TMI Blog2020 (4) TMI 229X X X X Extracts X X X X X X X X Extracts X X X X ..... Co.Ltd. [ 2010 (8) TMI 77 - BOMBAY HIGH COURT] - Since the year under consideration is AY 2006-07, therefore we are also of the view that as per the decision of Hon ble Bombay High Court in the case of Godrej Boyce Mfg.Co.(supra), the provisions of Rule 8D are not applicable for the year under consideration. Assessee had aggregate interest-free funds by way of share capital and reserves and amounting to ₹ 195.10 crores which are more than the investment in shares and mutual funds amounting to ₹ 129.80 crores. Thus, in this way, the assessee was having enough interest-free funds and, hence, the disallowance out of interest expenditure could not have been made while relying upon the ratio laid down by the Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. [ 2009 (1) TMI 4 - BOMBAY HIGH COURT] Since Ld.CIT(A) had rightly concluded that disallowance of ₹ 2,56,00,942/- out of interest expenditure made by the Assessing Officer as per section 14A of the Act was not justified keeping in view the principles laid down by the Hon ble Bombay High Court as well as the Coordinate Bench of ITAT Ahmedabad and even no new facts or circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... N, JUDICIAL MEMBER : The captioned appeal has been filed at the instance of the Revenue against the appellate order of the Commissioner of Income Tax(Appeals)-XIV, Ahmedabad [CIT(A) in short] dated 14/05/2012 arising in the assessment order passed under s.143(3) r.w.s.147 of the Income Tax Act, 1961 (hereinafter referred to as the Act ) dated 17/11/2011 concerning Assessment Year (AY) 2006-07. The assessee has also filed cross-objection in the Revenue s appeal. 2. First, we take up the Revenue s appeal in ITA No.1668/Ahd/20212 for AY 2006-07, wherein following grounds have been raised by the Revenue: 1) The Ld.Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance of ₹ 2,56,00,942/- made by the Assessing Officer u/s.14A of the Act. 2) The Ld.Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in allowing relief to the Assessee after rejecting the recomputation of the Long Term Capital Loss by the Assessing Officer at ₹ 47,74,277/- as against claim of the Assessee at ₹ 8,20,72,056/-. 3) The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered and not found acceptable. As regards the reply of the assesse as per his letter dated 03/11/11 at para number 7 to para number 7.4 the same has already been dealt with vide this office letter dated 29/09/2011 while rejecting the objections taken by the assessee for reopening of assessment under section 147 of the act and the same has been reproduced above at para no. 3 of this order and are not being reproduced again for the sake of brevity. Further on merits, it is stated that Parliament in its wisdom had enacted section 14A with retrospective effect from 1-4-1962 in order to clarify the already existing position that only those expenses could be claimed which were relatable to the taxable income. In the past, it was seen that assessee's were pushing the expenses relating to exempt income which were not taxable towards taxable income and thereby reducing the taxable income wrongly. It was to curb this mischief that the Parliament enacted section 14A and also to overcome the decision of Hon ble Supreme Court in the case of Rajasthan State Warehousing Corpn. v. CIT [2000] 2421TR 450, wherein it was held that if the exempted income and the taxable income are earne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure directly relating to the exempt income as per clause (i); expenditure by way of interest which is not directly attributable to particular income as per clause (ii); an amount equal to one half per cent of the average of the value of investment as per clause (iii). The sum total of these three amounts is the amount disallowable under section 14A. The stipulation of section is to compute the amount of expenditure which is not allowable under section 14A, as is re lot able to the exempt income and not for considering all the expenses one by one for ascertaining if either of them have resulted into exempt income and thereafter, considering such an amount as disallowable under section 14A. If that way of interpretation of section 14A was to be accepted, then the method of computing the expenditure as relatable to the exempt income as provided in rule 8D, would become meaningless and the words 'in accordance with such method as may be prescribed' in sub-section (2) for determining the amount disallowable would require obliteration, which is not possible. The expression 'in relation to ' has been used in various sections apart from section 14A, such as se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es amply clear that not only the expenditure directly relating to exempt income [Sub-rule 2(i) of rule 8D] hut also the indirect expenditure like interest which is not directly attributable to any particular income or receipt [Sub-rule 2(ii)] and then further, one half per cent of the value of investment to cover up incidental indirect expenses [Sub-rule 2(iii)] have been categorized as 'expenditure incurred in relation to exempt income'. The intention behind using expression 'in relation to ' in section I4A is to encompass not only the direct but also the indirect expenditure which has any relation to exempt income. Therefore, all the direct and indirect expenses are disallowable under section 14A, which have any relation with the income not chargeable to tax under the Act. Be that as it may, the discussion about the apportionment of direct or indirect expenditure towards taxable and exempt income has become academic in view of rule 8D, which prescribes mechanism for working out the disallowance under section 14A. In that scenario, the further question raised by the parties about the onus on the Assessing Officer or the assessee for bringing a particular amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of appellate proceedings, the AR of the appellant has made the written submission and it will be appropriate to reproduce below the relevant part of the submission: The learned A. O. has invoked provisions of Rule SD and made disallowance of interest by applying the formula of Rule 8D, in total disregard of the fact that at the time of original assessment the appellant had already explained before him that the investments were not referable to any borrowed funds and this aspect was appreciated by him as also by the C1T(A) as per extracts from such orders reproduced in the earlier para. Hence this disallowance on concluded issue is totally unjustified. Apart from this, it is submitted that Rule 8D is not applicable to the year under consideration, as it is applicable only prospectively from 1-4-2008 as held by the Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. 194 !TR Taxman 203. Having regard to this aspect, the appellant further submits that various courts have been taking a consistent view that disallowance u/s.l4A can be made only if there is an actual nexus between tax-free income and expenditure incurred on the same. In this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, it is noticed that while passing the assessment order u/s. 143(3) dated 30/12/2008 in para 2.1 and 2.2, the A. O/had considered the investment in shares made by the assessee and its source. He had, thereafter, disallowed 1% of the expenses by invoking section 14A. the Id.CIT(A) had thereafter in the appellate order -dated 19/02/2009 considered the applicability of section 14A and held that out of interest nothing was to be disallowed since the A. O. had not attached attributability..of such interest to any particular income and only administrative expenditure were found to be disallowable. The Id. CIT(A) had thereafter enhanced the disallowance to 0.5% of the investment i.e. to ₹ 48,77,592/-. Thus, the disallowance of interest and administrative expenses in terms of Section 14A was already considered and decided by my predecessor in the appeal against the order u/s. 143(3) of the Act referred to above. Hence, the A. O. was not justified in enhancing such disallowance by reworking the disallowance from interest and administrative expenses. Further, it is noticed that the provisions of Rule 8D are applicable from A. Y. 2008-09 as held by Bombay High Court in the case of Godr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise, it was rightly concluded by the ld.CIT(A) that the provisions of Rule 8D of the Income Tax Rules, 1962 are applicable from AY 2008-09 as held by Hon ble Bombay High Court in the case of Godrej Boyce Mfg.Co.Ltd. (194 Taxman 203). Since the year under consideration is AY 2006-07, therefore we are also of the view that as per the decision of Hon ble Bombay High Court in the case of Godrej Boyce Mfg.Co.(supra), the provisions of Rule 8D are not applicable for the year under consideration. From the records, we also noticed that the assessee had aggregate interestfree funds by way of share capital and reserves and amounting to ₹ 195.10 crores which are more than the investment in shares and mutual funds amounting to ₹ 129.80 crores. Thus, in this way, the assessee was having enough interest-free funds and, hence, the disallowance out of interest expenditure could not have been made while relying upon the ratio laid down by the Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. (313 ITR 340). The Ld.CIT(A) while deciding this issue had also taken into consideration the decision of Coordinate Bench of ITAT Ahmedabad in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me as the cost before indexation. Accordingly, the LTCL worked out to ₹ 4774277 only as against ₹ 82072060 as was-deter mined by the assessee. Accordingly assessee was given a show cause vide this office letter dated29. 09. 2011 as to why LTCL should not be reworked after disallowing indexation claimed by you. In response to the above notice the assessee filed his reply vide letter dated 03/11/2011. The reply of the assessee has been considered and not found acceptable. Explanation (Hi) to section 48 defines indexed cost of acquisition and is reproduced as under: Explanation.-For (he purposes of this section,- (iii) indexed cost of acquisition means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April 1981, whichever is later To identify the cost of acquisition and to give the benefit of indexation are two different things and both the situation have been dealt under different sections of the act. Explana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered from the words used in the statute. It will be well to recall the words of RowlattJ. in Cape Brandy Syndicate v. IRC [1921] 1 KB 64 (KB) at page 71, that: '.....in a taxing Act one has, to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a lax. Nothing is to be read in; nothing is to be implied. One can only look fairly at the language used . In this regard reliance is also placed upon the decision of the Hon'ble Supreme Court in a bench of Five Judges in the case of Padmasundara Rao Vs State of Tamil Nadu[2002] 255 ITR 147 and also in the case of Prakash Nath Khanna Vs CIT[2004] 266 ITR 1 (SC). Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may, appear to the judicial mind to be. Further as far as the legislative intent was concerned the IT AT, Mnmbai 's ruling rejecting appellants plea in the case of Smt. Smita N Shah Vs. JCIT [2005] 94 JTD 492(Mum), that Section 51 of the Act should be interpreted with reference to the dictum: - UT RES MAGIS VALEA T QUAM PEREAT , i. e. such a mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there was no reference to the period of holding of the previous owner. Instead, the cost had to be indexed w.r.t. the period from which the assessee first held the asset. What was clearly spelt out in the .provisions of the Act cannot be overridden by assuming a different purpose or intent of the legislature. The purpose of Explanation I (b) to section 2(42A) was to determine the nature of capital gain i.e. whether it was Long Term Capital Gain or Short Term Capital Gain. There is no dispute to the fact that the asset transferred was a Long Term Asset liable to Long Term Capital Gain. The issue concerns only indexation of cost of acquisition which can be considered only from the year in which the asset was held by the assessee by virtue of Explanation (iii) to section 48 of the Act. Explanation l(b) to section 2(42A) of the Act does not override other provisions of the Act including Explanation (iii) of section 48. Neither section 2(42A), nor its explanation contains anon obstante clause. Thus, it cannot be taken into consideration for determining indexed cost of acquisition. Further, there was no basis for the argument that, as Explanation (iv) of section 48 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o disallowance of carry forward of long term capital loss of '₹ 7,72,9 7, 783 (₹ 8,20,72,060 minus ₹ 47,74,277). As only a plain reading of the impugned reassessment order shows, the appellant had made elaborate written submissions explaining how the proposed recomputation of the long term capital loss after ignoring the period for which the investments in question were held by their previous owners (the Amalgamating Companies) for the purpose of indexation of actual cost of acquisition was entirely misplaced. Before Your Honour, the appellant begs to further rely on an elaborate Note on this subject \vhich is attached at Annexure-'B' hereof. , The appellant begs to further point out: (a) that the Division Bench decisions of the ITAT on which the learned Assessing Officer has relied in justification of his stand for refusing to grant Indexation of the actual cost of the previous owners in respect of the period for which the investments in question were held by the previous owners, have since come to be disapproved by the decision of the Special Bench of the Hon'ble ITAT, Bombay in DCIT v. Manjulaben J. Shah rendered on 16-10-2009. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the indexed cost of acquisition under clause (Hi) of the Explanation to Section 48 of the Act. 15) For belter appreciation, of the dispute, we quote the relevant part of Section 48 herein : Mode of Computation 48. The income chargeable under the head capital gains shall be computed, by deducting from the full value of the consideration received or accruing as a result of the result of the transfer of the capital asset the following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto; Provided that... Explanation -For the purposes of this Section, (i) ...... (ii) ....... (iii) indexed cost of acquisition means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later; 16) It is the contention of the revenue that since the indexed cost of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eemed to have held the asset from 29/1/1993 and deemed to have incurred the cost of acquisition and accordingly made liable for the long term capital gains tax. Therefore, when the legislature by introducing the deeming fiction seeks to lax the gains arising on transfer of a capital asset acquired under a gift or will and the capital gains under Section 48 of the Act has to be computed by applying the deemed fiction, it is not possible to accept the contention of revenue that the fiction contained in Explanation l(i)(li) to Section 2(42A) of the Act cannot be applied in determining the indexed cost of acquisition under Section 48 of the Act, 19) It is true that the words of a statute are to be understood in their natural and ordinary sense unless (lie object of the statute suggests to the contrary. Thus, in construing the words 'asset was held by the assessee' in clause (iii) of Explanation to Section 48 of the Act, one has to see the object with which the said words are used in the statute. If one reads Explanation l(i) (b) to Section 2 (42A) together with Section 48 and 49 of the Act, it becomes absolutely clear that the object of the statute is not merely to tax the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 55(l)(b)(2)(u) of the Act provides that where the capital asset became the property of the assessee by any of the modes specified under Section 49(1) of the Act, not only the cost of improvement incurred by the assessee but also the cost of improvement incurred by the previous owner shall be deducted from the total consideration received by the assessee while computing the capital gains under Section 48 of the Act. The question of deducting the cost of improvement incurred by the previous owner in the case of an assessee covered under Section 49(1) of the Act would arise only if the period for which ; the asset was held by the previous owner is included in . determining the period for which the asset was held by the assessee. Therefore, it is reasonable to hold that in the case of an assessee covered under Section 49(1) of the Act, the capital gains liability has to be computed by considering that the assessee held the said asset from the date it was held by the determining the indexed cost of acquisition. 22) The object of giving relief to an assessee by allowing indexation is with a view to offset the effect of inflation. As per the CBDT Circular No. 636 dated 31/8/1992 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of ₹ 8,20,72,060. He has referred to the Explanation (in) below section 48 and held that the benefit of indexation is available to the assessee from the year in which the asset was held by the assessee. It is held by him that the investments were for the first time held by the assessee in the year in which it was sold and hence indexation is not given. As stated above in the statement of facts, the ITAT, Mumbai in the case of Manjulaben J. Shah has decided the issue in favour of the assessee and the said decision has been approved by the Bombay High Court vide decision dated 11-10-2011, copy of which is already attached. As discussed by the Bombay High Court, the term held, by the assessee is not defined in section 48 and it has to be understood with reference to section 2(42A) of the Act. The appellant may in the. back ground of this position refer to section 47 (vi) wherein it is held that transactions referred to in section 47 are not to be considered as transfer. This, inter alia, .includes in clause (vi) of section 47 to any transfer in scheme of amalgamation of capital asset by amalgamating company to the amalgamated company if the amalgamated compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, there shall be included the period for which the share or shares in the amalgamating company were held by the assessee ;] (d) in the case of a capital asset, being a share or any other security (hereafter in this clause referred to as the financial asset) subscribed to by the assesses on the basis of his right to subscribe to such financial asset or subscribed to by the person in whose favour the assessee has renounced his right to subscribe to such. financial asset, the period shall be reckoned front the date of allotment of such financial asset; . (e) in the case of a capital asset, being the right to subscribe to any financial asset, which is renounced in favour of any other person, the period shall be reckoned from the date of the offer of such right by the company or institution, .-as the case may be, making such offer ;] (f) in the case of a capital asset, being a financial asset, allotted without any payment and on the basis of holding of any other financial asset, the period shall be reckoned from the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... algamation had taken place. This is what is appreciated and by the Bombay High Court in the above referred case. Accordingly, the A. O. was not justified in rejecting the claim of indexation and disallowing the long term capital loss to the extent of R.s.7.72 crores. The addition deserves to be deleted. 15. We have heard the Learned Representatives for both the parties. We have also perused the material placed on record, judgements cited by the parties as well as the orders passed by the revenue authorities. Before we decide the merits of this ground, it is necessary to evaluate the order passed by the Ld.CIT(A) while deciding this ground. The Ld.CIT(A) has dealt with this ground in paragraph No.4.1 of his order which is reproduced hereinabove. The operative portion contained in paragraph No.4.3 of the order of the ld.CIT(A) is reproduced hereunder: 4.3. Decision I have carefully perused the findings of the assessing officer and submissions made by the Ld.AR. It is noticed that the appellant had claimed the cost of previous owner and indexation of such cost from the date when the relevant investments were acquired by the previous owner. The A.O. noticed that the inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering the date of amalgamation for the purpose of indexation. This finding is further supported by the ratio of the Bombay High Court decision in the case of CIT vs. Manjulla J. Shah {ITA No.3378 of 2010] dated 11/10/2011] wherein similar analysis has been made by the Hon ble Court. Accordingly, the A.O. is directed to consider the period of holding of the investment from the date when the investments were acquired by the amalgamating companies. The appellant s claim in this regard, is therefore, accepted and the ground of appeal is accordingly allowed. 16. After having heard the Counsels of both the parties at length and after having gone through the facts of the present case, we find that assessee had claimed the cost of previous owner and indexation of such cost from the date when the relevant investments were acquired by the previous owner. We notice that the investment sold by the assessee was acquired by the assessee in a scheme of amalgamation which became effective from 01/04/2005. However, as per Revenue, for the purpose of indexation cost, the year in which the asset was first held by the assessee is to be considered, but as per assessee, the indexat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reject the ground raised by the Revenue. Ground No.3 of Revenue s appeal 17. This ground raised by the Revenue relates to challenging the order of the Ld.CIT(A) in deleting the addition made of the amount disallowed u/s.14A of the Act while computing the Book Profit/Income u/s.115JB of the Act. 18. The Ld.DR relied upon the order of the Assessing Officer. 19. On the contrary, Ld.AR relied upon the decision of the Ld.CIT(A) as well as the written submissions filed before the Ld.CIT(A) which is contained in Paragraph No.5.1 of the order of the Ld.CIT(A) which is reproduced hereunder: 5.1 During the course of appellate proceedings, the AR of the appellant has made the written submission and it will be appropriate to reproduce below the relevant part of the submission: As stated above, the learned A.O. has made .adjustment to the book profit on account of disallowance of expenditure of aggregate amount of ₹ 3,04,78,534 made in the reassessment order. It is submitted that as per explanation 1 (f) of section 115JB only such expenditure, which are specifically relatable to the income to which section 10 applies are to be added back in the computation of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educed from the book profit unless the book profit of such year has been increased by those reserves :, or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be; or] (ii) the amount of income to which any of the provisions of : 30[section 10 (other than the provisions contained in clause (38) thereof)] or section 11 or section 12 apply, if any such amount is credited to, the profit and loss account; or [(iia) the amount of depreciation debited to the profit and loss account (excluding the depreciation on account of , revaluation of assets); or iib) the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation, on account of revaluation of assets referred to in clause.(iia); or] (iii) the .amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. It is submitted that as per explanation 1 (f) referred to above, only those expenditure which are specifically relatable to .income to which section 10(other than clause 38 of that sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... categorically held that under clause F of Explanation to section 115JA, the provisions of section 2 and sub- section 3 of section 14A cannot be imported. Further, the Coordinate Bench of ITAT Ahmedabad in the case of Gujarat State Energy Generation Limited in ITA Nos.1777 and 2028/Ahd/2009 vide order dated 15/04/2011 has held that after considering the decision of Hon ble Apex Court in the case of Apollo Tyres only such items which are specifically mentioned in Explanation to section 115JB need to be excluded or included and nothing more can be brought in. 20.1. Thus, after considering the decisions of the Coordinate Benches, we are also of the view that the book profit has to be computed as per the audited books of accounts maintained by the assessee and the audited results which have been approved in the AGM by the shareholders. Only those adjustments can be made to the approved book profit, which are specifically mentioned in the Income Tax Act. Thus, in our view, any notional adjustment in the book profit is not permissible. No new facts or circumstances have been brought before us in order to controvert or rebut the findings so recorded by the Ld.CIT(A). Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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