TMI Blog2017 (11) TMI 711X X X X Extracts X X X X X X X X Extracts X X X X ..... orders both dated 21/10/2016 of the Ld. First Appellate Authority, New Delhi. In ITA No.6606/Del/2016, the ground raised pertains to deleting the disallowance of ₹ 3,13,08,541/- u/s 14A of the Income Tax Act, 1961(hereinafter the Act) r.w.s 8D of the I.T. Rules 1962 (hereinafter the Rules) has been challenged. 2. During hearing, the crux of argument advanced by Shri Kaushlendra Tiwari, ld. Sr. DR is that CBDT Circular No.5/2014 dated 11/02/2014, which clarifies Rule-8D of the Rules and section 14A of the Act has been ignored by the Ld. CIT(A). In reply, Shri Sanat Kapoor along with Ms. Saumya Singh, Ld. counsel for the assessee, defended the impugned order by contending that no exempt income was earned by the assessee during the year, therefore, no disallowance can be made, for which, reliance was placed upon the decision from Hon ble jurisdictional High Court in Cheminvest Ltd. vs CIT 378 ITR 33 (Del.). 2.1. So far as ITA No.6607/Del/2016 is concerned, the argument on behalf of the assessee is that the assessee itself made disallowance to the extent of exempt income, therefore, no further disallowance is permissible, for which reliance was placed upon the decision Join ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. counsel also relied upon the decision in the case of M/s Daga Global Chemicals vs ACIT (ITA No.5592/Mum/2012), order dated 01/01/2015, Nimbus Communication Ltd. vs ACIT (ITA No.1424/Mum/2014), order dated 09/02/2016 and Tata Industries Ltd. vs ITO (ITA No.4894/Mum/2008), order dated 20/07/2016. 2.1. On the other hand, the ld. DR, Shri Rajesh Kumar Yadav, defended the addition and placed reliance upon the decision from Delhi Bench of the Tribunal in the case of Baba Global Ltd. vs DCIT (ITA No.1086 to 1091/Del./2015) order dated 05/05/2016. 2.2. We have considered the rival submissions and perused the material available on record. The ld. DR mainly relied upon the decision from Delhi Bench of the Tribunal in the case of Baba Global Ltd. (Supra), therefore, before coming to any conclusion, we are reproducing hereunder the relevant portion of this order for ready reference and analysis:- These are six appeals filed by the assessee against the action of the learned DRP upholding the order passed by the AO under Section 153A read with section 144C of the Act for assessment years 2006-07 to 2010-11 and under section 143(3) for assessment year 2011-12 consequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... afe Harbour Rules. On the issue of addition under Section 14A, the learned DRP confirmed the action of the AO. 8. Aggrieved by the order of the learned DRP and the final assessment order passed by the AO the assessee is in appeal before us. 9. It was contended by the learned AR that the AO was not justified in tinkering with the assessment for assessment years 2006-07 to 2008-09 as these assessments have not abated consequent to the search. The search has taken place on 21st January, 2011. No incriminating material was found during the course of the search as is evident from the assessment order. It was contended that in the absence of any incriminating material, the AO should not have made an addition. In support thereof the learned AR relied upon the order of the jurisdictional Delhi High Court in the case CIT (Central) III versus Kabul Chawla [2016] 380 ITR 573 (Del). 10. On the issue of the merit, it was contended by the learned AR that the additions are untenable as the assessee has paid the advances to its subsidiary companies out of EEFC accounts. The EEFC account even otherwise does not earn any interest. The advances given to the subsidiary companies we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as submitted by the learned AR that the disallowance has been made by the AO without recording any satisfaction. The AO has straightaway invoked the provisions of Rule 8D. In support there of the learned AR has placed reliance on the judgment of the jurisdictional Delhi High Court in the case of CIT vs. Taikisha Engineering India Ltd., (2015) 370 ITR 0338 (Del). 14. It was further submitted that in any case the disallowance under Section 14A cannot exceed the dividend income earned by the assessee company. 15. The learned DR, on the other hand, supported the order passed by the TPO as modified by the learned DRP. It was contended that the order passed by the TPO as well as the learned DRP on the issue of adjustment of interest is a speaking order. It was further contended that once the search has been initiated all the assessments get reopened consequent to the issue of notice under section 153A and as such the AO is entitled to make adjustment to the income as permissible under the law. 16. On the issue of rate of interest it was contended that the rate of interest has to be that of Indian Rupees as assessee would have earned the interest in Indian Rupees had it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO has the power to assess and reassess the 'total income' of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs in which both the disclosed and the undisclosed income would be brought to tax . iv. Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material. v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word 'assess' in Section 153 A is relatable to abated proceedings (i.e. those pending on the date of search) and the word 'reassess' to completed assessment proceedings. vi. Insofar as pending assessments are concerned, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment under section 153A. Respectfully following the judgment of the jurisdictional Delhi High Court, we hold that the AO was not justified in making the addition and accordingly the addition made by the AO in the assessment years 2006-07, 2007-08 and 2008-09 are directed to be deleted. Consequently the appeals filed for these assessment years are allowed. 20. As regards assessment years 2009-10 and 2010-11 are concerned the learned DRP has confirmed the addition applying the base rate of State Bank ofIndia plus 150 basis points. It was the contention of the learned AR that no addition can be made as the advance made was out of the EEFC account which carries no interest. Further amount advanced was for promoting its business. On this issue we are not in agreement with the contention of the learned AR. The amount having been advanced to an Associated Enterprises, the same has to be evaluated by applying arm s length price. Since it was a loan during the assessment years 2009-10 and 2010-11, the assessee company ought to have computed the arm s length price in respect of such loan advanced to its subsidiary companies. However, as regards the interest rate we are in agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no ‗special relationship , this will frequently not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est rate and recompute the adjustment on account of interest by applying the rate of interest of the relevant currency in the AY 2009-10 2010-11. Accordingly this ground of the assessee is partly allowed for AY 2009-10 2010-11.. XXXXXXXXXXXXXXXXX 22. As regards the addition on this account in assessment year 2011-12, the advance given to its subsidiary companies stand converted into share application money. Once the loan has been converted into share application money, for the issue of the share capital, then such amount cannot be considered as loan. The TPO is not permitted under the law to recharacterize the transaction and accordingly we are of the view that no interest on such share application money can be charged. The above view is supported by the judgment of the Coordinate Bench of the ITAT in the case of Bharti Airtel Ltd. vs. ACIT, [2014] 161 TTJ 0283 (Del) wherein the ITAT has held as under:- 47. We find that in the present case the TPO has not disputed that the impugned transactions were in the nature of payments for share application money, and thus, of capital contributions. The TPO has not made any adjustment with regard to the ALP of the capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly we direct the AO to restrict the addition to the exempt income. Accordingly this ground is partly allowed in favour of the assessee. 27. In view of the above findings the assessee s appeals for the A.Y. 2006- 07 being ITA No. 1086/Del/2015, A.Y. 2007-08 being ITA No. 1087/Del/2015, A.Y. 2008-09 being ITA No. 1088/Del/2015 are allowed, Appeal for A.Y. 2009-10 being ITA No. 1089/Del/2015, A.Y. 2010-11 being ITA No. 1090/Del/2015 and A.Y. 2011-12 being ITA No. 1091/Del/2015 are partly allowed. 2.3. We find that in the present appeal, the issue relates to disallowance of ₹ 27,19,404/- made u/s 14A(2) of the Act read with Rule-8D of the Rules. Considering the totality of facts, we are of the view that at best, if any disallowance could be made that cannot exceed the exempt income. The Tribunal in the case of Nimbus Communication Ltd. (supra) has made an elaborate discussion and thereafter reached to a particular conclusion, thus, the ratio laid down in the cases mentioned by the ld. Counsel for the assessee, clearly supports the case of the assessee. So far as, the case of Baba Global Ltd. vs DCIT (supra), relied upon by ld. DR is concerned, even in that case in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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