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DCIT, Circle-11 (1) , Kolkata Versus M/s Development Constultant Pvt. Ltd. And Vice-Versa

2018 (1) TMI 586 - ITAT KOLKATA

Addition u/s 14A r.w.s. Rule 8D - investment in subsidiary company from which the dividend income was earned - Held that:- No disallowance of interest expense claimed by the assessee can be made under the provision of Section 14A of the Act r.w.r 8D of IT Rules. Now coming to the disallowance made by the AO in respect of administrative expense we note that the investment which have given rise to the dividend income during the year can only be considered for the purpose of disallowance under Rule .....

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ed the dividend income during the year. - We also find that the assessee has made investment in subsidiary company from which the dividend income was earned by it during the year. In this regard, we observed that the assessee has made strategic investment in its subsidiary company to control the interest in the company and not with the object to earn dividend income. The dividend income is merely incidental from the subsidiary company. Therefore no disallowance of whatsoever can be made in r .....

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nts made in the non-subsidiary company which have yielded dividend income can only be considered for the purpose of the disallowance under section 14A r.w.r. 8D(2)(iii) of Income Tax Rules 1962. Thus the appeal filed by Revenue is partly allowed. Accordingly, AO is directed. - ITA No.213/Kol/2016 And C.O. No.21/Kol/2016 - Dated:- 6-12-2017 - Shri Waseem Ahmed, Accountant Member And S. S. Viswanethra Ravi, Judicial Member For The Assessee : Shri Anup Biswas, FCA For The Respondent : Shri Arindam .....

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behalf of Revenue and Shri Anup Biswas, Ld. Authorized Representative appeared on behalf of assessee. First we take up Revenue s appeal in ITA No.213/Kol/2016. 2. Solitary issue raised by Revenue in its appeal is that Ld. CIT(A) erred in deleting the addition made by the Assessing Officer for ₹78,94,597/- only for the expenses u/s 14A r.w.s. Rule 8D of the IT Rules, 1962. 3. Briefly stated facts are that assessee is a private limited company and engaged in activity of consultancy engineer .....

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s per the order of appellate authority. However, the AO observed certain facts and deficiency with the amount of disallowance made by the assessee in respect of dividend income as detailed under:- a) Assessee has disallowed suo motu expenses in relation to dividend income which implies that the assessee has incurred the expenses in the connection of dividend income. b) There was no justification filed by the assessee for making the disallowance @ 10% of the dividend income. The claim of the asse .....

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reference was made by the assessee. Thus, the disallowance offered @ 10% u/s 14A of the Act does not justify the amount of disallowance. In view of above, the Assessing Officer invoked the provision of Rule 8D r.w.s 14A of the Act and made the disallowance as under:- i) Direct expenses nil ii) Interest expense ₹ 76,78,824 iii) Administrative expense ₹ 2,15,773 Rs.78,94,597 iv) Amount already disallowed ₹ 3,37,336 v) Total disallowance Rs.75,57,261 The AO made the disallowance .....

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ount of investment of ₹29.30 lacs made during the year in mutual fund; 3) No part of borrowed fund was utilized in the impugned investment. Moreover, the loan funds are representing the term loan, cash credit and short term loan which were exclusively used for the purpose of business. Therefore the consideration of interest expenditure for ₹307,15,295/- for the purpose of disallowance u/s 14A of the Act is not justifiable. 4) The own fund of assessee is exceeding more than the invest .....

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rise to the dividend income during the year should only to be considered for the purpose of disallowance u/s. 14A of the Act. 7) The AO erred in considering the net current asset instead of total of the balance-sheet while making disallowance u/s.14A of the Act Ld. The ld. CIT(A) after considering the submission of the assessee deleted the addition made by the AO after having reliance on the order of Ld. CIT(A) for the preceding Assessment Year 2010-11 which reads as under:- 4.2 I have consider .....

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ted that no cogent reasons were recorded by the AO for regarding or rejecting the calculation of the appellant. Although the AO has held that Rule 8D is applicable in the relevant AY 2008-09, but he has not recorded any satisfaction nor has pointed out specific infirmity in the claim of the appellant. Section 14 clearly lays down that the AO has to record objective satisfaction in respect of the disallowance offered by the assessee having regard to its books of accounts. The AO has not considere .....

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From the audited accounts it is apparent that the average cost of investments during the relevant year was ₹446.35 lacs whereas the appellant s net owned funds in the form of share capital & reserves wee ₹3068.86 las. As such it is apparent that the assessee s net owned funds both at the beginning and at the closing of the relevant year were substantially higher than the cost of investments. It is also apparent that the unsecured loans have been repaid and there are no unsecured .....

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sponded to the secured loan amounts. In the circumstances in absence of any finding on Assessing Officer's part substantiating diversion of fund, one has to accept that secured loans were utilized only for specified purposes and not utilized for acquiring investments. I also find that the investments as at the end of the relevant year were substantially brought forward from the earlier years and in the earlier years disallowance was not made by establishing any correlation between use of bor .....

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he assessee s net own funds substantially exceeded the cost of investments and the AO not having established any proximate cause between use of secured loans and acquiring investments, disallowance was not justified simply on presumption. For the reasons set out in the foregoing, therefore, I do not find merit in the AO's action of disallowing interest of ₹9,66,502/- and the same is directed to be deleted. 4.4 Similarly the AO disallowed 0.5% of the average investments by invoking Rule .....

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inistrative expenses incurred for accounting of the expenses, the appellant had disallowed ₹1,46,866/-. Moreover no disallowance out of administrative expenses was permissible where the investments were made in subsidiaries for strategic but purposes. These investments were made with business motive and not to earn dividend income. The Delhi High Court in the case of Oriental Structure Engineers Pvt. Ltd. (216 taxmann 92) has held that where the assessee had made investments in shares of s .....

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he income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. In the circumstances only the expenses incurred in relation to investments which yielded exempt income amounting to ₹51.66 lacs, that the expenses could have been disallowed u/s.14A. On the contrary I find that the assessee itself had suo moto disallowed expenses of ₹1,46,868/-. S .....

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er book which is running from pages 1 to 84 and stated that own capital of assessee exceeds the amount of investment. Therefore no disallowance of interest expense can be made under Rule 8D(2)(ii) of the IT Rules, 1962. He cited case law of Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. reported in (2009) 313 ITR 340 (Bom) and CIT vs. HDFC Bank Ltd. Income Tax Appeal No. 330 of 2012 dated 23.07.2014. Ld.AR further submitted that the disallowance towards ad .....

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s Pvt. Ltd. 14,39,940 Kontest Chemicals 15,66,900 30,06,840 30,06,840 (ii) Non-subsidiary company Investech Securities Pvt. Ltd. 50,400 50,400 50,400 Total 30,57,240 In this regard, Ld. AR has relied on the order of Chennai Tribunal in the case of EIH Associated Hotels Ltd. vs. DCIT in ITA No.1503 & 1624/Mds/2012 dated 17.07.2013 for the assessment year 2008-09. Lastly, Ld. AR relied on the order of Ld. CIT(A). 6. We have heard the rival contentions of both the parties and perused and carefu .....

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33,73,356.00 Less: Deduct estimated expenditure @ 10% As per CIT(A) order 3,37,335.00 Total [see note below] 30,36,020.00 Note: dividend not eligible for exemption would be ₹ 9,85,646/- instead of ₹ 6,69,630/- mentioned above and consequently the dividend eligible for exemption would be ₹ 30,57,240/- [40,42,886 - 9,85,646] as against claim of exemption of ₹ 30,36,020/- in the return. This is because the contention of the appellant that no expenditure has been incurred in .....

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as follows: Own fund Rs. In lakhs Share capital - opening 120.00 Reserve & suurplus-opening 1780.29 1900.29 Deduct: Revaluation reserve-opening 690.33 Own fund at the beginning of the year 1209.96 Add: Profit of F.Y 2007-08 after tax 558.14 (A) 1768.10 Investments Total investment at the beginning of the year 416.75 Less: Total investment at the end of the year 446.35 Investment made during the year (B) 29.60 Net owned fund position as on 31.03.08 (C) [A-B] 1738.50 Submission: 1. Investment .....

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n holding so, we draw our support and guidance from the judgment of Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (supra) wherein it was held as under:- The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments .....

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nt made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A. In view of above proposition, we hold that no disallowance of interest expense claimed by the assessee can be made under the provision of Section14A of the Act r.w.r 8D of IT Rules. Now coming to the disallowance made by the AO in respect of administrative expense we note that the investment which have given rise to the dividend income during the year can only be con .....

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e yielded dividend income in the year under consideration. Therefore we direct the AO to make the disallowance under rule 8D after considering the investments which have yielded the dividend income during the year. 7. We also find that the assessee has made investment in subsidiary company from which the dividend income was earned by it during the year. In this regard, we observed that the assessee has made strategic investment in its subsidiary company to control the interest in the company and .....

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he strategic investment. The relevant extract of the order reads as under:- 141. We have considered the aforesaid submissions of the learned counsel for the computing the disallowance under section 14A of the Act read with rule 8D(2)(ii) and (iii) of the Rules, the Assessing Officer while adopting the average value of during the previous year. Similarly, in computing the disallowance under section 14A of the Act read with rule 8D(2)(ii) and (iii) of the Rules, the Assessing Officer while strateg .....

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ve, we hold that the investments made in the non-subsidiary company which have yielded dividend income can only be considered for the purpose of the disallowance under section 14A r.w.r. 8D(2)(iii) of Income Tax Rules 1962. Thus the appeal filed by Revenue is partly allowed. Accordingly, AO is directed. Coming to assessee s CO No.21/Kol/2016. 8. As far as CO filed by assessee is concerned, the first aspect to be considered is the condonation of 16 days delay in filing the CO which is explained a .....

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