TMI Blog2016 (7) TMI 1252X X X X Extracts X X X X X X X X Extracts X X X X ..... r maintaining the 98% of the investment made in the subsidiary companies, therefore, in the absence of any finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the AO is not justified, accordingly the same is deleted. Transactions with respect to own business demerger and consequent receipt of shares out of non-cash transactions direct the Assessing Officer to examine the claim of the assessee and decide afresh Disallowance u/s 14A while computing minimum alternate tax u/s 115JB - The argument on behalf of the assessee is that the amount should be restricted to 13.66 lakhs or 2% of the dividend income for calculating income for the purposes of section 115 JB - Held that:- Assessing Officer is directed to examine the claim of the assessee. Thus, this ground is allowed for statistical purposes. - ITA NO.8489/Mum/2011, ITA NO.152/Mum/2012, ITA NO.1278/Mum/2013 - - - Dated:- 5-7-2016 - Shri Joginder Singh, Judicial Member, and Shri Rajendra, Accountant Member For The Assessee : Shri Akram Khan, Jitendra For The Revenue : Jain and Shri Raunak Vardhan ORDER Per Joginder Singh (Judicial Member) The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order is reproduced hereunder for ready reference and analysis:- 3. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that similar issues involved in assessee s own case for the earlier years i.e. A.Y. 2003-04 2004-05 have been decided by the Tribunal in assessee s own case vide its common order dated 10.9.2009 passed in ITA No. 6807/M/06 and 6233/M/07. A copy of the said order is placed on record and a perusal of the same shows that similar issues have been decided by the Tribunal in favour of the assessee for the following reasons given in para No. 18 of the said order: We have considered the rival submissions. Reading of provisions of section 43(6) clause (c)(b) shows that WDV of block asset can be reduced only in the case of sale, discarding or demolition or destruction of an asset forming part of block assets. It is not in dispute that goodwill and non-compete fees already formed part of block of assets and depreciation had been allowed on the same in the past. During the previous year, there was no sale, discarding, demolition or destruction of the same. In such circumstances, it was not within the power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at investments had been made from its own funds and that no borrowings were utilized. 7) The learned Commissioner of Income Tax (Appeals) failed to consider that disallowance can be made only of expenditure which is incurred in relation to exempt income. Having regard to the facts and circumstances of the case and the provisions of law, the appellant submits that the Assessing Officer be directed to delete the disallowance under section 14A read with Rule 8D(2)(ii) amounting toRs.33,20,000/-. 8) The learned Commissioner of Income Tax (Appeals) erred in holding thatRs.13,77,000/- was required to be disallowed under section 14A read with Rule 8D(20(ii). The appellant submits that the disallowance is unjustified and is required to be deleted. 6. During the year under consideration, the assessee company had earned the dividend income ofRs. 3 crores which was claimed as exempt income u/s 10(34). According to the A.O., interest as well as administrative expenses incurred by the assessee to the extent attributable to earning of the said exempt income were liable to be disallowed as per the provisions of section 14A. He, therefore, required the assessee to explain why such disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the total funds ofRs.96.18 crores, he treated the borrowed funds ofRs.31.98 crores to the extent ofRs.10.10 crores as utilized for making investment in shares on pro-rata basis and proportionate interest attributable to the said amount worked out atRs.1,02,21,276/- was disallowed by him u/s 14A. He also identified the common administrative expenses incurred by the assessee company at ₹ 1,63,05,007/- and applying the ratio of 17.39% between the dividend income and total income, he worked out the disallowance u/s 14A on account of the said expenses at ₹ 28,35,404/-. Thus, a total disallowance ofRs.1,30,56,716/- was made by the A.O. on account of expenses attributable to the exempt income earned by the assessee company in the form of dividend on shares. On appeal, the ld. CIT(A) upheld the action of the A.O. in invoking the provisions of section 14A to make a disallowance out of interest and other administrative expenses. He, however, restricted the quantum of such disallowance made by the A.O. to ₹ 46,97,000/- by applying Rule 8D of the Income Tax Rules 1962 inserted w.e.f. 1.4.08. 8. We have heard the arguments of both the sides and also perused the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lus funds in repaying the borrowings instead of investing in shares and by not doing so, there was diversion of borrowed funds towards investment in shares to earn dividend income. In the case of CIT vs. Hero Cycles Ltd. 323 ITR 518 cited by the ld. Counsel for the assessee, a similar contention was raised in the context of disallowance of interest expenditure u/s 14A and reliance in support of this contention was placed on behalf of the Revenue on the decision in the case of CIT vs. Abhishek Industries Ltd. 286 ITR 1. The Hon ble Punjab Haryana High Court, however, did not accept this contention raised on behalf of the Revenue observing that the judgment of Abhishek Indiustries Ltd. (supra) was on the issue of allowability of interest paid on loans given to sister concerns without interest. It was held that the relevant observations recorded in the said judgment therefore have to be read in that context. In the case of Hero Cycles Ltd. (supra), a finding was recorded by the Tribunal that the investment in shares and funds was made by the assessee out of the dividend proceeds and not out of borrowed funds and in view of this finding of fact, it was held by the Hon ble Punjab Ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2005- 06 (ITA No.1629/Mum/2009) order dated 17/09/2010. 3.2. So far as, investment out of own funds is concerned, the issue has been dealt with by the Tribunal in ITA No.4897/Mum/2012 (Assessment year 2006-07), wherein, the disallowance of interest claimed u/s 36(1)(iii) was discussed and affirmed the stand of the Ld. Commissioner of Income Tax (Appeal), who deleted the disallowance of interest made by the Assessing Officer. The relevant portion of the order is reproduced hereunder:- 8. In this appeal, the Revenue is aggrieved for deleting disallowance of interest of ₹ 41,34,375/- claimed by the assessee u/s.36(1)(iii) of the Act. 9. Rival contentions have been heard and record perused. The facts of the case were that the assessee had advanced an amount of ₹ 3,30,75,000/-to Al Rahba International Trading LLC, Abu Dhabi as interest free loan. M/s. Al Rahba International was a company in which the assessee had acquired 675 equity shares for an amount of ₹ 8,10,000/-. The AO noticed that appellant had paid interest on its borrowed funds but did not charge interest on its advances of ₹ 3.31 crore made to M/s. AI Rahba International Trading LL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance of interest made by AO at ₹ 41,34,375/- is therefore, deleted. 11. Against the above order of CIT(A), Revenue is in further appeal before us. 12. We have considered rival contentions and found from the record that advance of ₹ 3.30 crores was made by the assessee to M/s Al Rahba International Trading LLC, Abu Dhabi, which is an entity operating in breeding and processing of poultry based in Abu Dhabi. Under Abu Dhabi law, any entity operating in Abu Dhabi needs to necessarily have a majority shareholding by a resident domiciled in Abu Dhabi. This, however, does not prohibit the profit sharing ratio and funding ratio to be different. However, share of the assessee company in the capital of M/s Al Rahba International Trading LLC was restricted to 45% because of the shareholding restriction in Abu Dhabi. In respect of profit and loss, it was decided by the partners that share of assessee would be 70%. Accordingly, part of the funding was required to be attributed towards share capital in the ratio of shareholding while the balance funding was required to be structured as loan. Thus, the assessee had satisfactorily explained the business expediency of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance made by AO was confirmed. The Ld. AR has submitted that the AO was required to record the satisfaction that the claim of the assessee is not correct having regard to the accounts of the assessee and only if the AO is not satisfied with the explanation offered by the assessee with regard to the accounts, he could apply Rule 8D. In support of his contention he has relied upon the decisions of Hon ble Jurisdictional High Court in the case of Godrej Boyce Manufacturing Co. Ltd. Vs. DCIT (328 ITR 81) and submitted that the major investment of the assessee company i.e. ₹ 1490.86 crores out of ₹ 1524.08 crores which comes to 97.82% is strategic investment in unlisted subsidiary companies and joint venture companies and are long term investments. No expenses are incurred for maintaining the portfolio of these investments or for holding the same. Hence, no disallowance u/s 14A can be made with respect to these investments. The Ld. AR has relied upon the decision of this Tribunal in the case of Garware Wall Ropes Limited Vs. Addl. CIT, dated 15/01/2014 In ITA No. 5408/Mum/2012. He has also relied upon the decision dated 02/12/2011 of Delhi Bench of this Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he accounts of the assessee furnish an objective basis for the AO to arrive at a satisfaction in regard to correctness of the claim of the assessee of the expenditure, there would be no warrant for taking recourse to the method prescribed by the Rules. 7. Having considered the rival submissions as well as relevant material on record, we note that so far as applicability of Rule 8D is concerned, there is no quarrel on this point that for the A.Y. under consideration Rule 8D is applicable. Further for the A.Y. 2008-09, the Tribunal held in para 15 as under:- We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. In the instant case, the only dispute is regarding determination of disallowance of expenditure for earning tax free dividend income of ₹ 18,17,68,458/- the assessee disallowed on its own ₹ 16.50 lakhs u/s 14A. Despite being asked by the AO to furnish the disallowance under rule 8D, the assessee did not furnish the details. The provisions of rule 8D inserted by the IT (Fifth Amendment) Rules ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning these investments or portfolio of these investments. In the case of Godrej Boyce Mfg. Co. Ltd. (supra) Hon ble Jurisdictional High Court while dealing with the issue of disallowance u/s 14A and application of Rule 8D has recorded the principles as laid down by the Hon ble Supreme Court in the case of Walfort Share and Stock Brokers P. Ltd. [2010] (326 ITR 1,) in para 31 as under:- (a) The mandate of section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income. (b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) The principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and nontaxable income of an indivisible business; (d) The basic principle of taxation is to tax net income. This principle applies even for the purpose of section 14A and expenses towards non-taxable income must be excluded; (e) Once a proximate cause for disallowance is established which is the relationship of the expenditure with income which does not form part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must-be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the Legislature directs him to follow the method that may be presc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point because the investment has been made by the assessee in the group concern and not in the shares of any un-related party. Therefore, the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. Further the investment were made long back and not in the year under consideration. Therefore, in view of the fact that the investment are in the group concern we do not find any reason to believe that the assessee would have incurred any administrative expenses in holding these investments. The AO has not brought on record any material to show that the assessee has incurred any expenditure in relation to the income which does not form part of the total income. Section 14A has within it implicit the notion of apportionment in the cases where the expenditure is incurred for composite/indivisible activities in which taxable and non taxable income is received but when no expenditure has been incurred in relation to the exempt income then principle of apportionment embedded in section 14A has no application. The object of section 14A is not allowing to reduce tax payable on the non exempt income by deducting the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies as per documents produced before him, they are attributable to commercial expediency, because as per submission made by the assessee, it had to form Special Purpose Vehicles (SPY) in order to obtain contracts from the NHAI and the SPVs so formed engaged the assessee company as contract to execute the works awarded to them (i.e. SPVs) by the NHAI. In its profit and loss account for the year, the assessee has shown the turnover from execution of these contracts and therefore no expense and interest attributable to the investments made by the appellant in the PSVs can be disallowed u/s 14A LW. Rule 8D because it cannot be termed as expense/ interest incurred for earning exempted income. Under the circumstances, Ld. Commissioner of Income Tax (Appeals) is correct in holding that disallowance of a further sum ₹ 40,556/- calculated@2%ofthedividend earned is sufficient. Under the circumstances, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals), hence we uphold the same. 13. In view of the above discussion and facts and circumstances of the case we agree with the view taken by this Tribunal in the above stated cases and accordingly h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficient evidence was brought on record by the assessee to establish that investment in shares was out of own funds and the borrowed funds were entirely utilized for business purposes, thus, no interest can be disallowed u/s 14A of the Act. The ratio laid down in Escorts Ltd. vs ACIT 104 ITD 427 (Del.) and Malwa Cotton Spining Mills vs ACIT 89 ITD 65 (Chd.) supports the case of the assessee. Likewise with respect to Plchem Hygiene Laboratories Pvt. Ltd. is concerned, for the impugned assessment year, no additional investment was made. So far as, Godrej Oil Plantation Ltd. (formerly known as Godrej Aqua Feeds Ltd.) (subsequently knows as Godrej Oil Palm Ltd.), during the year, the assessee with the approval of the shareholders, u/s 391 394 of the Companies Act, 1956 and with the sanction from Hon ble jurisdictional High Court transferred its oil palm business in the state of Andhra Pradesh, Gujarat, Mijoram and Orissa on Slump sale basis to this company for consideration of ₹ 49.75 crores, which was paid to the assessee company by way of allotment of equity shares of Godrej Oil Plantation Ltd. (refer note no.10)(a) of Notes to accounts at page 24 of the compilation and the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndirect interest expenditure as per clause (ii) of Rule-8D by considering the average of only new investment made during the year. The ld. DR advanced identical plea as has been raised in the grounds of appeal, whereas, the ld. counsel for the assessee defended the conclusion/direction contained in the impugned order. Considering the totality of facts and the discussion made in earlier paras of this order, we find no infirmity in the direction of the Ld. Commissioner of Income Tax (Appeal), therefore, the appeal of the Revenue is dismissed. 6. Now, we shall take up the appeal of the Revenue (ITA No.1278/Mum/2013) Assessment year 2009-10, wherein, the first ground pertains to deleting the disallowance of ₹ 2,56,26,588/-. The ld. DR advanced arguments, which is identical to the ground raised. On the other hand, the ld. counsel for the assessee explained that dividend received during the year was ₹ 69.53 lakhs for which our attention was invited to page-20 of the paper book and suo-moto disallowance was made to the tune of ₹ 6,00,375/-, whereas, the Assessing Officer made disallowance of ₹ 2,56,26,588/-. The ld. counsel for the assessee defended the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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