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DCIT, Circle 8 (1) , New Delhi Versus M/s SIL Investment Ltd. And Vice-Versa

2017 (12) TMI 360 - ITAT DELHI

Addition u/s 14A r.w.r.8D - Held that:- For assessment year 2010-11 this Tribunal in assessee’s own case has set aside the issue to the assessing officer to compute the disallowance under rule 8D (2) (iii) at the rate of 0.5% of investments which actually have resulted in the exempt dividend income and rather than 0.5% of the average total investment. Following the rule of consistency we are also inclined to set aside this issue back to the file of Ld. AO for recomputing the disallowance under r .....

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and Cross Objection filed by assessee has been filed against order dated 24/07/14 passed by Ld. CIT (A)-11, New Delhi for assessment year 2011-12 on the following grounds of appeal: ITA No. 5242/del/2014 That the Ld.CIT(A) has erred in deleting disallowance made by AO amounting to ₹ 4,87,35,014/- under Rule 8D(2)(ii) of I.T. Rules read with Section 14A of the I.T. Act, 1961. The appellant craves leave to amend, modify, alter, add or forego any grounds of appeal at any time before or during .....

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the return of income. 1.2. That the CIT(A) failed to appreciate that in the absence of satisfaction being recorded by the AO u/s 14A(2) of the Act, Rule 8D of the Rules had no application. 1.3. That the CIT(A) erred on facts and in holding that satisfaction in terms of 14A(2) of the Act could also be recorded by the CIT(A). 1.4. That the CIT(A) erred on facts and in holding that the basis/formula adopted by the appellant for making disallowance out of administrative expenses was not reasonable/ .....

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(1) of the Act was issued. In response to the above notices representatives of assessee appeared and filed details/documents as called for. 2.1. Ld. AO during the assessment proceedings observed that assessee has claimed exempt income of ₹ 7,92,83,324/-being dividend on long-term investment and current investment. During the course of assessment proceedings, assessee was specifically asked as to why Rule 8D be not applied, in working out disallowance to be made under section 14A. Assessee .....

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6/-, after giving credit to the suo moto disallowance made by assessee. 3. Aggrieved by the order of Ld. AO, assessee preferred appeal before Ld. CIT(A). 4. Ld.CIT(A) observed that, difference of opinion regarding the attributability of interest expense in respect of the tax-free dividend income has caused the disallowance under section 14 A by Ld. AO. It was observed by Ld. CIT(A) that assessing officer attributed interest amounting to ₹ 8,59,56,292/-being the entire interest expenses deb .....

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ests and their destination to different corporate entities at a slightly higher rate of interest on the basis of the details furnished, the bank accounts through which these funds have travelled. Ld. CIT (A) was of opinion that assessee had established nexus of interest expenses with its main activity of financing and there was not a single amount of interest bearing borrowings which could be related to the investment which yielded tax free dividend income. 4.1. It has been further observed by L .....

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eliance on his own order for assessment year 2010-11 in assessee s own case, where no disallowance under rule 8D (2) (ii) was called for. 4.2. The Ld.CIT(A) however confirmed addition amounting to ₹ 61,73,967/-made by Ld.AO under rule 8D (2) (iii) of the Act. 4.3. Aggrieved by the order of Ld. CIT (A) both revenue as well as assessee are in cross appeals before us. 4.4. We shall first deal with appeal filed by Revenue. 5. Ld. DR places reliance upon the assessment order in support of his a .....

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r making any investments in the relevant assessment year no part of the borrowings of the assessee could be said to have any nexus whatsoever with the investment which are actually carried forward from the preceding assessment year. 6.1. Ld. AR referred to page 47, 48, 49 of paper book wherein, details of income credited to the profit and loss account, details of loan taken and details of secured loan taken during the year and repaid during the year and its application, has been recorded being p .....

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ate loans or for repayment of existing loans only and therefore the same had no nexus with the investments held by assessee during the relevant assessment year. 6.2. Ld. AR submitted that the one-to-one nexus of such additional borrowings with inter corporate loans granted or repaid during the relevant assessment year is demonstrated before the Ld. CIT (A). For the sake of convenience the submissions made by assessee before Ld. CIT (A) at pages 5 and 6 of Ld.CIT(A) s order is reproduced herewith .....

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nter corporate loans or for repayment of existing loans. The additional borrowings of ₹ 45 crores apx. were also, it is respectfully submitted, utilised in the relevant Assessment Year for granting inter corporate loans or for repayment of existing loans only and therefore, the same had no nexus with the investments held by appellant during the relevant assessment year. The one to one nexus of such additional borrowings with inter corporate loans granted or repaid during the relevant Asses .....

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105.42 crores is as under. Name of the party from whom loan taken Amount of loan (Rs. In crores) Rate of interest Utilisation of amount of loan L&T Finance Ltd. 20 10.5% Carried forward from preceding AY L&T Finance Ltd. 20 10.10% Utilised for granting loan to RTM Investment & Trading Co.Ltd. at interest rate of 14% and 13% p.a. Bajaj Auto Finance Ltd. 10 10.5% Carried forward from preceding AY Tata Capital Ltd. 15 11.99% Carried forward from preceding AY Tata Capital Ltd. 20 11.5% .....

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loan as follows. * Repayment of ₹ 15 crores to Aditya Birla Finance Ltd. * Loan of ₹ 5 crores to SCM Investment & Trading Co.Ltd. at interest rate of 14% and 13% p.a. Total 105 On careful perusal of the aforesaid facts of the case, it would be appreciated that no part of the borrowings were utilsied for making investment, on the contrary the borrowed funds were utilised for giving interest bearing advances/loans, resulting in taxable income in the hands of the appellant. In view .....

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sions advanced by both the sides in the light of the records placed before us. 7.1. It is observed that assessee has demonstrated complete flow of funds from its borrowing at a lower interest rate to the granting of intercorporate loans at a higher rate of interest and therefore the nexus of interest expenses with the Finance activity has been substantiated for the year under consideration. 7.2. Assessee has demonstrated at page 49 the details of secured loans taken during the year under conside .....

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ndustries Ltd. Funds remain with us for payment of interest etc. 500 900 550 50 3. L&T Finance Ltd. 2000 RTM Investment & Trading Co.Ltd. 2000 Total: 6000 Total: 6000 7.3. A joint reading of the above table along with the details of loan taken/repaid during the year at page 48 proves to explain that not a single amount of interest-bearing borrowings could be related to investments which yielded tax free dividend income for the year under consideration. 7.4. In the preceding assessment ye .....

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lding tax free income. 18. In our opinion, the findings of Learned Commissioner of income tax (appeals) on the issue in dispute is well reasoned and no interference is required on our side. Further, assessing officer in the assessment year 2009-10, has also accepted the fact of having no nexus between the borrowed funds and the investment in assets yielding tax free income and accordingly has not made any disallowance under rule 8D (2) (ii) of the act. Thus, the rule of consistency also demand t .....

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Accordingly the ground raised by the revenue stands dismissed. 8. In the result appeal filed by the revenue stands dismissed. CO No. 142/del/50 9. The cross objection filed by assessee is against addition made by Ld. AO under rule 8D (2) (iii) of the Act. Ground No.1 10. Ld. AR submitted that the disallowance under rule 8D (2) (iii) of the Act may be restricted to 0.5% of investment, which actually have resulted in dividend income. He further submitted that assessing officer himself has observed .....

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ncial results in mind, now, the AO s computation of disallowance u/s 14A is analysed, as under. (a) The AO has observed that there are no directly attributable expenses in respect of tax free dividend income. The appellant has also reiterated the same. Therefore, as far as disallowance u/s 14A of the Act read with Rule 8D(2)(i) of the I.T.Rules is concerned, the same has been rightfully accepted as NIL. (b) There has been a difference of opinion regarding the attributability of interest expenses .....

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st income and payment of interest as debited in the profit and loss account. The appellant has established that the activity of financing from which major portion of income amounting to ₹ 11.93 crores has been earned, the same has been earned through differential rate of interest in borrowing on which the interest amounting to ₹ 10.61 crores has been paid and advancing the same at a slightly higher rate of interest to the corporate entities, including its group companies. The appella .....

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ount of interest bearing borrowings-which could be related to the investments which yielded tax-free dividend income. On the other hand, the AO has not established any nexus of the interest bearing borrowings and consequent interest expenses with the investments resulting into tax-free dividend income. Similar issue has arisen in the appellant's own case in the AY 2006-07, wherein although Rule 8D was not into existence, but no such attributability of interest expenditure relating to tax fre .....

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Now, evidently, the AO did not establish any such nexus between the expenditure incurred and the exempt income earned by the assessee company. Even the CIT(A), though he restricted the disallowance from ₹ 47,33,200/- to ₹ 16,54,531/- did not establish any such nexus and it was merely observed that this amount related to the investment activity of the assessee company, without clarifying as to how it was found to be so. In appellant s own case for Assessment Year 2009-10 also, no suc .....

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