TMI Blog2017 (6) TMI 827X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout rejecting the report mechanically applied Rule-8D and computed the amount of disallowance, which cannot be said to be justified. At best, the disallowance may be restricted as suo-moto made by the assessee. Thus, no further disallowance was required to be made.- Decided in favour of assessee. TDS credit - Held that:- Two parties deducted TDS but did not hand over the TDS certificate to the assessee. It was also explained that the assessee wrote to the Assessing Officer of those parties with respect to this claim but there was no response from the Assessing Officer also. The Ld. Counsel relied upon section 205 of the Act. In such a situation, we remand this ground to the file of the Ld. Assessing Officer to examine the claim of the assessee and if felt necessary, The Ld. Assessing Officer may call report from the Assessing Officer of those parties, as prayed by the assessee. The ld. Assessing Officer may also send notices to the concerned parties and examine them with respect to deduction of tax at source, if so required. The assessee be given opportunity of being heard with further liberty to furnish evidence, if any, in support of its claim. Thus, this ground of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses to the tune of ₹ 8.74 lakhs. The ld. counsel further contended that ignoring the explanation of the assessee, the Ld. Assessing Officer upheld the net disallowance of ₹ 1.78 crores after making adjustment of suo-moto disallowance made by the assessee. It was further explained that own funds are much in excess of the borrowed funds for which our attention was invited to page- 8 of the paper book. Reliance was placed upon the decision in HDFC Bank Ltd. vs DCIT 383 ITR 529 (Bom.) and CIT vs Reliance Utilities and Power Ltd. 313 ITR 340 (Bom.). It was further explained that the assessee is in the business of finance and the interest income is more than interest expenditure. Our attention was invited to page-14 of the paper book and the latest decision from Hon'ble jurisdictional High Court in the case of CIT vs Jubilant Enterprises Pvt. Ltd. (ITA No.1512 of 2014 order dated 28/02/2017 and another decision in the case of Shri Paresh K. Shah (ITA No.8214/Mum/2011), order dated 05/06/2013. It was further explained that the conclusion of the assessee is on the basis of the decision of the accountant which is more scientific and rational, by further pleading that no de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 Accumulated depreciation 136.16 Gross Cash Net Worth 20166.65 3.2. During hearing before us, the ld.counsel for the assessee explained that the investment was made out of own surplus funds. Before we go into the questions at hand it would be appropriate to not only examine the provisions of section 14A of the Act but also to notice its legislative history. Section 14A was inserted into the Act by the Finance Act, 2001 with retrospective effect from 01/04/1962. For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. By virtue of the Finance Act, 2002, the following proviso was inserted in section 14A and was deemed to have been inserted with effect from 11/05/2001:- Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 3.4. By Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes (CBDT), in exercise of its powers under section 295 of the said Act read with subsection (2) of section 14A of the said Act, made the Incometax (Fifth Amendment) Rules, 2008 to further amend the said Rules (i.e., the Income-tax Rules, 1962) by i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The law prior to insertion of Section 14A 3.5. Prior to the introduction of section 14A in the said Act, the position of law was as laid down by the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd: 82 ITR 452 (SC) and Rajasthan State Warehousing Corporation v. CIT: 242 ITR 450 (SC) was different. In Maharashtra sugar Mills Ltd (supra) the assessee s business comprised of two parts, namely, (1) cultivation of sugar cane and (2) the manufacture of sugar. The Revenue had contended that as the income from the cultivation of sugar cane, being the result of an agricultural operation, was not exigible to tax, therefore, any expenditure incurred in respect of that activity was not deductible. The Supreme Court repelled this contention in the following manner:- This contention proceeds on the basis that only expenditure incurred in respect of a business activity giving rise to income, profit or gains taxable under the Act can be given deduction to and not otherwise. We see no basis for this contention. To find out whether the deduction claimed is permissible under the Act or not, all that we have to do is to examine the relevant provisions of the Act. Equitable consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stituted one indivisible business or not; if they do, the entire expenditure will be a permissible deduction but if they do not, the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee. 3.7. Thus, prior to the introduction of section 14A in the said Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of the said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the exempt income or income not exigible to tax, was not allowable as a deduction. 3.8. The object behind the insertion of section 14A in the said Act is apparent from the Memorandum explaining the provisions of the Finance Bill 2001 which is to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income ..Expenses allowed can only be in respect of earning taxable income. This is the purport of section 14A. In section 14A, the first phrase is for the purposes of computing the total income under this Chapter which makes it clear that various heads of income as prescribed in the Chapter IV would fall within section 14A. The next phrase is, in relation to income which does not form part of total income under the Act . It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. 3.10. The Supreme Court also clearly held that in the case of an income like dividend income which does not form part of the total income, any expenditure/deduction relatable to such (exempt or non-taxable) income, even if it is of the nature specified in sections 15 to 59 of the said Act, cannot be allowed against any other income which is includable in the total income. The exact words used by the Supreme Court are as under:- Further, section 14 specifies five heads o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) of section 14A. 3.12. Let us examine the expression in relation to . we may refer to the Supreme Court decision in Madhav Rao Scindia v. Union of India: AIR 1971 SC 530 where, in paragraph 134, it is observed as under:- The expression provisions of this Constitution relating to in article 363 means provisions having a dominant and immediate connection with: it does not mean merely having a reference to. 3.13. In Doypack Systems Pvt Ltd v. Union of India: AIR 1988 SC 782, the Supreme Court observed that the expressions pertaining to , in relation to and arising out of , used in the deeming provision, are used in the expansive sense. The Supreme Court further observed as under:- 49. The expression in relation to (so also pertaining to ), is a very broad expression which presupposes another subject matter. These are words of comprehensiveness which might both have a direct significance as well as an indirect significance depending on the context In this connection reference may be made to 76 Corpus Juris Secundum at pages 620 and 621 where it is stated that the term relate is also defined as meaning to bring into association or connection with. It has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. (i) The first component being the amount of expenditure directly relating to income which does not form part of the total income. (ii) The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. (iii) The third component is an artificial figure one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4/2006 dated 28.12.2006 and to paragraphs 11 to 11.3 thereof. Paragraph 11 dealt with the method for allocating expenditure in relation to exempt income and paragraphs 11.1 and 11.2 explained the basis and logic behind the introduction of sub-section (2) of Section 14A of the said Act. Paragraph 11.3 specifically provided for applicability of the provisions of subsection (2) and it clearly indicated that it would be applicable from the assessment year 2007-08 onwards . It is, therefore, clear that sub-sections (2) and (3) of Section 14A were introduced with prospective effect from the assessment year 2007-08 onwards. However, sub-section (2) of Section 14A remained an empty shell until the introduction of Rule 8D on 24/03/2008 which gave content to the expression such method as may be prescribed appearing in Section 14A(2) of the said Act. Thus, it is clear that, in effect, the provisions of subsections (2) and (3) of Section 14A would be workable only with effect from the date of introduction of Rule 8D. This is so because prior to that date, there was no prescribed method and sub-sections (2) and (3) of Section 14A remained unworkable. 3.22. So far as, as to how Section 14A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment. 3.23. In view of the foregoing discussion, we find that the assessee suo-moto disallowed ₹ 6.36 lakhs on account of interest and ₹ 8.74 lakhs as indirect expenses, therefore, we find merit in the claim of the assessee. As mentioned earlier and argued by the ld. counsel for the assessee, the assessee was having own funds, which was in far excess of borrowed funds, therefore, mechanically no disallowance can be made. The Hon'ble Bombay High Court in Reliance Utilities and Power Ltd. (supra) held as under:- The very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over ₹ 172 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier order of the Tribunal, which is not entertained by this court in appeal. This without even as much as a whisper of any explanation with regard to how and why the facts of the two cases are different warranting a view different from that taken by the Tribunal earlier. In fact when an appeal is not entertained then the order of the Tribunal holds the field and the coordinate benches of the Tribunal are obliged to follow the same unless there is some difference in the facts or law applicable and the difference in fact and / or law should be reflected in its order taking a different view. Tribunal has acted beyond the limits of its authority. (Para19) Impugned order of the Tribunal has an observation therein that there is no such thing as estoppel in law and by virtue of that gives itself a licence to decide the issue before it ignoring the binding precedent in the petitioner s own case in HDFC Bank Ltd(supra). Once there is a binding decision of HIGH Court, the same continues to be binding on all authorities within the State till such time as it stayed and / or set aside by the Apex Court or this very Court takes a different view on an identical factual matrix or larg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra25) 3.25 In the light of the above decisions from Hon'ble jurisdictional High Court, it can be concluded that since the investment was made out of surplus funds, no further disallowance is required to be made u/s 14A of the Act as section 14A provides for disallowance of expenditure incurred in relation to income which does not form the part of the total income, meaning thereby, there should be direct nexus between the actual expenditure incurred for the purpose of earning tax free income. No doubt, the word in relation to appears to be broad at firm impression but on deeper examination and read in conjunction with the word incurred it seems that these are restrictive words, restricting the power of Assessing Officer to estimate a part of expenditure, incurred by the assessee, to produce nontaxable income. To elaborate further, the word incurred refers to factual spending of expenditure in relation to exempt income and does not refer to deemed spending or assumed spending for the purpose. While applying the section, there is no authority conferred by the section upon Assessing Officer to deem or assume certain expenditure to have been incurred in relation to tax free inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdinate Bench held as under: This appeal by the assessee is directed against the order dated 30.8.2011 of the Commissioner of Income Tax(Appeals) for the Assessment Year 2008-09. 2. The assessee has raised the following grounds in this appeal: On the facts and in the circumstances of the case and in law, the Commissioner of Income Tax(Appeals) erred in upholding the disallowance u/s 14A of ₹ 17,65,069/- u/r 8D of I T Rules without appreciating that the appellant had sufficient interest free funds to make the investments. 2. On the facts and in the circumstances of the case and in laws the Commissioner of Income Tax(Appeals) erred in not considering the fact that the borrowed funds were not utilized for the purpose of making investment in the shares. 3 The only issue arising from the appeal of the assessee is whether in the facts and circumstances of the case, the Commissioner of Income Tax(Appeals) is justified in confirming the disallowance made by the Assessing Officer u/s 14A of ₹ 17,65,069/- by applying Rule 8D of the I T Rules. 3.1 During the course of assessment proceedings, the Assessing Officer proposed to make the disallowance u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce Finstock P Ltd in ITA No.3221/Ahd/2011 and submitted that the Tribunal has upheld the disallowance made u/s 14A when the assessee has used mixed funds for the purpose of investments in shares. 5 Having considered the rival submissions as well as the relevant material on record, we find that the assessee s own funds comprising share capitals reserves and surplus is ₹ 4,48,47,798/-, which is equalant to the cost of investment in the shares. Further, there is no fresh investments during the year under consideration and all these investments were made in the earlier year; therefore, there is no question of utilization of the borrowed funds during the year under consideration. 5.1 It is pertinent to note that when the Assessing Officer had not made any disallowance u/s 14A on account of interest expenditure in the earlier year; therefore, in the absence of fresh investment during the year, no disallowance can be made on account of interest by applying the provisions of sec. 14A. Further, the assessee earned the interest income of ₹ 42,17,981/- against the interest brokerage expenditure of Rs.. 30,79,450/- . This net interest expenditure offered to tax by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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