TMI Blog2016 (5) TMI 1464X X X X Extracts X X X X X X X X Extracts X X X X ..... average value of the investments as per Rule 8D(2)(iii) as expenditure incurred for earning of exempt income and the ld. CIT(A) has rightly confirmed the disallowance made by the AO. - Decided against assessee. Disallowance under section 35D - Held that:- In the present case, the assessee is stated to have incurred expenditure for creating intangible content of the motion picture industry. The expansion activity has not been completed in the assessment year under consideration as accepted by the assessee and therefore, either expansion activity has been completed or the production activity of the assessee has been carried out for which the assessee has claimed amortization of expenses under section 35D which in our opinion is not permissible. CIT(A) has elaborately discussed the issue with regard to claim of deduction u/s 35D by relying on various decisions and the assessee could not counter the findings of the CIT(A). Thus, we confirm the order of the CIT(A) - Decided against assessee. - I.T.A.No.1537/Mds/2015 - - - Dated:- 27-5-2016 - Shri Chandra Poojari, Accountant Member Shri Duvvuru RL Reddy, Judicial Member For the Appellant : Shri Anil Nair, C.A. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- as deduction under section 35D of the Act. As the said expenses do not appear to have been claimed in relation to any public issue, etc. the assessee company was asked to furnish the details of the said expenses. Accordingly, the assessee has submitted under as under: With the advent of Digital Cinema and with a view to extend the activities of the company, the company took steps for substantial extension of the undertaking and incurred expenses on placement of shares. The project also included setting up facilities for digital cinema in southern states and all over India and setting up theatres and creating intangible content of the motion picture industry. The total estimated project cost in the various years under the broad heads is as under: Asset Details Amount (₹. In crores) Plant and Machinery 30 Buildings 200 Land including leasehold 120 Other fixed assets 5 Total 355 The entire expansion is yet to be completed and the the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 qualify for deduction under section 35D of the Act. Further the assessee has not explained the nature and service rendered by the parties concerned to whom the amounts were paid and what services were rendered by them. Further, the assessee has also not informed whether any TDS had been deducted thereon. Though the expenses were related to an earlier year, the assessee cannot absolve itself from furnishing these details as the deduction was claimed by the assessee in this year also. Under the facts, the Assessing Officer has held that only expenditure in the nature as specified under section 35D(2()(c)(iv) of the Act is allowable for deduction under that section and that only for any public issue. Therefore, the claim of expenditure relating to preference share issue expenses and other payments not specified under section 35D(2)(c)(iv) of the Act are not allowable deduction. 6.3 Before the Assessing Officer, the assessee has submitted that the extension is for creating intangible assets of the motion picture ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus . As per the details submitted by the assessee before the Assessing Officer, the expenses incurred towards the issue of shares, the assessee company has not explained the nature and services rendered by the above concerns as reproduced hereinabove. The assessee has not submitted any fresh details with regard to the expenses incurred for the purpose of issuing shares. Therefore, the findings of the ld. CIT(A) is hereby confirmed. With regard to expansion of industrial undertaking, the assessee has not adduced any details except setting up of theatres. Therefore, we are unable to take a different view. 7.1 Conclusively, in view of the decision of the Hon ble Madras High Court in the case of CIT v. Ashok Leyland 349 ITR 663 [Mad], the expenditure incurred in connection with expansion of the capital base of the company would be allowable under section 35D of the Act cannot be applicable to the facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 maintain its establishment and towards administration, a portion of which can be attributable to the activity of earning dividend. Therefore, a portion of the expenditure of the assessee could be attributable towards the dividend earned by the assessee which I claimed as exempt under section 10 of the Act. Even though the accounts of the assessee show that a portion of establishment expenses as referred to above, is attributable to the earning of the income which does not form part of total income, the assessee has not disallowed any amount of such expenditure on its own and failed to satisfactorily prove its claim that no expenditure has been incurred in relation to income, which does not form part of the total income. Therefore, the Assessing Officer has opined that the provisions of sub11 section (2) of section 14A of the Act are directly attracted in this case and moreover, the assessee has not made any disallowance on its own, it is mandatory to apply the disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, 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 issued with the Finance Bill, 2001. It explains that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. There was another amendment by the Finance Act, 2006 to section 14A which enlarged the scope of applicability of section 14A which says the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income. But with effect from AY 2008-09 the rules for determination of disallowance were prescribed vide Rule 8D. 8.4.2 The mandate of the provisions of section 14A is to curb the practice to claim deduction of the expenses incurred in relation to exempt income against taxable income and at the same time to avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. On the principles of equity, when an item of income is exempted from income-tax, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 investments can be taken into account for the purpose of Rule 8D from which income has been earned. No specific argument has been advanced in this behalf. We find that sec. 57(iii) deals with any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning the income. In a number of cases decided under this provision, it has been held that actual earning of the income is not sine qua non for deciding the deduction of expenditure laid out or expended wholly or exclusively for the purpose of earning the income. Thus, where investment has been made in shares, which did not yield any dividend in the year under consideration, the expenditure incurred for earning the income is deductible notwithstanding the fact that no such income has been earned. We are of the view that ratio of these cases will apply mutatis mutandis under sec. 14A of the Act also while ascertaining the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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' the income. The question is whether the word income should be interpreted narrowly or widely? The narrow interpretation would be that only when such income is actually earned, the expenditure can be disallowed. The wider meaning would be that even if no income is earned in a particular year but the investments are capable of earning the income, the expenditure relatable to holding of the investments becomes disallowable. In this connection, we may examine a reverse provision contained in section 57{iii), which allows the deduction of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly or exclusively for the purpose of making or earning such income from income chargeable under the head income from other sources . There are a number of decisions which hold that the earning of the income in a particular year is not sine qua non of allowing expenditure. Thus, the income may be nil, yet the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 that no expenditure was incurred, the assessing authority has to presume the incurring of such expenditure as provided under sub-sec.(2) read with Rule prescribed. Therefore, it becomes clear that even in a case where the assessee claims that no expenditure was so incurred, the statute has provided for a presumptive expenditure which has to be disallowed by force of the statute. In a distant manner, literally speaking, it may even be considered for the purpose of convenience as a deeming provision. When such deeming provision is made on the basis of statutory presumption, the requirement of factual evidence is replaced by statutory presumption and the Assessing Officer has to follow the consequences stated in the statute. It means that even in a case where no expenditure is stated to have been incurred, the assessing authority has to apply Rule 8D. As the statutory presumption substitutes the requirement of factual evidence, the question o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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