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ACIT Circle 6 (1) And ACIT (OSD) 2 (1) , Mumbai Versus Af-taab Investment Company Limited And Vice-Versa

2017 (11) TMI 963 - ITAT MUMBAI

Addition made u/s 14A - computation of claim - Held that:- As in the case of CIT v. Srishti Securities Private Limited [2009 (1) TMI 408 - BOMBAY HIGH COURT] held that interest on funds borrowed by an investment company for making investment in shares which may be held as investment or stock in trade or for the purposes of controlling interest in other companies shall be allowed as deduction u/s 36(1)(iii). The assessee has voluntarily suo motu disallowed an interest expenditure on ICD to the tu .....

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e A.O. to factual matrix of the case while computing disallowance u/s 14A keeping also in view the claim of the assessee that it is an investment company holding more than 99% investments in subsidiaries companies/strategic investments and also that the assessee is a single segment company being an investor and dealer in shares & securities and consequently all the business expenses ought to have been incurred towards this segment under normal circumstances unless otherwise shown, which shall al .....

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P Ltd. [2017 (6) TMI 1124 - ITAT DELHI] - Addition u/s 14A - A.O invoked Rule 8D r.w.s. 14A which led to disallowance of expenses which was higher than actual expenses incurred by the assessee as debited to Profit and Loss Account which disallowance was later restricted by learned CIT(A) to actual expenditure - Held that:- The assessee is a single segment company being an investor and dealer in shares & securities and consequently all the business expenses ought to have been incurred towards .....

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incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. - Exclusion of diminution in the value of investments for the purposes of computation of disallowance u/s 14A - Held that:- As observed that the AO has also included diminution in the value of investments for the purpose of computing disallowance u/s. 14A, which loss has arisen because of the restructuring/amalg .....

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losses arising due to diminution in the value of the investments due to merger/amalgamation, that certainly is not the mandate of Section 14A. We affirm the order of learned CIT(A) on this ground and dismiss the appeal of the Revenue. - I.T.A. No.1807/Mum/2011 & 1812/Mum/2011, I.T.A. No. 4284/Mum/2014, I.T.A. No. 7069/Mum/2013 & 6546/Mum/2014, I.T.A. No. 6573/Mum/2014 And I.T.A. No. 7128/Mum/2014 - Dated:- 16-11-2017 - SHRI D.T. GARASIA, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER .....

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2011 in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called the tribunal ) read as under:- 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to re-compute the disallowance u/s 14A on a reasonable basis relying on the judgement of Bombay High Court in the case of Godrej & Boyce Mfg. Ltd. without appreciating the fact that the judgment of Bombay High Court has not been accepted by the .....

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er dated 10 December 2010 passed by the Commissioner of Income-tax (Appeals)-14, Mumbai [ CIT(A) ] for the aforesaid assessment year on the following among other grounds: 1. The learned CIT(A) erred in not deleting the entire disallowance made by the Assessing Officer under section 14A of ₹ 4,10,78,401/-. 2. The learned CIT(A) erred in directing the Assessing Officer to determine the reasonable amount of disallowance under section 14A. The learned CIT(A) ought to have held that in the pres .....

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business, and accordingly, interest expenditure on borrowings for investment purposes is allowable as deduction under section 36(1)(iii). 5. The learned CIT(A) erred in confirming the action of the Assessing Officer in increasing the book profits under section 115JB by the amount of additional disallowance made under section 14A. 6. Each one of the above grounds of appeal is without prejudice to the other. 7. The appellant reserves the right to amend, alter or add to the grounds of appeal. 4. Th .....

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the assessee claimed to be an exempt income u/s. 10(34) . The assessee disallowed expenditure of ₹ 3,64,34,450/- incurred for earning the exempt income u/s. 14A . The assessee took into account proportionate expenditure on interest on ICD but excluded administrative expenses. The AO rejected the contention of the assessee and work out the disallowance in accordance with the Board notification 45/2008 dated 24.03.2008 . The AO also relied upon the decision of Special Bench of tribunal in I .....

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f ₹ 3,64,34,450/-, vide assessment order dated 28-11-2008 passed by the AO u/s 143(3). 5. Aggrieved by the assessment order dated 28-11-2008 passed by the AO u/s 143(3), the assessee filed an appeal before the learned CIT(A), who held vide appellate order dated 10-12-2010, as under:- 7. I have gone through the above submissions very carefully and facts of the case. The appellant company submitted that the provisions of Sec. 14A is not applicable in its case as no expenditure was incurred b .....

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e, 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 on method consistent with all the relevant facts and circumstances after furnishing a. reasonable opportunity to the assessee to place all the germane material on the record. Following the above decision, the Assessing' Officer is directed to determine the reasonable am .....

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earning income which does not form part of total income can be considered for disallowance and not notional expenditure that is attributed to earning such income. The appellant submits that the increase in book profits on the ground of recalculation of disallowance under section 14A attributable to interest expense is unwarranted. The appellant relies on the submissions at paras 2.1 to 2.43 above. The learned CIT-A rejected contentions of the assessee by holding as under, vide appellate order d .....

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t the tribunal has passed the order in assessee‟s own case in ITA no. 3684/Mum/2012 and 8981/Mum/2010 for AY 2004-05 and 2005-06, vide common orders dated 11th May, 2016. It was submitted that the tribunal vide its aforesaid orders dated 11-05-2016 had given relief to the assessee, by holding as under: 2. The assessee company is engaged in the business of investing and dealing in shares and securities. The company derives its income from short term and long term investments in shares, mutu .....

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e assessee filed an appeal for the above mentioned assessment year before us. 3. However, the assessee has raised number of issues but the learned representative of the assessee only raised the issue u/s.14A of the Income Tax Act, 1961( in short the Act ) wherein the learned CIT(A) confirmed the disallowance the interest expenditure to the tune of ₹ 8,42,08,035/- for A.Y.2004-05 and ₹ 9,70,012/- for A.Y.2005-06. The learned representative of the assessee has argued that the assessee .....

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se of Commissioner of Income Tax - 8 Vs. Srishti Securities Pvt. Ltd. and [2013] 35 taxmann.com 210 (Delhi) High court of Bombay in case Commissioner of Income Tax Vs. Oriental Structural Engineers Pvt. Ltd.. However, on the other hand learned departmental representative has refuted the said contention. In the instant case investment made in subsidiary company for strategic investment i.e. for commercial expediency or investment or stock in trade is in question. Assessing Officer disallowed the .....

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ew of the above mentioned law appeal of the appellant are hereby allowed and Assessing Officer is hereby directed to re-calculate the expenditure incurred towards the dividend income by excluding the investment made for controlling interest in the other companies while computing average value of investment. The law settled in [2014] 46 taxmann.com 18, Income Tax Appellate Tribunal, Mumbai bench in case of Garware Wall Ropes Ltd. Vs. Additional Commissioner of Income Tax Range 5(1), [2009] 183 ta .....

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-05-2016 and the addition made u/s 14A stood deleted, which order dated 05-06-2017 passed by the AO is placed in file, wherein it is held by the AO as under:- Name of Assessee Af-Taab Investment Co. Ltd, Address 24, Homi Modi Street, Bombay House, Mumbai-400001 PAN AAACA4800H Status Company Assessment Year 2005-06 Date of the order 05.06.2017 Order Giving Effect to ITAT s order In view of the Hon ble ITAT s order ITA no. 3684/Mum/2012 and ITA no. 8981/Mum/2010 dated 11.05.2017. The total assesse .....

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r dated 11 May 2016 (3,92,31,324 +9,70,012) Disallowance u/s. 14A (4,02,01,336) Taxable book profit 16,73,99,771 Reliance were also placed on the decision of Hon‟ble Bombay High court in the case of Principle CIT v. Reliance Capital Asset Management Ltd. in ITA no. 487/2015 dated 19th September 2017 . The Ld. DR on the other hand relied upon the assessment order of the AO. 7. We have considered rival contentions and have perused the material on record . We have observed that the assessee i .....

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- being interest on ICD incurred for earning the exempt income u/s. 14A . The AO made disallowance by invoking Rule 8D, wherein total disallowance of expenditure u/s 14A r.w.r. 8D was worked out at ₹ 4,10,78,401/-. The AO considered interest on ICD as well administrative expenses for making disallowance u/s 14A r.w.r. 8D while the assessee only considered interest on ICD for disallowance. The learned CIT(A) directed the A.O to adopt reasonable basis on the method consistent with all the re .....

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tual fund, equities and investment in real estate. The assessee company is a 100% subsidiary of the Tata Power Company Ltd. The assessee company invested in the subsidiary company and earned exempt income but the contention of the assessee is that the expenditure incurred upon the strategic investment is not liable to be added in the income of the assessee. But the Assessing Officer assessed the same as income of assessee and the learned CIT(A) confirmed the order of Assessing Officer therefore .....

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e expended the money for strategic investment with the object to control the stake in group concern and not to earn the income, therefore, in the said circumstances no disallowance of any kind is required in connection with the expenditure incurred if any for the said investment in view of the law settled in [2014] 46 taxmann.com 18, Income Tax Appellate Tribunal, Mumbai bench in case of Garware Wall Ropes Ltd. Vs. Additional Commissioner of Income Tax Range 5(1), [2009] 183 taxman 159 (Bom) in .....

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e interest expenditure to the tune of ₹ 84,20,803/- for A.Y. of 2004-05 and an amount of ₹ 7,70,012/- for the A.Y.2005-06. But in connection with the strategic investment in the subsidiary company the law is not quite clear that if any company made an investment in subsidiary company for commercial expediency or investment or stock in trade for any purpose of controlling interest in other companies then interest paid to such parties would not be taxable u/s.36(1)(iii) of the Act. In .....

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taxman 159 (Bom) in case of Commissioner of Income Tax - 8 Vs. Srishti Securities Pvt. Ltd. and [2013] 35 taxmann.com 210 (Delhi) High court of Bombay in case Commissioner of Income Tax Vs. Oriental Structural Engineers Pvt. Ltd. in accordance with law. 4. In result the both the appeal of the assessee are hereby allowed for statistical purpose. It is also brought on record that the department has already passed an order giving effect to the afore-stated tribunal orders dated 11-05-2016 and the a .....

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he total assessed income is recomputed as under: Particulars Rs. Total income as per order giving effect dated 05.06.2017 (2,28,25,500) Less: Relief granted by ITAT vide order dated 11th May 2016 (3,92,31,324+9,70,012) Disallowance u/s 14A (4,02,01,336) Total income/Loss (6,30,26,836/-) Total income as per the provisions of section 115JB is computed as under: Particulars Rs. Book profits assessed under section 115JB- as per order giving effect dated 05.06.2017 20,76,01,107 Less: Relief granted b .....

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motive is to acquire shares in order to obtain controlling interest in the investee company . The relevant portion of the Hon‟ble Karnatka High Court order is reproduced hereunder: 8. So far as second question of applicability of Sec.14A of the Act to the expenses incurred by the appellant towards interest and others on the loan borrowed is concerned, the finding of the Tribunal is at paragraph11 which reads as under : 11. The revenue is in appeal and we have considered the rival contentio .....

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y, uphold in principle the applicability of section 14A. However, it is for the Assessing Officer to ascertain from the facts of the case as to how much interest bearing borrowings was utilized to acquire shares in the companies. It is also necessary to see as to whether any interest bearing borrowed funds were used in making the advances and expenditure in the case of Castle Breweries. This factual exercise has to be carried out by the Assessing Officer after giving due opportunity to the asses .....

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sing Officer to ascertain from the facts of the case as to how much interest bearing borrowings was utilized to acquire shares in the companies and the matter is relegated to the Assessing Officer. As per the language in Sec.14A, the enquiry has to be undertaken by the Assessing Officer which has been so ordered by the Tribunal. Hence, it can be said that the Tribunal has exercised the discretion where rights of both sides are kept open for admissible deduction under Sec.14A. When such a discret .....

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ng Officer, we do not find that any further observations are required to be made in this regard. In any case, the question of law as sought to be canvassed would not arise for consideration at this stage on the said aspects as sought to be canvassed. We have also observed that Hon‟ble Supreme Court in the recent decision dated 08-05-2017 in the case of Godrej and Boyce Manufacturing Company Limited v. DCIT reported in (2017) 81 taxmann.com 111(SC) has dealt with applicability of Section 14 .....

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spective has been challenged by the Revenue in another appeal which is presently pending before this Court. The said question, therefore, need not and cannot be gone into. Nevertheless, irrespective of the aforesaid question, what cannot be denied is that the requirement for attracting the provisions of Section 14A(1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income. Insofar as the appellant-assessee i .....

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tion. In the appeals arising out of the assessments made for some of the assessment years the aforesaid question was specifically looked into from the standpoint of the requirements of the provisions of sub-sections (2) and (3) of Section 14A of the Act which had by then been brought into force. It is on such consideration that findings have been recorded that the expenditure in question bore no relation to the earning of the dividend income and hence the assessee was entitled to the benefit of .....

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ssee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) r .....

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g Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and ₹ 280.64 crores as on 31.3.2002) remains unproved by any material whatsoeve .....

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ing res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. 39. In the above circumstances .....

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find any fault with this conclusion of the First Appellate Authority based as it is on the language of subsection (2) of Section 14A of the Act, reproduced above. The Commissioner was aware that the assessee is acting as an Asset Management Company of Reliance Mutual Fund. Its principal business is of managing the mutual fund schemes of Reliance Mutual Fund. As Investment Manager, the assessee has earned management and advisory fees. The assessee has invested its own surplus fund in various inv .....

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ssee in various schemes of Reliance Mutual Fund and its subsidiaries. There should not be any dispute that the investments made in the various schemes of Reliance Mutual Fund and also in the group concerns are on account of business policy. The assessee received dividend from 27 transactions, out of which 8 receipts were by way of direct credit to its Bank account and 19 receipts were in the form of reinvestment of dividend, namely, the dividend amount was reinvested and it did not physically re .....

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the Rules. We are, therefore, not in agreement with Mr. Suresh Kumar that Rule 8D(2)(iii) has been overlooked or ignored by the Tribunal completely. In the peculiar facts and circumstances of the assessee's case and the nature of its investments made, the Tribunal concluded that the disallowance worked out by the assessee should have been accepted. However, it did not accept the figure of disallowance worked out by the assessee. That although the Tribunal, in one line or sentence in para 8, .....

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in its entirety, does not mean that the appeal raises a substantial question of law. We do not think that the Tribunal's exercise can be termed as totally erroneous or illegal. It is neither perverse. The Tribunal's order cannot be said to be vitiated by an error of law apparent on the face of the record. We do not think that the working by the Tribunal or the determination of the disallowance at ₹ 3,50,000/does not meet the ends of justice. It is restricted bearing in mind the fac .....

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Court has held that interest on funds borrowed by an investment company for making investment in shares which may be held as investment or stock in trade or for the purposes of controlling interest in other companies shall be allowed as deduction u/s 36(1)(iii). . The assessee has voluntarily suo motu disallowed an interest expenditure on ICD to the tune of ₹ 3,64,34,451/- u/s 14A which disallowance was raised by the AO to ₹ 4,10,78,401/-, wherein administrative expenses were also c .....

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company holding more than 99% investments in subsidiaries companies/strategic investments and also that the assessee is a single segment company being an investor and dealer in shares & securities and consequently all the business expenses ought to have been incurred towards this segment under normal circumstances unless otherwise shown, which shall also be kept in view by the AO while computing disallowance. We order accordingly. With respect to the second issue, the contentions of the ass .....

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work out disallowance accordingly. We order accordingly. This disposes of the appeal of the assessee as well Revenue in ITA No. 4284/Mum/2014 and ITA no. 1807/Mum/2011 respectively for AY. 2006-07. 8. In the result appeal of the Assessee and Revenue in ITA No. 4284/Mum/2014 and ITA no. 1807/Mum/2011 respectively for AY 2006-07 are allowed for statistical purposes. We order accordingly. Revenue Appeal- ITA No. 1812/Mum/2011 for AY 2007-08 9. Our decision in Revenue‟s appeal in ITA 1807/Mum .....

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eedings u/s 143(3) r.w.s. 143(2), it was observed by the AO that the assessee is investor and dealer in shares and securities . The assessee is having investments in shares and mutual fund. The assessee earned dividend income of ₹ 6,69,80,635/- during the previous year relevant to the impugned assessment year which was claimed as an exempt income . The assessee was asked by the AO to explain why disallowance u/s. 14A r.w.Rule 8D should not be made . The assessee made following submissions: .....

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xpenses, insurance premium internal audit fees, auditors remuneration, maintenance charges, or electricity charges have no relation or nexus to dividend income. Therefore, proposed disallowance of the above expenses as being attributable to earning of dividend income is unfair The A.O observed that all the expenses which are connected with the exempt income have to be disallowed u/s. 14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial and the same .....

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passed by the AO u/s 143(3), as against disallowance of ₹ 1,35,367/- worked out by the assessee. 12. Aggrieved by the assessment order dated 31-10-2011 passed by the AO u/s 143(3), the assessee filed first appeal before learned CIT(A) who gave part relief to the assessee by holding as under, vide appellate orders dated 27-09-2013:- 3.3 The Assessing Officer's order, submissions made for the appellant and materials on records have been considered. The case pertains to A.Y. 2009-10. It i .....

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Section 14A(2) of the Act if the AO is not satisfied with the correctness of the claim of the taxpayer of the expenditure related to exempt income, then the AO shall calculate the expenditure ay applying Rule 8D of the Rules. There is no discretion to the Assessing Officer for restricting the disallowance to the extent of exempt income as he has to follow the formula provided in Rule 8D. It may be stated here that, the issues arising out of application of sec.14A and Rule 8D now stand settled b .....

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odrej and Boyce Mfg. Ltd., has held that the provisions of Rule 8D shall apply w.e.f. A.Y.2008-09. Therefore, it is evident that all expenses connected with the exempt income have to be disallowed u/s.14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial in accordance with law. It is further evident that deduction in respect of expenditure incurred by the assessee in relation to exempt income and taxable income has to be determined as per the mechan .....

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ed in view of the provisions of subsection (2). Therefore, since from assessment year 2008-09, rule 8D is applicable, the AO shall be free to compute the disallowance of expenditure as per this rule in respect of the exempt income in all such cases where the assessee claims that no expenditure has been incurred in respect of the said income and no suo-mote disallowance of expenditure has been made by the assessee. This is quite logical as well, because it cannot be the case of any investor that .....

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n a single penny for making investment, maintaining the investment portfolio and thereby earning exempt income. Even if the requirement of AO's satisfaction in this regard is considered necessary, the very knowledge of the fact on the part of the AO that the appellant has not disallowed any expenditure suo-moto was sufficient for her to compute the disallowance under rule 8D read with section 14A of the Act. 3.3.3 The argument of the appellant that on strategic investment no dividend is earn .....

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ned. Therefore they should be excluded while calculating 5% (sic.0.5%) of average investment made by appellant merits consideration income from investment in debentures are chargeable to tax. Therefore, while calculating average value of investment they should be excluded. The A.O, is therefore directed to exclude the investment in debentures as it earns taxable income and recalculate the disallowance under 5% (sic.0.5% )of average investment. 13. Aggrieved by the appellate order dated 27-09-201 .....

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the total expenses of 38,04,573/- claimed by the assessee in its P&L A/c as an expense for the entire year. It was submitted that strategic investments/stock in trade are to be excluded for computing disallowance under 14A . It was submitted that strategic investments were more than 91% of the total investment . It was also submitted that no satisfaction was recorded by the A.O as is contemplated u/s 14A(2). It was submitted that Rule 8D is applied and disallowance have been made more than .....

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e assessee is having investments in shares and mutual fund. The assessee earned dividend income of ₹ 6,69,80,635/- during the previous year relevant to the impugned assessment year which was claimed as an exempt income . The assessee has incurred total expenditure of ₹ 38,04,573/- which was debited to Profit and Loss account . The assessee claimed to have incurred following expenses in relation to the earning of exempt income:- 1. Dematerialisation charges ₹ 36,910/- 2. Transac .....

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shares & securities and consequently all the business expenses ought to have been incurred towards this segment under normal circumstances unless otherwise shown, which shall also be kept in view by the AO while computing disallowance. The issue of disallowance u/s 14A and manner of computing disallowance is discussed by Hon‟ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd.(supra) wherein it has been held by the Hon‟ble Supreme Court in para 37 as und .....

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application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment d .....

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utatis mutandis to the issue in this appeal in ITA no. 7069/Mum/2013 for AY 2009-10. We are also of the considered view that only those investments which have yielded exempt income shall be considered for computing average value of investment for the purposes of Rule 8D(2)(iii) keeping in view ratio of decision of Special Bench of the tribunal in the case of Vireet Investment Private Limited(supra), wherein tribunal held as under: 11.16 Therefore, in our considered opinion, no contrary view can .....

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remain exempt. There is no dispute that if an investment has yielded exempt income in a particular year then it will enter the computation of average value of investments for the purposes of Rule 8D(2)(iii). The assessee's contention that if there is no certainty that an income, which is exempt in current year, will continue to be so in future years and, therefore, that investment should also be excluded, is hypothetical and cannot be accepted. The issues under this appeal are therefore rest .....

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11. With respect to the stock-in-trade being shares and securities held by the assessee, we are of the considered view that the said stock-in-trade cannot be included for the purposes of disallowance u/s. 14A as the same are held as business asset for trading purposes and not for earning of exempt income. The assessee has rightly relied on the decision of Hon‟ble Punjab and Haryana High Court in the case of Pr. CIT v. State Bank of Patiala (2017) 78 taxmann.com 3 (P&H HC) and we agree .....

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tock-in-trade and, accordingly, section 14A would not be applicable in relation to incidental income by way of tax free income, namely, interest or dividend which is exempt under sections 10(15)(iv)(h), (34) and (35). The term investment does not include stock-in-trade. He relied upon Accounting Standard (AS) 13, issued by the Institute of Chartered Accountants of India, to contend that there is a distinction between investment and stock-in-trade. Stock-in-trade is not investment as per clause 3 .....

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nstitute of Chartered Accountants of India, recognized under section 145(2) of the Act, in so far as it draws a distinction between investment and stock-in-trade. As per clause 3.1, stock-in-trade is not an investment. He contended that section 14A, which is a charging section, and rule 8D, which is the computation provision, constitute an integrated code and as the computation provisions do not apply, as the word used therein is investment and not stock-in-trade , the charging section also cann .....

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