank interest shown in PAL account of its 100% EOU unit is ₹ 42.63 lakh only which clearly shows that the assessee company has borrowed funds which was used for mixed purposes. 3. The appellant craves to be allowed to add any fres .....

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short the Act ) was issued and served within stipulated period. During the scrutiny proceedings, the Assessing Officer observed loss of ₹ 24,85,249/- from one of the unit eligible under section 10B of the Act. The Assessing Officer further observed that the assessee made investment in shares and earned dividend income of ₹ 4,49,521/, which was claimed as exempt under section 10(33) of the Act. The Assessing Officer also observed that the assessee made investment in the unit eligible .....

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nterest expenses corresponding to 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)(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 investm .....

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n 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 section 10A has been held essentially and in substance held as exemption provision. Accordingly, he held that provisions of section 14A of the Act were clearly applicable to the .....

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business account where the funds were mixed and, therefore, he upheld the disallowance under Rule 8D(2)(ii) corresponding to the investment in shares/mutual funds. The Commissioner of Income Tax (Appeals) also upheld the disallowance at the rate of 0.5% of the average investment towards administrative expenses under Rule 8D(2)(iii) of the Rules amounting to ₹ 10,10,140/-. 3.4 Aggrieved, with the above findings of the learned Commissioner of Income-tax (Appeals), both the assessee and Reve .....

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which is exempt and not in respect of the income for which deduction is available. He submitted that in the case, the assessee has claimed deduction under section 10B of the Act in respect of the export oriented unit. According to the learned Authorized Representative, it was settled law that section 10B is a deduction provision and not an exemption provision, and, therefore, provisions of section 14A of the Act were not applicable to the investment made in EOU covered under the provisions of s .....

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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 legisla .....

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Specialities Private Limited Vs. ACIT(supra) Disallowance u/s 14A is contemplated in respect of exempt income and not which is eligible for deduction under any relevant provision. It is impermissible to mix both the deduction and exemption provisions and then take them in one stride for computing disallowance u/s 14A. We, therefore, hold that the authorities below were not justified in placing the exemption provision and deduction provision on one platform for the purpose of making disallowance .....

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of section 14A, resulting in duplicating the exercise, is not called for. We, therefore, incline to uphold the order of the learned Commissioner of Income Tax (Appeals) in this regard and dismiss the ground no. 2 for both the assessment years. Opus Software Solutions Private Limited Vs. ACIT(supra) 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 .....

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ext, it is found that section 10A was substituted by Finance Act, 2000 with effect from 1-4-2001. • From the perusal of amended provisions of section 10A, it is quite clear that the provision envisages and allows a deduction of 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 .....

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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 which are sought to be carried forward by the assessee are for the assessment .....

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t provisions of section 14A are not applicable to investment made in EOU covered under the provision of section 10B of the Act and hence disallowance under Section 14A is untenable. 5.4 Further, the Hon ble Bombay High Court in the case of Hindustan Unilever Ltd Vs. Deputy Commissioner of Income Tax (supra) held that after the substitution of section 10B by the Finance Act, 2000, the provision as it now stands provides for deduction of such profit and gains as are derived by 100% export oriented .....

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provides an exemption and that in respect of the Crab Stick Unit the assessee had suffered a loss of ₹ 1.33crores. The Assessing Officer has observed that since the income of the unit was exempt from taxation, the loss of the unit could not have been set off against the normal business income. However, this was allowed by the assessment order and it is opined that the assessee s income to the extent of ₹ 1.33 crores has escaped assessment. 24. There is merit in the submission which h .....

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nd 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 ar .....

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assessee were eligible under section 10B. Three units had returned a profit during the course of the assessment year, while the Crab Stick Unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the basis on which the assessment is sought to be re-opened is contrary to the plain language of section 10B. 5.5 Howev .....

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elevant finding of the Hon ble Delhi High Court is reproduced as under: In interpreting sub-section (1) of Section 10A after the amendment made by the Finance Act, 2000 w. e. f. 01.04.2001, one cannot deny that there is ambiguity or doubt, because of the language used, as to whether the sub-section provides for an exemption or a deduction. We have earlier referred to the difficulty caused by the language which says that the deduction shall be made from the total income, when the Act contains no .....

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refore, not impermissible to rely on the heading or title of Chapter III and interpret the section as providing for an exemption rather than a deduction. 29. The key to the problem seems to lie in appreciating the difference between a provision which exempts an income and a provision which provides for a deduction of the income or a part thereof in computing the total income of the assessee. We have attempted to outline the difference between the two kinds of provisions in the light of the autho .....

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s 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 j .....

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ation and is not subject to any computation. The computation provisions of the Act do not get attracted at all to the exempted income. 5.6 Following the above decision of the Hon ble Delhi High Court, the learned Commissioner of Income Tax (Appeals), held as under: Thus, the Hon'ble Delhi High Court has held that from the language of the heading of Chapter III, it is clear that income as contemplated under section 10B is outside the scope of total income and has no relevance with the gross t .....

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he provisions of section 10B. The claim of the appellant that section 14A is not applicable to investment made in an EOU covered under the provisions of section 10B is, therefore, not accepted. This ground of appeal is, therefore, dismissed. 5.7 Respectfully, following the decision of the Jurisdictional High Court, we uphold the finding of learned Commissioner of Income Tax (Appeals) on the issue in dispute. The ground No. 3 of the appeal of the assessee is accordingly, dismissed. 6. In ground N .....

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re 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 .....

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(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 investment in the shares stood at ₹ 4,43,05,740/- ( PB page 3) . In view of above, the learned Authorized Representative submitted that no borrowed funds have been utilized in the investment in shares/mutual funds. 6.3 Further, the learned Authorized Representative of the assessee submitted that the Assessing Officer has taken into considera .....

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the bank was utilized for the purpose of working capital. As regard loans from others, the learned Authorized Representative submitted that entire amount of such loans have been utilized for the purpose of business and no part of the same was utilized towards investment. In this regard, he submitted that as on 31st of March, 2007, when it raised the unsecured loan from the Directors and Shareholders to the tune of ₹ 10,21,65,76/- the investment in shares was only of ₹ 12,49,980/- whi .....

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d Authorized Representative submitted that investment in shares was not made out of borrowed funds and accordingly disallowance in respect of shares/mutual funds under Rule 8D2(ii) made by the Assessing Officer and upheld by the learned Commissioner of Income-tax (Appeals) was not justified. 6.5 On the other hand, the learned Sr. Departmental Representative relied on the findings of the learned Commissioner of Income Tax (Appeals) 6.6 We have heard the rival submissions and perused the relevant .....

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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 a .....

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hares/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. The ground No. 4 of the assessee s appeal is accordingly allowed. 7. The ground No. 5(i) and 5(ii) of the assessee s appeal were not pressed before us and, therefore, accordingly are dismissed as infructuous. 8. In the result, the appeal of the asses .....

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rned Commissioner of Income-tax (Appeals) allowed relief to the assessee only in respect of disallowance towards investment in EOU and disallowance towards shares/Mutual fund investments already stood confirmed, therefore, he preferred to argue only issue of disallowance corresponding to investment in EOU in the appeal of the Revenue. Addressing the ground No. 2, the learned Sr. Departmental Representative submitted that the assessee debited a sum of ₹ 2.81 crores in the profit and loss ac .....

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itted that the Assessing Officer has assumed that the investment in EOU has come out of borrowed funds and taken the value 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 in .....

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3/- (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/- , consisted of the opening capital as on 01.04.2007, profit of the EOU and a part of the profit of head office and it is having no links with the borrowed funds. (iv) In financial year 2008-09 i.e .....

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the bank and for which interest was being debited in the profit and loss account of the EOU ( PB page-10- 11) 9.3 In view of above, the learned Authorized Representative emphasized that the action of the Assessing Officer in including the amount of capital of EOU for the purpose of disallowance under section 14A of the Act was absolutely unjustified and against the provisions of the law. 9.4 We have heard the rival submissions and perused the relevant material on record. It is evident from the s .....

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-08, and ₹ 8,27,197/- in financial year 2008-09. 9.5 In view of above, it is manifested that no borrowed funds have been utilized by the head office for investment in the EOU. In our opinion, the argument of the learned Sr. Departmental Representative that assessee debited ₹ 2.81 crore in profit and loss account under the head interest paid to bank loan, whereas, total amount of back interest shown in the profit and loss account of its EOU unit is ₹ 42.63 lakhs only, is thus no .....

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