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2016 (12) TMI 54 - ITAT MUMBAI

2016 (12) TMI 54 - ITAT MUMBAI - TMI - Addition u/s 14A read with Rule 8D(2)(ii) - Held that:- In the instant case before us, interest amount other than interest on term loans works to be ₹ 23 lakhs i.e., (45.32 crores 45.09 crores). However, the interest incurred on the loan taken from bank is to be considered u/s.36(1)(iii) and since it is not incurred for earning exempt income, the same cannot be disallowed u/s.14A read with Rule 8D(2)(ii). As per the working of CIT(A), such disallowa .....

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on which disallowance under Rule 8D(2)(iii) can be applied. Applying the proposition of law as cited by Ld. A.R. and referred by us in para 8 to the facts of instance case, we found that no disallowance is warranted under Rule 8D(2)(iii), in so far as after excluding such investment there remains to be nil investment. However, keeping in view the working given by the assessee, we restrict the disallowance to the extent of ₹ 14,79,411/-. - Addition made on account of provision for wealt .....

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er ) And Shri Amit Shukla ( Judicial Member ) Appellant By : Shri. Arvind Sonde Revenue By : Shri. Satyapal Kumar ORDER Per R. C. Sharma, Accountant Member These are the cross appeal filed by the Revenue and Assessee against the order of the Ld. CIT for the AY 2008-09. 2. Rival contentions have been heard and record perused. 3. Facts in brief are that assessee is engaged in rendering services for setting up of industrial infrastructure, project related activities, internet services etc. During t .....

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of generating exempt income should be executed i.e., investment in Reliance Engineering (Middle East) DMCC of ₹ 3.81 crores and mutual funds of ₹ 34.38 crores. The CIT(A) also deleted the addition made on account of provision for wealth tax. Against this order of CIT(A) both the Assessee and Revenue are in appeal before us. 4. We have considered the rival contention and carefully going through the order of authorities below and found from record that addition made on account of provi .....

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. Accordingly, following the rule of consistency and also after taking note of jurisdictional High Court s decision in the case of CIT vs. Echjay Forgings Pvt. Ltd. reported in 251 ITR 0015, the addition on account of provision for wealth tax while computing book profits u/s. 115JB of the Act is deleted even for the year under consideration. Thus, appellant s this ground of appeal is decided in favour of the appellant. Ld. CIT(A) has also deleted the disallowance made under section 14A after hav .....

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hat the disallowance u/s 14A has to be computed as per the prescribed Rule 8D having regard to the accounts of the appellant and if the A.O. is not justified about the correctness of the appellant s claim of expenses. Respectfully, following the decision of the Hon'ble Jurisdictional High Court, I consider it proper and appropriate to hold that the provisions of Rule 8D are applicable for the impugned year in appeal. However, it is seen that during the course of assessment proceedings, the a .....

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ores is directly related to the business activity of the appellant, and hence no disallowance out of such expenditure is called for. Interest expenditure is allowable as deduction u/s 36(1)(iii) of the Act since the funds have been borrowed and used for the purpose of business. Thus, it can be concluded that the term loans on which interest of ₹ 45.09 crores has been paid has not been utilized for the purpose of investment in shares and securities. The appellant during the course of appell .....

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ppellant company on account of term loan, which was utilized for the purposes of business and hence the same cannot be held for the purpose of investments. I find force in the appellant s contention that the remaining expenditure can be taken under rule 8D(2)(ii)r.w.s 14A of the Act. Accordingly I direct the A.O to modify the computation under rule 8D(2)(ii) r.w.s 14A on the basis of aforesaid observation of the appellant s case. Accordingly the disallowance under rule 8D(2)(ii) is restricted to .....

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ngineering(Middle East) DMCC of ₹ 3.81 crores and Mutual Fund Units- Unquoted of ₹ 34.38 crores as on 31.03.2008 and ₹ 37.79 crores as on 31.03.2007 are not capable of earning exempt income. On the basis of aforesaid discussion of the facts and taking note of the investment of the legislation as stipulated in Rule 8D(iii) of the IT rules and also after taking note of the decision of Hn ble Jurisdictional High Court. I consider it proper and appropriate to hold that the term inv .....

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crors as on 31.03.2007 which are not capable of earning the exempt income. Thus, the A.O. is directed to restrict the disallowance u/s. 14A r.w.r. 8D to R.s 26,64,777/- out of interest expenditure and re-compute the disallowance out of administrative expenses @ 0.5% of average value of investments excluding investments in equity shares of Reliance Engineering (Middle East) DMCC of ₹ 3.81 crores an Mutual Fund Units - Unquoted of ₹ 34.38 crores as on 31.03.2008 and ₹ 37.79 crore .....

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ove. With these observations, appellant s ground of appeal is partly allowed. 5. Against the above order of CIT(A) both revenue and assessee are in appeal before us. 6. With regard to disallowance of interest under section 14A, Ld. AR invited our attention to the balance sheet, Schedule C indicating secured loan, wherein assessee has taken a term loan from bank amounting to ₹ 500/- crores. As per Ld. AR interest was attributable to the term loan taken from bank and was not invested in secu .....

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e during the year after claim of depreciation of ₹ 86.45 crores, it means there was cash accrual of income to the tune of ₹ 230.37 crores which was available to the assessee for investment in tax free securities. However increase in investment in shares and securities during the year was only ₹ 10.38 crores. As per learned A.R in case of availability of interest free funds in the form of capital and reserve more than the investment made for earning exempt income, no disallowanc .....

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allowance in respect of other expenditure under Rule 8D(2)(iii). For this purpose reliance was placed on the following judicial pronouncement. - Garware Wall Ropes Limited Vs. Addl. CIT(ITA No. 5408/Mum/2012) - CIT Vs. Oriental Structural Engineers Pvt. Ltd. (Delhi High Court) - M/s JM Financial Limited Vs. Addl. CIT(ITA No. 4521/Mum/2012) 9. In support of the proposition that only those investments are to be considered for disallowance u/s.14A on which dividend is received during the year, reli .....

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of authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us. We had also verified the audited balance-sheet, P & L account and its annexure wherein we found that assessee had taken loan of ₹ 500 crores from its banks. The terms and condition of utilization of loans / facility taken from the bank clearly stipulated as under: The Loan/ the .....

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pose for which loans was sanctioned and the purpose for which loans could be utilized. 12. From the record, we found that total interest debited by assessee in its P&L account is ₹ 45.32 crores, out of which interest attributable to the term loan of ₹ 500 crores taken from the banks works out to be ₹ 45.09 crores. Disallowance u/s.14A can be made only with respect to the interest which is attributable to earning of exempt income. In the instant case before us, interest amou .....

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ly, we confirm the action of CIT(A) for restricting the disallowance of interest under Rule 8D(2)(ii) to the extent of ₹ 26,64,777/-. 13. Now, coming to the disallowance warranted under Rule 8D(2)(iii) under which we have to disallow 0.5% of the average investment. However, while working out the disallowance of such expenses, strategic investment and investments not yielding dividend income is required to be reduced from the total investment. 14. As per the records, such investment works o .....

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