TMI Blog2019 (10) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... the administrative expenses to the extent of ₹ 20000.00 only. Hence the ground of appeal of the Revenue is dismissed and the ground of appeal of the assessee is partly allowed. TDS u/s 194H - addition u/s 40(a)(ia) - HELD THAT:- Identical issue pertaining to the assessment year 2011-12 decided issue in favour of the assessee Addition u/s 14A read with rule 8D as per clause(f) of explanation 1 to section 115JB - HELD THAT: Disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. [ 2014 (11) TMI 1169 - CALCUTTA HIGH COURT] Determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB - we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te orders of the Commissioner of Income Tax (Appeals) 2, Vadodara [CIT(A) in short] vide appeal no. CAB/(A)-2/468/14-15 and CAB/(A)-2/276/15-16 dated 25/02/2016 and 02/09/2016 arising in the assessment orders passed under s.143(3) of the Income Tax Act, 1961(hereinafter referred to as the Act ) dated 22/01/2015 22/03/2016 relevant to Assessment Years (AYs) 2012-13 and 2013-14 respectively. Since the issues are inter-connected, these appeals were heard together and are being disposed of by this consolidated order for the sake of convenience. First, we take up the Revenue s appeal in ITA No.1191/Ahd/2016 for AY 2012-13 as lead case. The Revenue has raised the following grounds of appeal: 1. On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in deleting the addition of ₹46,44,832/- out of disallowance of ₹ 79,09,770/- made u/s.14A r.w. rule 8D without considering the fact that in a mixed system of accounting the identification of money employed towards exempted and non-exempted income cannot be made. 2. On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in deleting the additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof, section 11 or section 12 apply is to be added to the net profit as per Profit Loss A/c for computing book profit, and that disallowance u/s.154A relates to amount of expenditure incurred in relation to income that do not part of income, and section 10 of the Act deals with income which do not part of total income. The 1st issue raised by the Revenue in ground Nos. 1 to 4 is that the learned CIT (A) erred in deleting the addition made by the AO for ₹ 46,44,832.00 out of the total addition of ₹79,09,770.00 under the provisions of section 14A read with rule 8D of Income Tax Rule. 2. Briefly stated facts are that the assessee in the present case is a limited company and engaged in the business of manufacturing and otherwise dealing in worsted (woven blended) made primarily from wool, also manufacturing and otherwise dealing in felt, blanket and filter fabric. The assessee in the year under consideration has claimed exempted income amounting to ₹86,36,479.00 only under section 10(34) of the Act. The assessee against such income h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment made by transferring investment from other scheme cannot be considered for making disallowance out of interest only if the appellant is in position of show that the earlier investments were made out of own funds. However, all such investments will be considered for disallowance at 0.5% on account of administrative cost. 4.1.4. During the year under consideration, the appellant has claimed to have made following investments in Mutual Fund:- Sr. No. Date Amount (Rs.) Name of Bank (source) 1 08.04.2011 2,00,00,000/- HDFC Bank 2 14.06.2011 2,00,00,000/- HDFC Bank 3 23.12.2011 1,00,00,000/- HDFC Bank 4 13.02.2012 1,42,50,000/- South Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Share Broking Pvt. Ltd. (2013) 37 taxmann.com 128. 4.1.6. In view of the above discussion and the directions, the Assessing Officer directed to re-compute the disallowance under Rule 8D. Thus, partly succeeds in respect of Ground No. 1. Being aggrieved by the order of the learned CIT (A) both the Revenue and the assessee are in appeal before us. The Revenue is in appeal for the deletion of the addition made by the AO for interest expenses whereas the assessee is in appeal for the confirmation of the addition for the administrative expenses. 4. The learned DR before us submitted that the assessee has not given any documentary evidence suggesting that the investment was not made out of the borrowed fund. 5. On the other hand, the learned AR before us submitted that the issue is covered in its favour in its own case pertaining to the earlier assessment years. The ld. AR before us also filed a brief note as detailed under:- During the course of hearing, Hon'ble Bench has asked to submit the brief note on disallowance of 14A of the Act. Relevant points are as under In earlier Assessment Years i.e. from A.Y. 2007-08 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourable to them. 6. We have heard the rival contentions and perused the materials available on record. The issue in the present case relates to the disallowance made by the AO by invoking the provisions of section 14A read with rule 8D of Income Tax Rule towards the interest and administrative expenses. The learned CIT (A) deleted the interest expenses by observing that the own fund of the assessee exceeds the investment. However, the learned CIT (A) confirmed the addition of the administrative expenses calculated in the manner as provided under rule 8D of Income Tax Rule against the exempted /dividend income. 6.1 Regarding the issue of interest expenses, we note that the own fund of the assessee exceeds the amount of investment as evident from the annual accounts of the assessee placed on pages 1 to 60 of the paper book. The own fund of the assessee as on 31st March 2012 stands at ₹9603.39 Lacs whereas the investment is of ₹ 2159.53 Lacs as on that date. This fact can be verified from the extract of the balance sheet available on page 20 of the paper book. Thus, there is no ambiguity that the own fund of the assessee exceeds the amount of investment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from non interest bearing funds and assessee has not made any expenditure in order to earn above said income. On similar facts, ITAT decided matter in favour of assessee in ITA No.2313 2504/Ahd/2011 and a lump sum disallowance of ₹ 20,000/- was made. Therefore with consonance to the aforesaid ITAT order, we dismiss this ground of appeal of the department. 6.6 In view of the above, we draw a presumption that the investment has been made by the assessee out of its own. Therefore there cannot be any disallowance of interest expenses. 6.7 Regarding the administrative expenses, we also note that the Hon ble ITAT in the own case of the assessee (supra) has directed to restrict the disallowance to the tune of ₹20,000 only. The relevant finding of the ITAT order has been reproduced in the preceding paragraph. 6.8 There is no material change in the facts circumstances in the year under consideration. Therefore, respectfully following the same we restrict the disallowance of the administrative expenses to the extent of ₹ 20000.00 only. Hence the ground of appeal of the Revenue is dismissed and the ground of appeal of the assessee is partl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e heard the rival contention and perused the materials available on record. It is settled law that the amount of disallowance made by the AO u/s 14A of the Act cannot be imported while determining the profit u/s 115JB of the Act. In this regard, we rely on the judgment cited by the ld. AR for the assessee in the case of Alembic Ltd. in Tax Appeal No.1249/2014. 33.1 We also note that in the recent judgment of Special Bench of Hon ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 has held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the book profit u/s 115JB of the Act. The relevant portion of the said order is reproduced below: In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962. 33.2 The ratio laid down by the Hon ble Tribunal is squarely applicable to the facts of the case. Thus it can be concluded that the disallowance made under section 14A r.w.r. 8D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recting for the ad-hoc disallowance to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also feel to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. But now we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus the ground of appeal of the assessee is partly allowed. Respectfully following the above finding of the ITAT, we direct the AO to make the ad hoc disallowance at the rate of 1% of the dividend/exempt income earned by the assessee in the year under consideration. Hence the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies. 17. The AO during the assessment proceedings found that the assessee on the one hand has made investment in the subsidiary company without charging any interest on the investment and on the other hand it is incurring the interest cost on the loan borrowed by it. Therefore the AO worked out the amount of interest for ₹1,24,43,195 being 9.5% on ₹13,09,81,000.00, an amount invested in the subsidiary companies and added to the total income of the assessee. 18. Aggrieved assessee preferred an appeal to the learned CIT (A) who has confirmed the order of the AO. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us. 19. The learned AR before us submitted that in the identical issue the Tribunal in the own case of the assessee pertaining to the assessment year 2010-11 and 2011-12 have deleted the addition made by the AO after having reliance on the orders pertaining to the assessment year 2007-08 and 2008-09. The learned AR also submitted that the finding of the tribunal was also upheld by the Hon ble Gujarat High Court in the own case of the assessee in tax appeal numbers 797 and 798 of 2017. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances of the case, the Income Tax Appellate Tribunal was right in law and on facts in holding that the investment made for the purchase of shares of subsidiary company was not a legitimate business activity of the appellant? 6. After considering the facts in totality, the Hon ble Jurisdictional High Court observed as under:- 7. Before us learned counsel Shri Soparkar for the assessee submitted that the assessee had sizeable interest free funds for investment which were utilized for investment in the subsidiary company. The Assessing Officer as well as the Tribunal committed a serious error in disallowing the same. Certain borrowings were made during earlier assessment years. Such funds were invested for business purpose. Deduction of interest under section 36(1)(iii) of the Act was allowed. He relied on the following decisions of this Court: 1) Commissioner of Income tax-II v. Hitachi Home and Life Solutions (I) Ltd. reported in (2014) 41 taxmann.com 540 (Gujrat). 2) Commissioner of Income tax v. Rgghuvir Synthetics Ltd. reported in (2013) 354 ITR 222 (Guj). 8. On the other hand learned counsel Shri Parikh supported t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act would not automatically imply that any diversion of funds without interest to a subsidiary would automatically give rise to disallowance. So much has been discussed by the Supreme Court in case of S.A. Builders Ltd.(supra). The assessee had demonstrated before the Assessing Office that it had sizeable net profit and availability of interest free funds for investment in subsidiary company. 11. In case of Raghuvir Synthetics ltd (supra), Division Bench Of this Court following the decision of Supreme Court in case of S.A. Builders Ltd.(supra), upheld the view of the Tribunal rejecting the appeal of the Revenue on the ground that substantial interest free funds were available, the Commissioner and the Tribunal also considered the question of business expediency. In case of Hitachi Home and Life Solutions (I) Ltd (supra), the Court held and observed as under: 4. Learned counsel Ms. Mauna Bhatt has fervently urged that the Tribunal had held the funds to be mixed funds and therefore, disallowances had been rightly made by the Assessing Officer, which were not to be disturbed. The Tribunals holding that Rule 8D could not have been invoked is contrary to its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to divert its tax bearing income. 13. In view of above, we answer the question in favor of assessee, allow the appeal and reverse the judgement of the Tribunal on this issue. 7. A perusal of the aforementioned judgment of the Hon ble Jurisdictional High Court qua the facts in issue before us clearly tilts the balance of convenience in favour of the assessee and against the revenue. Since, the issue is now well settled by the decision of the Hon ble Jurisdictional High Court (supra), we direct the A.O. to delete the disallowance of ₹ 31,87,067/-. This ground of the appeal is allowed. In view of the above, we do not find any reason to uphold the finding of the learned CIT (A). Hence, we set aside the order of the learned CIT-A and direct the AO to delete the addition made by him. Thus the ground of appeal of the assessee is allowed. 21. The next issue raised by the assessee is that the learned CIT (A) erred in confirming the order of the AO by treating the interest of ₹ 18,86,101.00 as capital in nature. 22. The assessee in the year under consideration has purchased several machineries for the purpose of its business out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18,86,101/- In view of the above, the AO opined that the amount of interest expenses as discussed above needs to be capitalized in terms of the provisions of section 36(1)(iii) of the Act. Accordingly, the AO after giving the opportunity of being heard to the assessee has capitalized the amount of interest and added to the total income of the assessee. 23. Aggrieved assessee preferred an appeal to the learned CIT (A) who has confirmed the order of the AO by observing as under: 4.4. Ground No.4 pertains to disallowance of ₹ 18,86,101/- u/s.36(1)(iii) of the Act. It is noticed by the Assessing Officer that the assessee company has utilized interest bearing funds in the form of term loan for purchase of Plant Machinery. The total investment in purchase of Plant Machinery amounted to ₹ 21,12,78,953/-. In view of the provision of section 36(1)(iii), the Assessing Officer has disallowed interest on borrowed fund upto the date of actual use of capital assets for business purposes. Utilization of borrowed funds for purchase of the capital assets is not disputed by the Ld. Authorized Representative. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w have not brought anything on record suggesting there was expansion in the production capacity or in the sphere of market area. Thus merely acquisition of the machinery does not ipso facto refer to the extension of the business. 26.2 The case law referred by the ld. AR i.e. CIT Vs. Nicholas Piramal (India) Ltd. reported in 69 tamann.com 164 is distinguishable from the facts of the present case so far as the bottling plant was already in existence and there was interlacing of the funds in that case. But in the case on hand there is new activity of electricity generation unit and there was no interlacing of the fund utilized in the acquisition of machineries. 26.3 Therefore, taking all facts and circumstances into consideration, we are of the opinion that the issue needs to be re-examined by the AO in the light of the above stated discussion and as per the provision of law. Hence the ground of appeal of the assessee is allowed for statistical purposes. 27. In the result, the appeal of the assessee is partly allowed for the statistical purposes. Coming to assessee s appeal bearing ITA No. 3180/AHD/2016 for AY 2013-14 28. The Assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber 16 of this order. Hence, the ground of appeal of the assessee is allowed. 33. The 3rd issue raised by the assessee is that the learned CIT (A) erred in confirming the addition of ₹ 5,40,109.00 by treating the same as capital in nature under section 36 1(iii) of the Act. 34. At the outset we note that the impugned issue has already been restored back to the file of the AO for fresh adjudication as per the provision of law in its own case pertaining to the assessment year 2012-13 in ITA No. 781/AHD/2016. Please refer the relevant paragraph bearing number 21 of this order for the detailed discussion. Hence respectfully following the same we allow the ground of appeal of the Revenue for statistical purposes. 35. In the result, the appeal of the assessee is partly allowed for the statistical purposes. Coming to Revenue s appeal bearing ITA No. 3369/AHD/2016 for AY 2013-14 36. The Revenue has raised the following grounds of appeal: 1.(a) On the facts and in the circumstances of the case, the learned CIT(A) erred in directing the AO not to consider the investment made in HDFC Fixed mutual fund and HDFC cash management f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of the case, the Ld.CIT(A) erred in deleting disallowance made u/s. 14A for determination of book profit made by the AO without appreciating the fact that the Provisions of Clause (f) of Expl.l below Sec.115 3B clearly provide that book profit means net profit as per Profit Loss Account and as increased by amount of expenditure relatable to income exempt u/s. 10. Accordingly, the AO has correctly computed book profit u/s.115 JB of the Act by increasing the amount of expenditure relatable to exempt income as per rule 8D. 5. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary. Relief claimed in appeal It is prayed that the order of the CIT (Appeals) be set aside and that of the Assessing Officer be restored. 37. The 1st issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO in part under the provisions of section 14A read with rule 8D of Income Tax Rule. At the outset, we note that the identical issue has already been adjudicated along with the appeal filed by the Revenue bearing ITA No. 1191/AHD/2016 wherein the appeal of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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