TMI Blog2014 (8) TMI 1106X X X X Extracts X X X X X X X X Extracts X X X X ..... ed:- 8-8-2014 - SHRI T.R. SOOD, ACCOUNTANT MEMBER AND Ms. SUSHMA CHOWLA, JUDICIAL MEMBER Appellant by: Shri Navneet Sehgal Respondent by: Shri Manjit Singh O R D E R PER T.R. SOOD, A.M These appeals are directed against the order dated 31.10.2012 of the Ld CIT(A)-II, Ludhiana. 2. In both these appeals various grounds have been raised but at the time of hearing Ld. Counsel for the assessee submitted that dispute is only regarding addition on account of disallowance u/s 14A and levy of interest u/s 234B of the Act. 3 After hearing both the parties we find that in assessment year 2008-09 (Pertaining to ITA No. 1349/Chd/2012) during assessment proceedings the Assessing Officer noticed that assessee has made investment of ₹ 5,99,19,958/- in equity shares as on 31.3.2008 whereas investment as on 31.3.2007 was only ₹ 6617351/-. This clearly shows that fresh investments have been made. The assessee was asked that why disallowance should not be made u/s 14A r.w.r. 8D of I.T. Rules. In response the assessee submitted the details of interest and investments. It was further submitted that disallowance u/s 14A could not be made unless expenses hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new investments have been made. Secondly assessee is not having separate account for surplus funds or profit earned during the year and it is a case of mixed funds. Theory of disallowance u/s 14A r.w.r. 8D on proportionate basis itself is based on concept of mix funds. In fact in case of Chadha Super Cars (supra) the issue was discussed in para 17 to 28 in detail which are as under: 17 We have considered the rival submissions carefully and find that during the year the assessee has made investment in partnership and mutual fund. The profit from mutual fund in the form of dividend is exempt. As far as share profit from partnership firm is concerned, the same is also covered u/s 10(2A), therefore, there is no force in the submissions that the assessee has made investment in firm which itself is paying tax, therefore, it cannot be called that the investment has been made to earn exempt income. Section 10(2A) reads as under: [(2A) in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm. Explanation.-For the purposes of this clause, the share of a partner in the total income of a firm separately assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in computing the total income of the firm subject to any specific limitation/prohibition provided for the allowance of such expenditure. Having regard to judicial opinion and also the legislative changes in the Act, a partnership firm is a separate entity than that of its partners under the IT Act and if there exists any specific provision in the income-tax law modifying the partnership law then, such specific provision shall be applied and if the tax law is silent on a specific issue, then a reference will have to be made to the provisions of partnership law for the adjudication of the same and in the present case, provisions of law sufficiently take care of the issue involved herein, hence, the issue is to be decided accordingly. There exist specific provisions for computing the income of the partnership firm as well as that of its partners, hence, total income of both is liable to be computed in accordance with such provisions. Since partnership firm, for the purpose of IT Act is a separate assessable entity and therefore partners vis-a-vis partnership firm would stand on the same footing of shareholders vis-a-vis company. Accordingly income charged in the hands of a partnersh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present cased, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application. 19 Second decision relied on is that of CIT V. Hero Cycles (supra). In that case following question was raised before the Court: Whether on the facts and in law, the Hon'ble Income-tax Appellate Tribunal was legally justified in deleting the disallowance of ignoring the evidence relied on by the Assessing Officer and holding that a clear nexus has not been established that the interest bearing funds have been vested for investments generating tax free dividend income. 20 In this case the Assessing Officer made disallowance u/s 14A(3) which was partly upheld by the ld. CIT(A). On further appeal, the Tribunal held that there was no nexus between the expenditure incurred and the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application. In view of the above, we are of the opinion that no substantial question of law arise. 22 It is clear that both the above decisions pertain to Assessment year 2004-05 when Rule 8D was not even in statute book. Rule 8D has been introduced by I.T. Rules (5th Amendment) w.e.f. 24.3.2008. Therefore, in both the above cases, Rule 8D could not have been possibly applied. In any case in a leading judgment the Hon'ble Bombay High Court in case of Godrej and Boycee Manufacturing V DCIT, 328 ITR 81 (Bom) held that rule 8D can not have retrospective application and the same can be applied only from Assessment year 2008-09. Further in case of CIT V. Winsom Textile, 319 ITR 204, the issue was whether the principles laid down in case of Abhishek Industries (supra) were applicable for the disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articularly sub-section (2) and do not offend article 14 of the Constitution ; (v) The provisions of rule 8D of the Income-tax Rules which have been notified with effect from March 24, 2008, shall apply with effect from the assessment year 2008-09 ; (vi) Even prior to the assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub- section (1) of section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record ; (yii) The proceedings for the assessment year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee in relation to income which does not form part of the total income under the Income- tax Act. The proposed amendment will take effect retrospectively from April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent Assessment Year. 24 Hon'ble Bombay High Court noted this decision and then confirmed the theory of apportionment of expenses and held that same is very much applicable in Section 14A. At placitum 28 it has been observed as under: During the course of this judgment, it would be necessary to revisit the decision of Hon'ble Supreme Court in Walfort. At this stage, however, it needs to be emphasized that the provisions of section 14A were construed in Walfort to evince Parliamentary intent not to allow deduction in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act against taxable income. Section 14A is clarificatory of the position that expense can be allowed only to the extent that they are relatable to the earning of taxable income. Only those expenses which are in respect of the earning of taxable income can be allowed. The sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Indore vs. Commissioner of Income Tax (2005) 275 ITR 23 (MP). It was contended that it was only the actual expense incurred for earning dividend which was to be deducted from the dividend income for calculating the admissible deductions under Section 80M of the Act. It was urged that the plea of the Revenue that proportional expenses should also be reduced, was against the statute. 13. We have given our thoughtful consideration to the respective submissions of the learned counsel for the parties and find *force in the submissions of the learned counsel for the revenue. Finance Act 2001 had inserted Section 14A with effect from 1.4.1962. Accordin g to the said Section, any expenditure incurred by the assessee for earning income which did not form part of the total income under the Act was not to be allowed as expenses. This Court in the case of Punjab State Cooperative Milk Producer's Federation Ltd.'s case (supra) relying upon the decision of the Apex Court in Walfort Share and Stock Brokers's case (supra), wherein, while def ining the scope of Sect ion 14A of the Act, incorporated retrospectively w.e.f. 1.4.1962, it had laid down as under: The insertion of Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in Sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in part of total income could not be allowed against ore income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of exp enditures between taxable and non-taxable has, in principle, been now widened under Section 14A. Reading Section 14 in juxtaposition with Sections 15 to 59, it is clear that the words expenditure incurred in Section 14A refers to expenditure on rent, taxes, salaries, interest,etc. in respect of which allowances are provided for (see Sections 30 to 37). ' 14. The apex Court had specifically recorded that the theory of apportionment of amount of expense* between taxable and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:- A X B C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total asset as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. (3) For the purposes of this rule, the total assets shall mean, total asset as appearing in the balance sheet excluding the increase on account of revaluation of asset but including the decrease on account of revaluation of assets.). 28 Clause (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th reference to rule 8D(2)(ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax free investment. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as A in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example - any aspect of the assessee s business such as plant/machinery etc.). As regards rule 8D(2)(iii) it has been submitted that some mechanism or formula had to be adopted for attributing part of the administrative/managerial expenses to tax exempt investment income. The administrative expenses attributable to tax free investment income have a fixed component and a variable component. A view was taken that the disallowance should also be linked to the value of the investment rather than the amount of exempt income. Under Portfolio Management Scheme (PMS) the fee charged ranges between 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed admin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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