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2018 (3) TMI 810

ubsidiaries. In the instant case before us, advance was given to the wholly owned subsidiaries at an interest rate of 9%. No infirmity in the order of CIT(A) for deleting the disallowance of interest so made by the AO. - Disallowance u/s. 14A r.w.R. 8D(2)(iii) - Held that:- Since the assessee’s own funds were more than the investment no disallowance of interest is warranted under Rule 8D2(ii) of the IT Act. Accordingly, there is no infirmity in the order of CIT(A) for deleting the disallowance of interest u/s.14A. - No merit for the disallowance of corporate membership fees paid to be treated as revenue expenditure incurred for business purposes. - Disallowance made by AO under Rule 8D(2)(iii) - Held that:- Restore the matter back to the file of AO and direct the AO to recompute the disallowance after excluding the investment on which no exempt income has been earned as well as investment in subsidiary companies. - Reopening of assessment - allowing setting of speculation loss from trading in shares out of income from trading in commodities - Held that:- Since assessee was trading at un-recognised stock exchange, therefore, income arising out of trading of commodit .....

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of advisory and transactional services, trading / investment in securities and derivatives. During the course of scrutiny assessment for the A.Y.2007-08, AO disallowed claim of deduction of interest paid to the extent of differential rate in between the borrowings made from M/s. Lehman Brothers and the interest charged on the short term leading to wholly owned subsidiary companies amounting to ₹ 65,09,590/-. The A.O. has discussed this issue in detail in para 4 of the assessment order. The relevant portion of A.O.'s order is extracted herein below: - After analysis of Balance Sheet and fund flow, it emerges that the loan received from M/s.Lehman Brothers has been utilized for making loans to subsidiary companies. Admittedly, the rate of interest charged is lower than the rate of interest paid to M/s.Lehman Brothers. The assessee is engaged in the business of merchant banking and advisory services. The assessee has given large loans to such subsidiary companies. Therefore, it is evident that the main purpose of the loan taken from M/s.Lehman Brothers was to provide fund to subsidiary companies, which are operating in different fields, such as NBFCs, Insurance business etc. .....

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ance is called for merely for the reason that the 5 year term borrowings from Lehman Brothers have been utilized for giving loans to wholly owned subsidiary companies at a lower rate of interest. 8.3 In the circumstances the disallowance of claim of deduction of interest paid to the extent of the differential rate in between the borrowings made from Lehman Brothers and the interest charged on the short term lending to wholly owned subsidiary companies of Rs.65,09,590/- is deleted. Thus, the appellant this ground of appeal is allowed. 8. During the course of hearing before us, the learned AR has relied on the following judicial pronouncements in support of contention that no disallowance of interest is warranted in case of advance to subsidiary at concessional rate of interest or without interest Hero Cycle Pvt. Ltd vs CIT [379 ITR 347 SCI S-A. Builders Pvt. Ltd. Vs CIT [288 ITR 0001 SC] CIT vs Reliance Communication Infrastructure Limited [260 CTR 0159] ACIT vs Reliance Communication Infrastructure Limited [2009-TIOL-313 ITAT-Mum] CIT vs Dalmia Cement (Bharat) Limited [330 ITR 0595] ACIT vs Edicon Mining Equipment Pvt. Limited RTA 77S8/Mum/20101 ApnalQaa.com India Private Limited [ .....

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s of the assessee of the previous year. However, AO did not accept assessee s contention and computed disallowance under Rule 8D (2)(ii) & 2(iii). 13. By the impugned order, CIT(A) deleted disallowance of interest under Rule 8D(2)(ii) after observing as under:- 8.11 Before considering whether the AO has correctly computed the disallowance under Rule 8D, it would be worthwhile to consider the findings of the A.O. and the submissions made by the AR's. The AO, after recording his reasons for working out the disallowance under Rule 8D(2), has not determined any direct expenditure incurred in relation to the income which does not form part of the total income as per Rule 8D(2)(i). As regards Rule 8D(2)(ii), the AO has worked out the disallowance on account of gross interest debited to the Profit & Loss Account. From the findings recorded in the assessment order, it is seen that the AO has arrived at the satisfaction since the appellant did not furnish any documentary evidence or fund flow statement to prove the contention that the shares/mutual funds were not made out of borrowed funds. The AO in the circumstances held that it would be reasonable to conclude that the investm .....

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/facts from the appellants balance sheet, it is evident that the appellant company had source of own funds (share capital, share premium & profits) and borrowed funds (unsecured loans repayable on demand and short term deposits). The own funds are in excess of the investments made in shares & securities. Further, in the facts of appellant's case, the additional funds by way of demand loans and short term deposits were fo.* short term duration. Hence they cannot be said to have been deployed for the purposes of making investments during the year unless and until proximate relation/nexus is established by the A.O. that such investments have been sourced from the borrowings. Thus, it can be concluded that the borrowed funds have not been used for the purposes of investments in shares & securities. Besides this, the appellant company is engaged in the business of investment banking and financing. Hence, on the basis of the Jurisdictional High Court decision in the case of CIT v Reliance Utilities and Power Ltd. [supra] it is held that the appellant company must have made investments out of its own funds rather than from borrowed funds and hence the interest expenditure .....

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CIT v Reliance Utilities and Power Ltd. [supra], the appellants AR further argued that the onus is on the AO to establish that the investments in shares and securities are sourced from the appellants borrowed fund and in the absence of such determination of such nexus, it would be incorrect to draw a presumption that the investments in tax free securities/shares have been made out of a common pool of funds in proportion to the borrowed funds and the own funds. I find that the Hon'ble Delhi ITAT have held in the case of Maharashtra Seamless Ltd. (supra) and Jindal Photo Ltd. (supra), that it is the duty on the part of the A.O. to prove that the specific claim of the interest expenditure of the appellant company is not related to business expenditure and after this decision only the A.O. can make the disallowance under Rule 8D(2)(ii) r.w.s. 14A of the Act. The issue hence, in the facts of appellants case, is whether the onus is on the appellant to establish that the investments in shares & securities are sourced from its own funds; and whether merely because the source of funds were mixed funds (own funds and borrowed funds) and it was difficult to establish that the own fund .....

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ng any disallowance u/s. 14A of the Act In Maruti Udyog v DCIT 92 ITD 119 (Del), it has been held that before making any disallowance u/s. 14A of the Act, the onus to establish the nexus of the same with exempt income, is on the revenue. In Wimco Seedlings Limited v DCIT 107 ITD 267 (Del)(TM) it has been held that there can be no presumption that the assessee must have incurred expenditure to earn tax free income. Similar are the decisions in i. Punjab National Bank v DCIT 1'03 TTJ 908 (Del) ii. Vidyut Investments Ltd. 10 SOT 284 (Del); and iii. D.J. Mehta v ITO 290IR 238 (Mum)(AT) In the case DCIT v Maharashtra Seamless Ltd. (Del) (ITA No. 4063/Del/2006) it was decided by the Hon'ble of ITAT as under: 7. We have heard the parties and have perused the material on record. The Id. CIT(A), while determining the disallowance, has observed, that the assesses had maintained that the interest expenditure in question was incurred in respect of the borrowings on cash credit limits utilized for normal business purposes of the assesses; that no part of the borrowed funds had been utilized by the assessee for making investments in the tax free bonds; that Rs,17 crores has been invested .....

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aid is in the negative (i.e. the gross interest received is in excess of interest paid). Once the netting of interest is done, there would be no disallowance u/r.8D(2)(ii) of the IT rules. While coming to the conclusion, I am fortified by the converse principle laid down in the case of Reliance Utilities (supra). In the case of the appellant, the interest paid on borrowing are presumed to be on the utilization of borrowed fund for the purpose of business carried on by the appellant i.e. investment banking and financing. In the facts of the appellant's case, the appellant during the year had sufficient own funds to explain the source of the additional investment made during the year. It is also a fact that the appellant had obtained funds by issuance of securities and borrowing. Thus, the assessee has a mixed set of own funds and borrowed funds. Neither the assessee nor the A.O. has established any nexus in between the borrowed fund and the investment made. In these circumstances, the principles laid down by the Hon'ble Bombay High Court become squarely applicable. For the aforesaid reasons, I find it appropriate to hold that the provisions of Rule 8D(2)(ii) are not applicab .....

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facts of appellants case, the entire interest expenditure has been claimed to be allowed as deduction u/s.36(1)(iii) of the Act. Thus, in the facts of the appellant's case, there can be no denial of the fact that the interest paid on borrowings are directly attributable to the income assessable under the Act. In these facts, and having regard to. the principle laid down by the Hon:ble Jurisdictional High Court in the case of Reliance Utilities (supra), it is held that the entire interest expenditure is directly attributable to business income, which has been duly taxed by the A.O. Hence no disallowance under Rule 8D(2)(ii) can be made as the interest expenditure incurred by the appellant company is an allowable expenditure u/s.36(1 )(iii) of the Act as business expenditure. , 8.19 In summation and in view of the discussion hereinabove, it is held that the disallowance computed by the A.O. under Rule 8D(2)(ii) is incorrect and not justified in aforestated facts in case of appellant company. The entire interest expenditure is directly attributable to the income or receipts chargeable to tax under the head 'Income from Business or Profession1 as it is evident from appellant .....

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more than the investment, in view of the decision of Jurisdictional High Court in case of HDFC Bank Ltd., and Reliance Utilities and Power Limited, no disallowance of interest is warranted under Rule 8D2(ii) of the IT Act. Accordingly, there is no infirmity in the order of CIT(A) for deleting the disallowance of interest u/s.14A. 20. Ground No.3 of Revenue s appeal are same as discussed by us in the Assessment Year 2007-08, following the reasoning given hereinabove, we do not find any infirmity in the order of CIT(A) for deleting disallowance of difference of interest u/s.36(1)(iii). We direct accordingly. 21. In the Assessment Year 2008-09, in the appeal filed by assessee, ground has been taken with regard to disallowance made by AO u/s.14A r.w.R 8D(2)(iii). The AO has discussed the issue at para 5.5 to 5.21 and page No.13-18. The CIT(A) has discussed the issue at para 8.6 to 8.23 at pages 23-38. It was argued by learned AR that in view of the decision of the Tribunal in the group concern M/s. Edelweiss Financial Services Ltd., in ITA No.6610/Mum/2011 disallowance should be restricted to 5% of the exempt income. He further contended that investment in subsidiaries company have to .....

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Capgemini Business Services (India) Ltd [ITA 7779/Mum/2011] SAB Miller India Limited [ITA 7123/Mum/2012] DClTvs HJnduja Global Solution Limited [ITA 1107/Mum/20I4 Clariant Chemicals (I) Ltd vs Addll CIT [ITA 4281/Mum/201 1] ITO vs Idea Cellular Ltd [ITA 3568/Mum/2008] 28. Respectfully following the proposition of law laid down by the Hon ble Supreme Court and the Mumbai Tribunal narrated above, we do not find any merit for the disallowance of corporate membership fees paid to be treated as revenue expenditure incurred for business purposes. 29. In the appeal filed by revenue, the revenue is aggrieved for deleting disallowance made by AO under Rule 8D(2)(ii). The CIT(A) has deleted the disallowance after recording detailed finding at para 2.1 to 2.4 at page 1&2. The CIT(A) has followed his decision for the A.Y.2008-09 dated 07/07/2011, wherein at para 8.18 page 33, it was held that assessee s own funds were invested in the securities, therefore, no disallowance is warranted. 30. We have considered rival contentions and found that assessee s own funds in the form of share capital and reserves were ₹ 13,54,82,54,318/-However, investment by the assessee was ₹ 12,49,72, .....

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.Y.2008-09, we restore the matter back to the file of AO and direct the AO to recompute the disallowance after excluding the investment on which no exempt income has been earned as well as investment in subsidiary companies. We direct accordingly. ITA No.315/Mum/2017(A.Y.2009-10) 37. This is an appeal filed by the revenue against the order of CIT(A) for the A.Y.2009-10, in the matter of order passed u/s.143(3) r.w.s. 147 of the IT Act. 38. In this appeal, Revenue is aggrieved for allowing setting of speculation loss from trading in shares out of income from trading in commodities. 39. Rival contentions have been heard and record perused. The brief facts of the case are that after assessment was completed u/s.143(3), the assessee's case was reopened u/s 147 of the Act vide notice dated 27.03.2014 issued u/s 148 of the Act. The AO has declined netting of speculative loss against the income of commodity trading. 40. By the impugned order, CIT(A) allowed set off of income from commodity trading, against speculation loss incurred by the assessee, after having the following observation:- 6.3.7 On perusal of all the above facts narrated above, it can be concluded that ground no. 2 of .....

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trading and which was not on the recognized stock exchange and once this is the fact then the income earned so by the appellant cannot be treated as normal income within the purview of Section 43(5)(d) of the I.T.Act, 1961. The AO has not disproved that the commodity trading income was not out of unrecognized commodity exchange market and as long as when the appellant earned out of unrecognized commodity exchange, the income or loss out of transaction on such unrecognized exchange will remain speculative in nature- the amendment in Sec 43(5)(d) was only to provide benefit to the assessees to treat their losses as non speculative only when such losses were incurred while trading on any recognized stock exchange and not otherwise. This benevolent provisions itself cannot be used against appellant by misinterpreting the same. Further reference can be made to the decision of Hon'ble Delhi High Court in the case of DLF Commercials (2013) 218 Taxman 45 (Delhi), where it has been held as under: - The term 'speculative transaction' has been defined only in section 43(5). At the same time, it is qualified that the scope of the definition is restricted in its application to work .....

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[Para 10] The stated objective of section 73 apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Explanation to section 73 has been enacted to clarify beyond any shadow of doubt that share business of certain types or classes of companies are deemed to be speculative. That in another part of the statute, which deals with computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such exclusion is limited for the purpose of those provisions or sections. In the instant case, by all accounts the derivatives are based on stocks and shares, which fall squarely within the Explanation to section 73. Therefore, it is idle to contend that derivatives do not fall within that provision. [Para 11] Therefore, the order passed by the Tribunal was not justified. [Para 12] To sum up, it is concluded that in so far as the action of the AO with regard to reopening of the case u/s.147 is concerned, the IT Act gives enough scope to give jurisdiction to the AO to reopen the case. Therefore, this part of the action of the AO is to be treated as upheld. However, the later part .....

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at during the financial year 2008-09 relevant to present assessment year 2009-10, which is under consideration, the exchanges were not recognized. Hence, in the light of High Courts decision in the case of Bharat Ruia (supra) and DLF Commercials (supra), I am of the considered view that the transaction in commodities is speculative transaction; thus, the Appellant has correctly set off the speculation loss against such income from the commodity trading. Therefore, the action of the AO in treating the income of Rs. 16,07,83,147/- from commodity trading as non-speculation income is quashed and the AO is directed to delete the amount of ₹ 16,07,83,147/-. In the result, this ground of appeal is Allowed. 41. Rival contentions have been heard and record perused. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders. From the record, we found that assessee was carrying out business of commodity trading on un-recognised exchange and also business of trading in shares. Assessee has claimed set off of loss arising out of trading in shares against the income arising out of trading in commodities. The AO declined set off on the pl .....

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ar 2010-11 (ITA No.4652/Mum/2014) 45. Ground taken by revenue with regard to deleting disallowance u/s.36(1)(iii) of the IT Act. Following the reasoning given in the A.Y.2007-08, we do not find any infirmity in the order of CIT(A) for deleting disallowance made u/s.36(1)(iii). 46. With regard to disallowance under Rule 8D(2)(ii), we found that assessee s own funds were to the extent of ₹ 13,082,410,000/-. However, investment was to the tune of ₹ 11,536,050,000/-. Thus there was excess own fund of ₹ 1,546,360,000/-. A clear finding to this effect has been recorded by CIT(A) in his appellate order. 47. It is clear from the above that there was an excess own fund of ₹ 1,546,360,000/-. Accordingly, no disallowance is warranted in view of the decision of Jurisdictional High court in case of HDFC Bank Ltd., and Reliance Utilities and Power Ltd., Respectfully following these decisions, we confirm the finding of CIT(A) for deleting disallowance under Rule 8D(2)(ii) of the IT Act. 48. Assessee is aggrieved for disallowance upheld by CIT(A) under Rule 8D(2)(iii). Following the reasoning given in the A.Y.2008-09, we restore the matter back to the file of AO and direct .....

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