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TMI Blog2017 (11) TMI 1368X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA/No.6440/Mum/2014: 2. First ground of appeal, raised by the AO, is about disallowance made u/s.14A of the Act r.w.r.8D of the Income-tax Rules,1962(Rules).During the assessment proceedings, the AO found that the assessee had earned dividend income of Rs. 106.53 crores and Long Term Capital Gain(LTCG) of Rs. 18.53 lakhs, that both were claimed exempt u/s.10 of the Act, that the assessee on its own had disallowed interest expenditure of Rs. 10.25 crores and had debited it to its P&L account. He asked the assessee to explain as to why the provisions of section 14A r.w.r.8D should not be applied. After considering the explanation of the assessee, he made a disallowance of Rs. 52.09 crores as per Rule 8D r.w.s. 14A of the Act. After reducing the suo-motu disallowance made by the assessee, he worked out the net disallowance at Rs. 41.84 crores. 2.1. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA)and also relied upon certain case laws. After considering the available material, he held that the provisions of Rule 8D were not applicable for the year under consideration, in view of the judgment of Hon'ble Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d u/s. 37 of the Act, that the assessee had claimed total HO expenses of Rs. 91.69 crores, that Rs. 52.09 crores were disallowed u/s. 14A of the Act. Treating the balance amount of Rs. 39.06 crores [91.69(-)52.09],he made a disallowance of the said amount and held that the expenditure was of capital nature. 3.1 During the appellate proceedings, before the FAA, the assessee made elaborate submissions. After considering the assessment order and the submission of the assessee, he held that at most Rs. 1.33 crores could be treated as capital expenditure. He deleted the balance addition. 3.2 It was brought to our notice that identical issue was decided in favour of the assessee and against AO by the Tribunal, while deciding the appeal for the AY. 2004-05(ITA/4894/Mum/2008,dtd.20/07/2016) We find that at para-19 at pg-42 of the order the Tribunal has held as under: "19. Though, in the case in hand, issue is not regarding the interest free advance to the sister concerns, yet, the proposition of law laid down by the Hon'ble Supreme court can be very well applied in this case as the assessee being an investment & finance company and a promoter of new companies and having interest in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olding his order, we dismiss Ground No.3. ITA/6750/Mum/2014: 5. First Ground of appeal ,raised by the assessee, is about disallowance made u/s. 14A of the Act. Paragraph 2.1.a. our order contains the facts about the disallowance made by the AO. 5.1 Before us, the AR argued that disallowance of administrative expenditure should not be made under section 14A in the absence of a precise formula, that the F AA had erroneously made disallowance at 2% of total expenses as against expenses of the HO, that disallowance should be restricted to 2% of the expenses of HO.He relied upon the cases of SICOM Ltd.(39 CCH 10).The DR supported the order of the FAA. 5.2 We find that the FAA had considered the total expenditure incurred by the assessee for making disallowance. In our opinion, expenditure incurred for earning exempt income only can be disallowed. As stated earlier, Rule 8D was not applicable for the year under appeal. But, the honorable Bombay High Court in the case of Godrej Boyce Manufacturing Company has held reasonable disallowance can be made u/s.14A of the Act for the year under appeal. Therefore, we hold that disallowance should be restricted to 2% of the expenses of HO. Fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits." "We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is held that no disallowance in this case is attracted u/s 36(iii) of the Act." Respectfully, following the above Ground 1.2 is allowed. 6. Second ground deals with disallowance made u/s.40(a)(ia)of the Act. During the assessment proceedings, the AO found that the assessee had not deducted tax at source on interest of Rs. 21.22 crores. Invoking the provisions of section 40(a)(ia),he disallowed the claim made on account of interest payment. 6.1 During the appellate proceedings, the FAA held that the assessee made payment of interest to a trust, that it had not deducted tax at source, that it was not covered by the exceptions provided by section 194A(3)(iii)of the Act, that the AO was justified in disallowing the disputed amount. 6.2 Before us, the AR argued that the recipient of the interest had paid tax, that as per the second proviso to section 40(a)(ia),no disallowance could be made if taxes were paid by the recipients, that the proviso had retrospective operation. He referred to the case of M/s.Selprint (ITA/3688/Mum/2012),wherein the matter was restored back to the file of the AO for verification. He also referred to other cases delivered by the Tribunal in that regard. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it was irrelevant to consider the object with which the loan was obtained. This issue is accordingly decided in favour of the assessee." Respectfully, following the above order of the Tribunal ,ground number three is decided in favour of assessee. 8. Last Ground of appeal pertains to taxability of capital gains of Rs. 10, 09, 44, 44,33,898/- in the hands of the assessee on sale of shares of IDEA by its wholly owned subsidiary (WOS), namely Apex Investment (Mauritius)Holdings Pvt. Ltd.(Apex). 8.1 During the assessment proceedings, the AO had found that Apex(earlier AT & T Cellular Pvt. Ltd.)had become WOS of the assessee towards end of the year 2005,that it sold 37.17 lakhs shares of IDEA Cellular Limited, during the year under consideration, for Rs. 1,505.71 lakhs to Birla TMT Holdings Pvt. Ltd.(BTHPL).After preliminary enquiry, the AO issued a show cause notice, dtd. 17/02/2009,to the assessee and directed it to explain as to why the capital gains arising on sale of shares of Apex should not be taxed in its hands as per the provisions of section 93 of the Act. He referred to the order passed by the Addl. DIT (IT)-Mumbai, dtd. 28/3/2008 passed u/s.201(1) and 201(1A) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me was applicable to the facts of the case, that the provisions of section 93(1) did not stipulate as to who had transferred the asset to whom and to whom the income had accrued, that section 93(1) stated that if as a result of transfer of asset income becomes payable to a non resident, then same has to be taxed in India. He further held that benefit of sub section-3 of section 93 were not available to the assessee, that it was the beneficiary from the sale of shares of IDEA held by Apex, that it had power to enjoy the income received by Apex, that Mauritius company had no substantial existence except for holding shares of IDEA, that it had no other business operations, that the income of Mauritius company in last few years was just a few hundreds of dollars, that expenses were incurred under the head audit fee, bank charges etc., that the assessee had argued that transfer of assets was bonafide and that it was an arm's length transaction between two unrelated parties, that it also contended that it was covered by exemptions provided in section 93 (3)(a) of the Act, that the exceptions of section 93 (3)(a) did not talk of bonafide or malafide of a transaction, that it only talked o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India that on 07/03/1995 AT&T Corporation had set up in Mauritius, 100% subsidiary namely AT&T Mauritius, that later on it was renamed as Apex, that on 19/05/1995 the entity received Tax Residency Certificate (TRC) from the Mauritius incomes Department, that in June, 2006 an agreement was entered into between Apex and Birla group for transfer of shares of Idea. He relied upon the cases of Azadi Bacho(263 ITR 706), Serco BPO(P)Ltd. (379 ITR 256), JSH Mauritius (84taxmann.com.37) Saraswati Holding Corporation (111 TTJ 334) and Vodafone International (326 ITR 276) and referred to stupidity circular number 333, dated 02/04/1982, CBDT circular 682 dtd. 30/03/1994, CBDT circular 789, dated 30/04/2000, Press release dated 01/03/2013. The DR supported the order of FAA and stated that facts of the case under appeal were identical to the case of M.CT.M Chidambaram Chettiar (supra), that capital gain arising to non-resident assessee was the deemed income of the assessee. He also referred to the provisions of section 160 and 163 of the Act and stated that income of the Mauritius entity was to be deemed to the income of the resident itself as per the provisions section 93, that provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asic question to be decided is as to whether provisions of section 93 are applicable to the sale of Idea shares by Apex to Birla Group. Section 93 of the Act is successor of section 44D of Indian Income tax,1922.The object of both the sections is clear from the title itself. The preamble of section talks of 'avoidance of income-tax by transactions resulting in transfer of income to non-residents'. The only and logical conclusion that can be drawn, from the above mentioned words, is that the object behind the sections (section 44D of 1922 Act and section 93 of the Act)is to prevent residents of India from evading the payment of by transferring their assets to non-residents while enjoying the income by adopting questionable methods. A close scrutiny of the sections reveals that for invoking its provisions following preconditions must exit: (a) there must be a transfer of assets; (b) by reason of such transfer, income arising from the said assets becomes payable to a non-resident(section 44 D of Indian Income tax also covered 'persons residents but not ordinarily residents' in its ambit besides the non-resident persons); (c) the resident by means of the transfer acquires a right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is entitled to engraft a deeming provision in a statute. While interpreting a deeming provision in a statute, the court has to give full effect to it by taking it to its logical conclusion by imagining as real and natural even the consequences flowing from an assumed situation or fact, unless such an interpretation would lead to absurd results." In the case of the Hon'ble Court has held that a deeming provision has to be applied like any other provision in an enactment, that while applying such a provision the court must not allow its imagination to boggle, and must apply the provision with all its necessary concepts. An analysis of the above referred judgments lead to the conclusion that when the law requires that a certain set of circumstances should be assumed for a given purpose, full effect should be given to that deeming provision and no other factor should be taken into consideration which would be inconsistent with the intendment of law. 8.6.4 As stated earlier, being a deeming provision, section 93 has to be strictly construed and has to be taken to its logical conclusion. It means that if the situation specified in the section exists, only then it will be applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 93 of the Act is concerned, we would like to mention that the treaty would prevail over the local act, as provided in section 90 (2) of the Act. We would like to refer to relevant portions of the judgment of the Azadi Bachao(supra)and same reads as under: The total income specified in sections 4 and 5 of the Income-tax Act, 1961, chargeable to income-tax is also subject to the provisions of an Agreement of the Central Government with the Government of a country outside India for avoidance of double taxation contemplated by section 90 to the contrary, if any. Such an Agreement operates as a bar on the power of the Government of India and the bar would operate on sections 4 and 5 . No provision of the Double Taxation Avoidance Agreement can possibly fasten a tax liability where the liability is not imposed by the Act. If a tax liability is imposed by the Act, the Agreement may be resorted to for negativing or reducing it ; and, in case of difference between the provisions of the Act and the Agreement, the provisions of the Agreement would prevail over the provisions of the Act and can be enforced by the appellate authorities and the court. Section 90 is specifically inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership of shares, is a circular within the meaning of section 90 , and, therefore, it must have the legal consequences contemplated by section 90(2) . In other words, the circular will prevail even if inconsistent with the provisions of the Income-tax Act, 1961, in so far as assessees covered by the provisions of the Convention are concerned. Circular No. 789 dated April 13, 2000,issued by the Central Board of Direct Taxes falls well within the parameters of the powers exercisable by the Central Board of Direct Taxes under section 119 . The Circular does not in any way crib, cabin or confine the powers of the Assessing Officers with regard to any particular assessment : it merely formulates broad guidelines to be applied in the matter of assessment of assessees covered by the provisions of the Indo-Mauritius Double Taxation Avoidance Convention, 1983. The test of liability for taxation is not to be determined on the basis of an exemption granted in respect of any particular source of income, but by taking into consideration the totality of the provisions of the income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntries tolerate or encourage "treaty shopping", even if it is unintended, improper or unjustified, for other non tax reasons, unless it leads to significant loss of tax revenue. The court cannot judge the legality of "treaty shopping" merely because one section of thought considers it improper. The court cannot characterise the act of incorporation under the Mauritian law as a sham or a device actuated by improper motives. If the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it is not permissible for the court to treat the intervening legal step as non est based upon some hypothetical assessment of the real motive of the assessee. An act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests. Considering the above, we are of the opinion that the FAA was not justified in confirming the order of the AO with regard to applicability of the provisions of section 93 of the Act. So, reversing hi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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