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TMI Blog2016 (5) TMI 1464X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs..2,50,60,000/- under section 115JB of the Act. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Act was duly served upon the assessee on 05.09.2011. The assessee in the computation has also claimed set off of brought forwarded loss of assessment year 2008-09 and had shown only nil income under normal provisions. After hearing the AR of the assessee and considering the details filed by the assessee, the Assessing Officer has completed the assessment under section 143(3) of the Act by assessing total income of the assessee at Rs..4,15,65,050/- after making various disallowances/additions. 3. On appeal, after considering the submissions of the assessee and also considering the facts of the case, the ld. CIT(A) partly allowed the appeal filed by the assessee. 4. On being aggrieved, the assessee is in appeal before the Tribunal. With regard to the confirmation of disallowance made under section 35D of the Act, the ld. Counsel for the assessee has strongly contended that film production, film processing activities is an industrial undertaking and therefore, the expenditure incurred in connection with the issue of shares is eligible for deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or operation. In the present case, the assessee is expanding its existing business and therefore the question of any deduction under section 35D of the Act would arise only if the said expansion is completed in the relevant assessment year. The fact as informed by the assessee vide its letter dated 26.03.2013 that the expansion is yet to be completed and the theatres are expected to commence operations in the financial year ended 2014. Further, the Assessing Officer has observed that the assessee has stated to have granted advances of Rs..341 crores as on 31.03.2013 i.e. subsequent to the balance sheet date of 31.03.2010 relevant for the assessment year 2010-11. Therefore, the Assessing Officer has held that the deduction under section 35D of the Act is not allowable in this year in which as per assessee's own version, the expansion is not completed. 6.2 Further, the assessee has claimed expenditure relating to issue of preference shares of about Rs..7.93 crores. The Assessing Officer has observed that the expenses incurred by the assessee are not related to any public issue. It is for the issue of preference shares and any expenses thereof, in the first place would not qualif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant assessment year only if the extension of the unit is completed. Therefore, the Assessing Officer has held that the assessee is not entitled to claim any deduction under section 35D of the Act and disallowed Rs..1,58,64,973/-. 7. After considering the written submissions of the assessee and by following the decision in the case of Nirma Industries Ltd. v. ACIT 95 ITD 199, wherein it was held that setting up of new industrial undertaking was to be amortized and deduction under section 35D would be allowed to the assessee in the year in which the industrial undertaking commenced production or operation, in our considered opinion, the ld. CIT(A) has rightly held that since the expansion was not completed during the relevant accounting period, the assessee is not entitled for deduction under section 35D of the Act. With regard to expenses incurred for issuance of preference shares of about Rs..7.93 crores, the ld. CIT(A) has observed that the allowability of expenditure incurred in connection with issue of public subscription of shares in the company is to be seen under section 35D(2)(c)(iv) of the Act. The said sub-clause is qualified with the words "being underwriting commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stments as appearing on 31.03.2010 are in shares including an offshore company for Rs..10,21,20,000/- and in partnership firms to the extent of Rs..246,00,54,354/-. The increase in the capital of firms and also the investment in shares during the year show that they were made with the active involvement of the management and executives. Further, the Assessing Officer has observed that the assessee has also incurred interest expenditure and financial charges of Rs..1,74,21,664/- during the year. The share of profits from the firms are exempt in the hands of the assessee company and the investment in shares also would give the assessee income which is not includible in the total income. The interest expenditure, management cost, etc. would have a portion attributable to the investment, which give raise to income which is exempt. However, the assessee has not made any disallowance under section 14A of the Act relating to any expenditure incurred for increasing/sustaining the investment which had or would result in an income by way of dividend, profit from firm, etc. which would not be forming part of the total income of the assessee. Further, the assessee incurs routine expenditure to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w. Rule 8D. 8.3 On appeal, after considering the submissions of the assessee as well as by considering various decisions, the ld. CIT(A) confirmed the addition made by the Assessing Officer. 8.4 Aggrieved, the assessee is in appeal before the Tribunal and the ld. Counsel for the assessee has reiterated the submissions as made before the authorities below. On the other hand, the ld. DR strongly supported the orders of authorities below. 8.5 We have heard both sides, perused the materials on record and gone through the orders of authorities below. The Assessing Officer by invoking the provisions of section 14A of the Act and by applying the provisions of Rule 8D, computed the disallowance since the assessee has not disclosed any expenditure incurred for earning of exempt income, where the establishment and administration expenses are attributed to the investments made by the assessee. While considering the facts of the case and by following various decisions, the ld. CIT(A) has observed and held as under: "8.4 The Decision: Section 14A was inserted by the Finance Act, 2001 with retrospective effect from 1-4-1962 and the legislative intent was given in explanatory memorandum issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or restricted manner. As per the Bench if such a wider meaning is given, the said expression would encompass not only the direct or proximate expenditure incurred for the purpose of making or earning exempt income, but it would also include all other expenses attributable or in relation to exempt income. In other words, it would signify or imply both direct and indirect relationship between expenditure and exempt income. 8.4.4 Actual earning of Exempted income is immaterial: Whether actual earning of income is not sine qua non for deciding deduction of expenditure laid out or expended wholly or exclusively for purpose of earning such income - Held as yes. Whether, therefore, where investment had been made in shares, which did not yield any dividend in year under consideration, expenditure incurred for earning income was deductible notwithstanding fact that no such income had been earned - Held, yes. In the case Technopak Advisors (P.) Ltd [2012] 50 SOT 31 (Delhi) it is held: "Section 14A(1) speaks about disallowance of expenditure incurred in relation to income which does not form part of the total income. The first argument of the learned counsel is that only those investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in sections 15 to 59, cannot be allowed against other income which is includable in the total income for the purpose of chargeability to tax." [Para 25]. 8.4.6 In Relaxo footwears ltd. V. Addl. CIT (2012) 50 sot 102 (Delhi), it is held that section 14A can be invoked even in the absence of exempt income. It is held: "The first question is-whether in absence of income which is not includible in the total income, the provision contained in section 14A can be invoked. None of the parties has cited any case before us. Therefore, the issue is to be decided on the basis of statutory language and general principles of interpretation of law. Subsection (1) of section 14A contains a provision to the effect that for the purpose of computing the total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. The factual position in this case is that no such income is statedly earned in this year although interest on NSCs has accrued as per the terms and conditions. Other investments may not have yielded income in this year but are capable of yielding' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n it came to disallowance of the same expenditure under section 14A. Now since dividend was exempt, as a consequence thereof expenditure had to be disallowed." [Para 22] 8.4.8 Statutory presumption substitutes the requirement of factual Evidence: In the case of M/s. Lakshmi Ring Travellers, ITA No.2083(Mds)/2011 Assessment Year: 2008-09. the ITAT held: "We considered the arguments of both the sides in detail. Sec.14A(l) declares the law that the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act shall not be allowed as a deduction in computing the taxable income of the assessee. Sec. 14A(2) provides for determining the quantum of such expenditure which shall not be allowed as a deduction. That is the machinery provision as far as sec.14A is concerned. In that provision, it has been provided that if the Assessing Officer is not satisfied with the correctness of the computations made by an assessee, he shall compute the quantum in accordance with the method that may be prescribed. For this matter, Rule 8D has already been prescribed. Sub-sec.(3} further provides that even in a case where an assessee claims t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me in view of the provisions of section 10(33) of the Act and hence, the expenditure which was incurred in relation to earning of that income has to be disallowed. By relying on the grounds of appeal, the ld. Counsel for the assessee has strongly contended that the formula under Rule 8D has been applied without establishing any nexus between exempt income and expenditure incurred thereon for earning such exempt income. We are of the opinion that the investments would definitely involve certain administrative and establishment cost since the decision to make investments, track investments, sale of such investments and follow-up of the receipt of income, sale proceeds etc have to be undertaken which entails definite costs. It is for this purposes that Rule 8D(2)(iii) provides that one half percent of the average value of the investments will be deemed to be expenditure incurred for the same. When the Act has specified a definite formula for working out the expenditure to be disallowed, the Department is not required to establish the nexus between the exempt income and expenditure incurred thereon for earning such exempt income. In view of the law laid down by the statute, since the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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