TMI Blog2018 (12) TMI 984X X X X Extracts X X X X X X X X Extracts X X X X ..... sfaction by the Ld.A.O which could prove that interest bearing funds have been applied for the investments in group concerns for non business purposes. Also see CIT V/s HDFC Bank Ltd (2014 (8) TMI 119 - BOMBAY HIGH COURT) wherein the assessee’s capital, profit, reserve surplus and current account deposits were higher than the investment in tax free securities, then it would have to be presumed that investment made by the assessee would be out of the available interest free funds - no disallowance u/s 14A was called for by the Ld.A.O - Decided in favour of assessee Disallowance of expenses - Disallowance has been merely made on the observation that some of the expenditure are incurred in cash and some vouchers are self made - held that:- Surprisingly there is no specific observation by the Ld.A.O which could prove that the assessee has claimed the expenses with a motive to evade the tax nor any observation has been made by the Ld.A.O for challenging the genuineness of the particular expenditure. In these given facts and circumstances merely making a ad-hoc disallowance of ₹ 2,00,000/- and completely disregarding the audited financial statements was certainly not justifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In reply to the show cause notice for the proposed disallowance u/s 14A of the Act, assessee submitted that no exempt income has been earned and therefore in view of the judgment of Hon ble Delhi High Court in the case of Cheminvest Limited vs CIT (2015) 378 ITR 033 (Delhi) no disallowance u/s 14A of the Act is called for. However Ld. A.O was not convinced with the reply submitted by the assessee and decided to compute the disallowance u/s 14A of the Act by applying the method provided in rule 8D of IT rules thereby computing the disallowance of ₹ 2,31,50,925/-. Apart from this Ld. A.O has also made ad-hoc disallowance of ₹ 2,00,000/- out of various expenses incurred towards miscellaneous expenses, repair and maintenance, stationary and printing, travelling, administrative expenses etc for want of necessary verification merely on the basis that some of the expenditure has been incurred in cash and vouchers are self prepared. After making the disallowance of ₹ 2,31,50,925/- u/s 14A and ₹ 2,00,000/- for disallowance of facility management expenses, income assessed at ₹ 4,34,43,640/- 5. Aggrieved assessee preferred appeal before Ld.CIT(A) and succe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income. The taxes as per book profits being higher the Respondent company paid taxes according to the provisions of section 115JB and claimed a refund of ₹ 19,82,090/-. 3. The assessment was completed u/s 143(3) on 23.03.2015 by making the following additions and creating a demand of ₹ 12,07,550/-: Returned Income 2,00,92,710/- Add: Disallowances on account of Disallowance u/s 14A Rs.2,31,50,925/- And Facility Management Expenses Rs.2,00,000/- Total Assessed Income as per order u/s 143(3) Rs.4,34,43,635/- Rounded off Rs.4,34,43,640/- 4. Being aggrieved by the additions made by the Ld. AO, the Respondent preferred an appeal before CIT(Al and the Hon'ble CIT(Al vide order dated 27.02.2017 in IT-128/15-16 deleted the additions made on account of disallowance under section 14A r.w.s. 8D and ad-hoc disallowance of various expenses, against which the department has preferred this appeal. 5. AS REGARDS TO THE GROUND RAISED BY THE DEPA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned any exempt income in respect of its these investments made in unlisted closely held companies, nor is there any possibility of earning such income, considering the fact that capital gains on liquidation of such investments will be taxable, without drawing the requisite satisfaction as envisaged by section 14A, and relying on the decision of the Honourable Special Bench of Delhi ITAT in the case of Cheminvest Ltd. worked out the disallowance in a mechanical manner applying the mathematical formulae prescribed by Rule 8D. 5.9 The Learned CIT(A) considering the fact that the decision of Honourable ITAT Special Bench Delhi was reversed by the Honourable Delhi High Court, deleted the disallowance primarily for the reason that the impugned investments did not yielded any tax exempt income and also considering the fact that the assessee company has earned considerable taxable income from the group companies, in which the investments were made by the respondent assessee company, deleted the disallowance. It is submitted that the disallowance has been rightly deleted by the Learned CIT(A ) on the facts of the case and after proper analysis of the broad legal view and settle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egorical finding, which is not at all in this case. A mere observation that the explanation offered is not found to the satisfaction of the AO does not meet the requirements of law, rather the Learned AO should have brought in categorical findings as to how and why he is not so satisfied. The satisfaction as envisaged u/s 14A ought to have spelled out in clear and unambiguous manner, which is not the case at all here. 5.19 The learned AO did not recorded his satisfaction while making the disallowance under section 14A as on which ground he was not convinced with the contention of the Respondent that no expenses have been incurred for the purpose of earning of the exempt income . 10. Ld. Counsel for the assessee relied on the following judgments; (i) Hon'ble High Court of Delhi in the case of Chemivest Ltd. V/s CIT (2015) 278 ITR 0033 (Delhi) (ii) Hon'ble High Court of Allahabad in the case of CIT V/s Shivam Motors (P) Ltd (2015) 230. (iii) Hon'ble High Court of Delhi in the case of CIT V/s Holicem India P. Ltd (2014) 90 CCH 0081 (Delhi HC) (iv) Hon'ble High Court of Gujarat in the case of CIT V/s Corrtech Energy Pvt. Ltd (2015) 372 ITR 0097 (Guj. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act at ₹ 2,31,50,925/- relying on various judgments by observing as follows; 3.2. I have gone through the appellant's contentions, the assessment order and various decisions in the matter. No exempt income has been earned from such investments during the year and in the past also. The decision of Special Bench decision of ITAT, Delhi in the case of Cheminvest Ltd. has been overruled by the Hon'ble Delhi High Court in Cheminvest Ltd. vs. CIT 2_Q_lS}'421 taxmann.com 118 (Del.). In the following cases also the High Courts have held that unless and until, there is receipt of exempted income for concerned assessment year (dividend from shares), section 14A cannot be invoked. i) CIT v. Lakhani Marketing Inc. [2014J 49 taxmanri.com 257 (Pun. Har.) ii)CIT v. Corrtech Energy (P.) Ltd. [2014J 45 taxmann.corn 116/223 Taxman . 130 (Guj.) iii) CIT v. Shivam Motors (P.) Ltd. [2015J 55 taxmann.com 262 (All.) 3.3 The appellant company has no investments in listed shares. It has made the entire investments in shares of private/unlisted group/ associate companies out of commercial and business expediency and to hold controlling stake in these c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racts and therefore no expense and interest attributable to the investments made by the appellant in the special purpose vehicles can be disallowed under section 14A read with rule 8D because it cannot be termed as expense/ interest incurred for earning exempted income, In view of the facts mentioned above: ( i) Interest expenses amounting to Rs, 2,96,731 have been directly found to be incurred for earning exempt income and hence disallowed under section 14A ( ii) Further, the company has earned dividend in respect of investments made anti some administrative expenses like management's salary, telephone, stationery, postage expenses, etc, must have been incurred thereon, Keeping in view the aforesaid, I am of the opinion that addition of ₹ 40,556 calculated at 2 per cent. o_: the dividend earned has to be made i.e. 2per cent. Of Rs, 20,27,812. Hence, addition. made by the Assessing Officer is upheld to the extent of ₹ 3,37,287 {Rs.2,96, 731 + ₹ 40,556). This ground of appeal is partly allowed, 5. Against the above order the Revenue is in appeal before us. 6. We have heard the rival contentions in the light of the material produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al purpose vehicles can be disallowed under section 14A read with rule 3D because it cannot be termed as expense/interest incurred for earning exempted income. Under the circumstances, the learned Commissioner of Income-tax (Appeals) is correct in holding that disallowance of a further sum ₹ 40,556 calculated at 2 per cen. of he dividend earned is sufficient. Under the circumstances, we do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals), hence, we uphold the same. 3.3.1 T'he above decision of the Delhi Tribunal was affirmed by the Hon'ble Delli High Court [2013] 35 taxmann.com 210 (Delhi). The Hon'ble ITAT, e ai Bench relying on the decision of the Hon'ble ITAT, Delhi in the case of Oriental Structural Engineers (P.) Ltd. held that as the assessee had to special Purpose Vehicles in order to obtain contracts from NHAI and as used to execute works awarded by NHAI, the expenses and attributable to investments made by assessee in special purpose 'de could not be disallowed under section 14A, read with rule 8D, as it could not be termed as expenses incurred for earning exempt income. 3.3.2 The appellant has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebutted this presumption by calling for the records from the bank itself. The Hon'ble Gujrat High Court in CIT vs. Kalthia Engineering and Constructi0n Ltd. 2015 (2) TMI 666 Gujrat High Court has also held that where both interest free funds are 'available and over draft/ loans taken than a presumption would arrives that the investments would be out of the interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investments. 3.5 In view of the facts and circumstances of the case the disallowance of ₹ 2,31,50,925/- made u/s 14A is deleted. Ground No.1 is allowed . 13. During the course of hearing Ld. Departmental Representative strongly relied on the judgments of Hon ble Apex Court in the case of Maxopp Investment Ltd Vs Commissioner of Income Tax (supra). However Ld. Counsel for the assessee made following written submissions to prove that the facts of the assessee s case are different from the facts adjudicated by the Hon ble Apex Court. The relevant extract of the written submission of the assessee comparing facts of the Maxopp Investment Ltd case with the assessee s case are as follows:- T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from which it never earned any dividend income or any other exempt income In nutshell, the facts of the present case are distinguishable from the facts of the case of Maxopp Investments Limited v/s CIT on the various footings tabulated hereunder: Sl. No Facts of Maxopp Investment Ltd. And findings of the Hon'ble Supreme Court Facts of the Respondents case and its contentions 1. Major investments were made Here the entire investments in the shares of widely held are in the shares of closely quoted/ listed public limited held unlisted/ unquoted group company. Here the entire investments are in the shares of closely held unlisted/unquoted group companies. The gains arising out of sale of such shares is taxable under the head of capital gains and the assessee has never earned any exempt income in respect of these investments 2. Substantial dividend income was earned from the investments in the shares of investee listed group company. This dividend income was claimed as exempt in return of income. No divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of CIT V/s Corrtech Energy (P) Ltd (supra) wherein the Hon ble High Court has held that where the assessee has not made any claim for any exemption then in such situation the disallowance u/s 14A of the Act have no application . 16. Perusal of the audited balance sheet of the assessee shows that as on 31.03.2012 the total of the share capital and reserve and surplus at the end of the year stands at ₹ 39,28,44,695/- and against these interest free funds available with the assessee, the average value of investment is ₹ 29,83,62,600/-, which means that the average investments are less than the interest free fund available with the assessee. Further there is no specific satisfaction by the Ld.A.O which could prove that interest bearing funds have been applied for the investments in group concerns for non business purposes. In such situation judgment of Hon ble High Court of Bombay in the case of CIT V/s Reliance Utilities Power Ltd (supra) is also applicable and is in favour of the assessee, wherein the Hon ble High Court while adjudicating similar issue held that if there are funds available, both interest free and over draft or loans taken, then the presum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he course of assessment proceedings and were subject to test check by the learned AO and it was explained that the expenses have been properly incurred and also accounted for and that considering the nature and volume of business also the expenditure is justified. 6.3 However, the disallowance was made by the Learned AO for the sake of making the disallowance by making general and vague allegation without pointing out any specific defect in any specific expenditure and an adhoc disallowance of ₹ 2,00,000/- was made. 6.4 That since the disallowance was made without pointing out any discrepancy in any specific expenditure, the disallowance made without any basis is wrong and ought to be deleted. 22. Ld. Counsel for the assessee has also placed reliance on following judgments; a) Hon'ble I.T.A.T. Pune Bench in the case of Lavrids Knudsen Maskinfabrik (India) Ltd. Vs. Addl. C.I.T reported in 102 TTJ 882 b) Sonic Biochem Extraction P. Ltd. versus Income Tax Officer 7(2)(4) [2013] in ITA Nos 8136, 8138 and 8137/ Mum/ 2011 c) Sanghi Brothers (India) P. Ltd. versus Department of Income Tax _ (2012) ITAI Indore Bench in ITA No. 286/Ind/ d) H ..... X X X X Extracts X X X X X X X X Extracts X X X X
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