TMI Blog2015 (7) TMI 1344X X X X Extracts X X X X X X X X Extracts X X X X ..... mpt income would arise. Once the above aspect has been remanded, we find nothing wrong with the order of Ld. CIT(A). At best, the Assessing Officer can also point out how he is not satisfied with the correctness of the accounts with reference to the disallowance of ₹ 50,000/- made by the assessee in respect of section 14A of the Act. Resultantly the appeal stands dismissed. - ITA No. 274/Chd/2015 - - - Dated:- 7-7-2015 - SHRI BHAVNESH SAINI AND SHRI T.R. SOOD, JJ. ppellant By : Shri Subhash Aggarwal Respondent By : Shri Manjit Singh ORDER T.R. Sood, j. 1. The appeal by the assessee is directed against the order dated 03.02.2015 passed by CIT(A)-2, Ludhiana. 2. In this appeal the assessee has raised the following grounds:- 1. That the Ld. CIT(A)-II has erred in confirming the disallowance of ₹ 10,75,505/- made by Assessing Officer u/s. 14A r.w. rule 8D of the Income Tax Rules (subject to relief on investment in debentures). 2. That the Ld. CIT(A)-II has ignored the fact that no satisfaction had been recorded by Assessing Officer for making the disallowance in respect of the submissions made before him. 3. That it has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter examining the submissions that on some of investments there was no tax free income. 5. Before us, Ld. Counsel for the assessee submitted that Section 14A as well as Rule 8D specifically provides that before application of Rule 8D, the Assessing Officer has to be satisfied that assessee has incurred expenditure which is more than the disallowance offered by the assessee. No such satisfaction has been recorded; therefore, disallowance was not justified. He contended that unless a mistake is pointed out in the disallowance already made by the assessee further disallowance could not be made. In this regard he relied on the decision of Hon'ble Punjab Haryana High Court in the case of CIT v. Deepak Mittal Amrit Sagar Mittal 361 ITR 131(P H) and Delhi High Court in the case of CIT v Taikisha Engineering India Ltd. 370 ITR 338(Del.) and Calcutta Bench of the Tribunal in the case of REI Agro Ltd. v DCIT 144 ITD 141. 6. He further submitted that assessee has itself disallowed a sum of ₹ 50,000/- and disallowance of ₹ 50,000/- was upheld in assessee's own case for the assessment year 2007-08 in ITA No. 374/Chd/2011, therefore, following the principle of consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opat V ACIT, 127 TTJ (Mum) 61. In that case it was held as under:- Though the partnership firm is not a separate entity as per general law, for a specific purpose it may be treated as independent of its partners under the provisions of IT Act, 1961. To put it differently, the concept of partnership firm, being a compendium of its partners is subject to the modifying such concept of partnership law which means that if there exist no provision in the tax laws for a particular situation, then, the provisions of partnership law would be the guiding factor for adjudication of that issue. The current judicial thought is leaning towards the concept of separate legal entity of partnership firm than that of its partners for the purposes of IT Act, 1961. here was a judicial opinion that on distribution or division or allotment of assets to partners by the on dissolution or otherwise there resulted no gain exigible to tax, however, by incorporating s. -45(2), 45(3) and 45(4), the legislature has declared its intention in clear terms that partners and the firm are two independent entities not only for the purposes of assessment but also for the purpose of determining the charge of incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Bom) 225 : (1979) 119 ITR 564 (Bom) and CIT v. Chase Trading Co. (1998) 147 CTR (Bom) 228 : (1999) 236 ITR 665 (Bom) applied; CIT v. R.M. Chidambararn Pillai 1977 CTR (SC) 71 : (1977) 106 ITR 292 (SC) distinguished. Therefore, it is clear that investment made in a firm is to be treated as investment for earning exempt income. 18. Coming to the second aspect of the issue that whether in any nexus is required between the investment and the disallowance to be made u/s. 14A, we shall first refer to the decision relied on by the ld. counsel of the assessee in case of CIT V. Winsom Textile, 319 ITR 204. In that case following question of law was considered: Whether, in the facts and circumstances of the case and in law, the Hon'ble Income-tax Appellate Tribunal was justified in holding that the order of the jurisdictional High Court in the case of CIT V. Abhishek Industries Ltd. reported in (2006) 286 ITR 1 (PH); 156 Taxman 257 (PH) are not applicable in this case and the disallowance made by the Assessing Officer u/s. 14A of the Income-tax Act is not as per law. The assessee was engaged in the manufacturing and sale of cotton yarn and had made certain invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee claimed that no expenses have been incurred, correctness of such claim can be gone into by the Assessing Officer. Hon'ble High Court held vide para 5 as under: In view of the finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance u/s. 14A was no sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, cannot be accepted. Disallowance under section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. In the present case, finding on this aspect, against the Revenue, is not shown to be perverse. Consequently, disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y out of non interest bearing funds then section 14A is not be applicable. In case before us, the situation is different which we shall see little later. We would also like to observe that even Hon'ble Punjab Haryana High Court in a latter decision in case of CIT V. Punjab State Industrial Development Cooperative Ltd. has made observations which we will also like to discuss little later. 23. Hon'ble Bombay High Court considered the issues arising out of Section 14A as well as implications of Rule 8D. Hon'ble High Court reached the following conclusion at para 88 which reads as under: 88 Our conclusion in t his judgment are as follows: (i) Dividend income and income from mutual funds falling within the ambit of section 10(33) of the Income-tax Act, 1961, as was applicable for the assessment year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of section 14A(1); (ii) The payment by a domestic company under section 115- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axes paid u/s. 115-O which is also known as dividend distribution taxes, would not make dividend income in the hands of shareholder as non-exempt. Similarly the taxes paid by a firm would be taxes on the profit of the firm and not in the hands of the assessee. The above decision also held that rule 8D would be applicable only from Assessment year 2008-09. In this decision the theory of apportionment of expenditure which was confirmed by the Hon'ble Supreme Court in case of CIT V. Walfort Share and Stock Brokers P Ltd.: (2010) 326 ITR 1 (S.C), was followed. In fact before introduction of Section 14A, the assessee had a right to claim all the expenses if such expenses could not be bi-furcated against normal taxable income as well as exempted income in view of the decision of Hon'ble Supreme Court in case of Rajasthan Warehousing Cooperation V CIT, 242 ITR 450. This position got changed after the introduction of Section 14A by Finance Act, 2001. The Memorandum explaining the provisions of Finance Bill reads as under: Certain income are not includible while computating the total income as these are exempt under various provisions of the Act. There have been cases where de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h sections 15 to 59, it is clear that the words 'expenditure incurred' in section 14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for (see sections 30 to 37). Thus on the basis of above, it was held that after introduction of Section 14A, it was possible to apportion the expenditure between taxable income and exempted income. 25. As observed earlier, almost similar observations have been made by the Hon'ble Punjab Haryana High Court in a recent judgment in case of CIT V. Punjab State Industrial Development Cooperation Ltd. in ITA No. 565 of 2006 vide order dated 18.7.2011. 11. Adverting to question No. (ii), learned counsel for the revenue submitted that while determining the quantum of deduction admissible to the assessee under Section 80M of the Act, the expenditure incurred relating to the earning of dividend income has to be excluded there-from. According to the learned counsel, the expenditure which was to be deducted was required to be deducted on proportional basis for incurring of such expenditure. Reliance was placed on Section 14A of the Act which was incorporated by Finance Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds, Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of Section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of Section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of Section 14A is that certain Incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have bean in which deduction has been sought In respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt Income by debiting the expenses, incurred to earn the exempt income, against ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments relied upon by the learned counsel for the assessee, Section 14A as incorporated by Finance Act 2001, with effect from 1.4.1962, was not under consideration and, therefore, the same do not come to the rescue of the assessee. 16. In view of the above, the substantial question No. (ii) is answered in favour of the revenue and against the assessee. Income Tax Appeal Nos. 565, 567 and 569 stand disposed of accordingly. 26. Thus theory of apportionment as approved by the Hon'ble Supreme Court in case of CIT V. Walfort Share and Stock Brokers P Ltd. (2010) 326 ITR 1 (S.C) followed by Hon'ble Bombay High Court in case of Godrej and Boycee (supra) has also been approved by Hon'ble Punjab Haryana High Court in case of CIT V. Punjab State Industrial Development Coop Ltd. (supra). 27. Now the question is how such expenditure can be apportioned. There may be a situation whether the expenses or interest cannot be identified against the particular item of income to meet these difficulties rule 8D was introduced which has been held to be constitutionally valid by Hon'ble Bombay High Court in case of Godrej and Boycee (supra). Rule 8D reads as under: R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is having mixed funds. The details of funds was stated to be as under before the ld. CIT(A): 31.3.2008 Rs. In Lakhs Share capital 78.36 Reserves and Surpluses 130.82 Own funds 209.18 Working capital borrowings 1779.62 Current assets 2243.45 Amount invested in excess of loan 463.83 Term loan borrowings 253.31 Fixed Assets 451.82 Amount invested in excess of loan 198.51 Amount invested in Chadha Moto s 255.96 Consequently by simply saying that the funds invested in fixed assets and current assets are more than the borrowed funds, would not show that specific funds have been borrowed for specific purpose. For example it can be very easily said that the assessee supported its business with own funds and borrowed loans have been used for mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icious, perverse or arbitrary. Applying the tests formulated by the Hon'ble Supreme Court it is not possible for this court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no madness in the method. Thus above rule was found to be valid and rational. Coming back to the case in hand, the perusal of the assessment order shows as observed earlier, no where before the Assessing Officer or the ld. CIT(A), the assessee has made a specific mention to show which particular funds were borrowed for which particular requirement and in the absence of such specific utilization Rule 8D, would be applicable. Perusal of the assessment order shows that disallowance u/s. 14A has been worked out on the basis of Rule 8D which is as observed earlier applicable in case of the assessee. Therefore, we set aside the order of the ld. CIT(A) and restore that of the Assessing Officer. 9. From the above it emerges that decisions of Hon'ble Punjab Haryana High Court in the case of CIT v. Hero Cycles Ltd., 323 ITR 518(P H) and CIT v. Winsome Textile Industries Ltd. in 319 ITR 203 (P H) were found to be disti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, lend credence to the revenue's stand that Rule 8D is retrospective. The Tribunal, therefore, rightly placed reliance upon the judgment in Godrej Boyce Manufacturing v. DCIT (supra), while holding that Rule 8D shall operate prospectively. The matter, however, does not rest here. The Tribunal having held that Rule 8D operates prospectively, proceeded to reduce the quantum of disallowance without recording satisfaction or assigning any cogent reasons or referring to any relevant facts/factors. The power to determine the quantum of disallowance, inheres the recording of satisfaction based upon relevant facts/factors. A perusal of the impugned order reveals that after holding that Rule Income Tax Appeal No. 199 of 2014(O M) -4- 8D of the Rules is prospective in operation, the Tribunal abruptly or should we say arbitrarily proceeded to reduce the quantum of disallowance recorded by the Assessing Officer from ₹ 7,19,513/- to ₹ 1,00,000/- and ₹ 60,97,429/-to ₹ 5,00,000/- in ITA No. 199 of 2014, and ₹ 7,55,849 to ₹ 1,23,754/-in ITA No. 237 of 2014, without reference to any relevant facts or factors. Consequently, we answer the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposition that if interest free funds are available with the assessee then it will be presumed that such funds have been invested in various investments. The Hon'ble High Court dealt with this issue as under:- In Reliance Utilities and Power Ltd. case (supra), the Revenue was in appeal before the Bombay High Court against an order passed by the Income Tax Appellate Tribunal, where negating the argument of the Revenue that shareholders funds to the tune of over ₹ 172 crores was utilized for the purpose of fixed assets in terms of the balance-sheet. It was found that a clear finding of fact was recorded that assessee had interest free funds of its own which had been generated in the year in question, which has been invested for earning exempt income. Similarly, in Hero cycles Ltd. case (supra), again the Revenue was in appeal. The Court has noticed that the Tribunal has held that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of the finding of fact, disallowance under Section 14A of the Act was not found to be sustainable. The Court observed that as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him in relation to income which does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. Further, Rule 8D of the Act reads as under:- (1) Where the Assessing Officer having regard to the accounts of the assessee of the previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) .... 15. The careful reading of the above section as well as Rule 8D would show that what is required under the provision is that Rule 8D can be resorted only when Assessing Officer having reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cured as they are backed by the government. Similarly, the bank FDRs are reasonably well secured. Investment in shares is highly risky because prices would move depending upon economic condition of the country as well as particular sector in which such company operates. It is required to be investigated and analyzed how an exist can be made from the particular investment. For example FDR is made for a period for which funds are not required and can be encashed generally at the end of the term of FDR because if the same is enchased earlier then some interest loss happens. In case of government securities, the same can be sold or purchased in the secondary market. The rate of return would also depend on the period for which investments are made. Further, it to be seen what is the liquidity attached to particular investment. In fact all these functions are highly specialized functions and requires skill of highly specialized persons. It is almost impossible to pin-point how much time is spent by such a team on the investment decisions because these treasury operations are very sophisticated. In a very large company, there may be designated treasury operation team, but in a medium size ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under section 14A read with rule 8D(2)(iii), which is issue in the assessee's appeal, is restored to the file of the AO for recomputation in line with the direction given above. No disallowance under section 14A read with rule 8D(2)(i) and (ii) can be made in this case. 19. Before us, Ld. Counsel for the assessee has also filed copy of the list of investments which is as under: INVESTMENTS 31.03.09 31.03.08 DIV. RECD SHARES GROUP COMPANIES FOR CONTROL PURPOSES 31.3.2009 Hero Honda Motors Limited 650,000 650,000 1,54,37,500 MunjaJ Showa Limited 3,000,000 3,000,000 60,00,000 Majestic Auto Limited 11,373,096 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15,000,000 - - TOTAL (C) 75,000,000 60,000,000 - INVESTMENT FROM WHICH INCOME IS EXEMPT TOTAL (A+B+C) 184,600,955 164,600,955 - FUNDS FROM WHICH INCOME FULLY TAXABLE: MUTUAL FUNDS-GROWTH (WITHOUT STT) JM Fixed Maturity Fund -Series Iv - Growth Plan - 2.500,000 TOTAL (D) - 2,500,000 DEBENTURES CITI Bank Debentures - Series 170 - 50,000,000 CITI Bank Debentures - CFIL Series 409 48,500,000 - TOTAL (E) 48,500,000 50,000,000 FUNDS FM WHICH INCOME IS TAXBALE TOTAL (D+E) 48,500,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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