TMI Blog2020 (4) TMI 426X X X X Extracts X X X X X X X X Extracts X X X X ..... re shares are held as stock in trade the main purposes to trade in shares and earned profit and in this process certain dividend is also earned which is exempt u/s 10(34) of the Act. Therefore, the expenditure attributable to exempt income will have to be apportioned and disallow u/s 14A of the Act. Assessee has rightly pointed out that in the case of Joint Investment Pvt. Ltd. vs. CIT [ 2015 (3) TMI 155 - DELHI HIGH COURT] has held that disallowance u/s 14A cannot exceed the dividend income. In the present case, the assessee earned exempt income of ₹ 7,00,000/- during the previous year and it has made suo moto disallowance of ₹ 5,00,000/- u/s 14A of the Act. In the light of the ratio laid down by the Hon ble Delhi High Court, the disallowance cannot exceed the exempt income of ₹ 7,00,000/-. Hence findings of the Ld. CIT (A) is erroneous to the extent that the Ld. CIT (A) has justified the suo moto disallowance on the ground that the AO has not excluded the strategic investments made by the assessee during the previous year. Partly allow this grounds of appeal of the revenue and modify the impugned order and direct the AO to restrict the disallowance to & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espectively against four orders dated 28.02.2018 passed by the Commissioner of Income Tax (Appeals) (for short the CIT (A) )-18, Mumbai, for the assessment years 2011-12, 2012-13, 2013-14 and 2014-15 respectively, whereby the Ld. CIT (A) has partly allowed the appeals filed by the assessee against assessment orders passed u/s 143 (3) of the Income Tax Act, 1961 (for short the Act ). Since all the appeals pertain to the same assessee and the issues raised by the parties in all the appeals are common, these appeals were clubbed, heard together and are being disposed of by this common order for the sake of convenience. We therefore, take the facts of the appeal pertaining to the Assessment Year (AY) 2011-12 as a lead case. ITA No. 3445/MUM/2018 (Assessment Year: 2011-2012) CO No. 136/MUM/2019 (Assessment Year: 2011-2012 The assessee company engaged in the business of providing detective, security and other related services, filed its return of income of for the assessment year under consideration declaring the total income of ₹ 2,25,96,240/-. The return was processed and the case was selected for scrutiny. In response to the notices, u/s 143 (2) and 142 (1) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bution to provident fund and ESIC of any particular month by the 15th and 20th day respectively of the following month. However, the assessee had failed to make the payments within the stipulated dates. 4. Whether on the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in giving relief to the assessee on issue of disallowance of ₹ 7,81,586/- as notional interest out of interest paid during the year without appreciating the fact that the money borrowed were utilized for business of the subsidiary company and not for the business of the assessee as such. 3. The assessee has filed the cross objection against the impugned order on the following effective ground: 1 (a) The Ld. CIT (A) failed to consider the fact that the ld. Assessing Officer invoked sub-section (2) of section 14A of the Act for applying Rule 8D, merely on general observations; without recording any fact specific dissatisfaction regarding the claim made by the respondent, having regard to the accounts of the assessee. (b) The ld. CIT (A) erred in facts and in law in not considering only investments from which exempt income has been earned during the year un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l observations without recording any dissatisfaction, after having regard to the accounts of the assessee as required under sub section 2 of section 14A and the Ld. CIT (A) has rightly held that the suo moto disallowance made by the assessee is reasonable and no further disallowance u/s 14A r.w.r. 8D is not warranted. The Ld. counsel further submitted that the Ld. CIT (A) has erred in not considering only investment which generated exempt income during the previous year while computing disallowance u/s 14A r.w.r. 8D(2) (ii) and 8D(2) (iii). The Ld. counsel without prejudice submitted that the disallowance u/s 14A r.w.r. 8D (2) cannot exceed the exempt income earned by the assessee in the light of the ratio laid down by the Hon ble Delhi High Court in the case of Joint Investments Pvt. Ltd. vs. CIT, 372 ITR 694 (Delhi). 6. We have heard the rival submissions and perused the material on record including the cases relied upon by the revenue and the Ld. counsel for the assessee. We notice that the Ld. CIT (A) has justified the suo moto disallowance of ₹ 5,00,000/-made by the assessee inter alia on the ground that if strategic investments are excluded disallowance u/s 8D(ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontribution towards Provident Fund and ₹ 1,49,74,234/- being ESIC after the due date prescribed under the relevant Act, the AO issued notice and asked the assessee to show cause as to why this amount should not be disallowed in view of the provisions of section 36(1) (va) of the Act. In response to the said notice, the assessee submitted that it has deposited the contributions before the due date of filing return of income and as per the legal position no disallowance can be made u/s 43B in respect of the employers or employees share to PF/ ESIC etc. The AO rejected the contention of the assessee and made disallowance of ₹ 3,09,07,284/- and ₹ 1,49,74,234/-. In the first appeal, the Ld.CIT (A) set aside the findings of the AO and deleted the addition made on account of the disallowance aforesaid. The Ld. DR relying on the assessment order submitted that since the AO had made the disallowance in accordance with the provisions of the Act, the Ld. CIT (A) ought to have confirmed the action of the AO. Therefore, the findings of the Ld. CIT (A) are liable to be set aside. 9. On the other hand, the Ld. counsel for the assessee submitted that the Ld. CIT (A) has rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vide Ground No. 4 the revenue has challenged the action of the Ld. CIT (A) in deleting the disallowance amounting to ₹ 7,81,586/- made by the AO as notional interest out of the interest paid during the previous year. The Ld. DR submitted before us that the assessee had advanced interest free loans amounting to ₹ 65,13,214/- during the previous year and appellant had paid interest of ₹ 6,99,73,000/- on its borrowings. Since, the assessee failed to offer explanation to the satisfaction of the AO, the AO rightly worked out the interest @ 12% on the said advances and added back the same to the income of the assessee. Since, the AO had made the disallowance in accordance with the provisions of law, the Ld. CIT (A) has wrongly deleted the addition made by the AO. 12. On the other hand, the Ld. counsel for the assessee submitted before us that the borrowed funds were used for business which is evident from Note 10 of Schedule 16 of the balance sheet. Further, all the interest free loans were brought forward from earlier years wherein the own funds were more than the investments and the loan advance. The Ld. counsel further submitted that since the findings of the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 89.95 Lakhs Surplus ₹ 3846.97 Lakhs 7.3.7 Since the own funds are more than investments and loans the presumption is that loans have been advanced by using the own funds only as held by Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities, 313 ITR 340. 7.3.8 It is also pertinent to note that the working capital loan and vehicle loans have been used only for business as is evident from Note 10 of Schedule 16 to balance sheet. 7.3.9 Besides, all the loans were advanced to subsidiary companies only out of commercial expediency. Therefore, the advancing of loans is for business purpose as held by the Hon ble Supreme Court in the case of SA Builders Ltd. vs. CIT, 158 Taxmann 74. 7.3.10 In the light of the foregoing, disallowance of proportionate interest on loans advanced to subsidiary companies is not warranted. 7.3.11 Therefore, interest disallowance of ₹ 7,81,586/- is hereby deleted. 14. We notice that the Ld. CIT (A) has deleted the addition made on account of disallowance of notional interest out of the interest paid during the relevant year on the ground that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est out of interest paid during the year without appreciating the fact that the money borrowed were utilized for business of the subsidiary company and not for the business of the assessee as such. 3. The assessee has filed the cross objection against the impugned order on the following effective ground: 1 (a) The Ld. CIT (A) failed to consider the fact that the ld. Assessing Officer invoked sub-section (2) of section 14A of the Act for applying Rule 8D, merely on general observations; without recording any fact specific dissatisfaction regarding the claim made by the respondent, having regard to the accounts of the assessee. (b) The ld. CIT (A) erred in facts and in law in not considering only investments from which exempt income has been earned during the year under consideration, while computing disallowance u/s 14A on application of Rule 8D (2)(ii) and Rule 8D(2)(iii). 2. Without prejudice to above, the disallowance u/s 14A of the Act ought to have been restricted to the extent of the exempt income of ₹ 17,50,000/- earned during the year under consideration. 4. Vide Ground No. 1 and 2 the revenue has challenged the action of the Ld.CIT (A) in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestments are in the nature of strategic investments to acquire the controlling interest in the appellant s business division sold to its wholly owned subsidiary companies in the year under reference. 2. Whether on the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in ignoring the decision of Hon ble Bombay High Court in ITXA No. 626/2010 Writ Petition No. 758/2010 dated 12/08/2010 in the case of Godrej Boyce Manufacturing Co. Limited, Mumbai vs. Dy. CIT-10(2), Mumbai in which the decision is in favour of the Revenue. 3. Whether on the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in giving relief to the assessee on issue of disallowance of ₹ 36,34,489/- as interest attributable to interest free advances without appreciating the fact that the money borrowed were utilized for business of the subsidiary company and not for the business of the assessee as such. 3. On the other hand, the assessee has filed the cross objection against the impugned order on the following effective ground: 1 (a) The Ld. CIT (A) failed to consider the fact that the ld. Assessing Officer invoked sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee during the relevant year, we dismiss the cross objection filed by the assessee. ITA No. 3448/MUM/2018 (Assessment Year: 2014-2015) CO No. 139/MUM/2019 (Assessment Year: 2014-2015) The facts of the present case are similar to the facts of the case of the assessee pertaining to the AY 2011-12, 2012-13 and 2013-14 except the amount of exempt income earned by the assessee during the previous year and the disallowance made by the AO u/s 14A r.w.r. 8D of the Rules. 2. The revenue has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:- 1.Whether on the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in granting relief to the assessee on the issue of disallowance u/s 14A r.w.r. 8D without appreciating the fact that the share investments are in the nature of strategic investments to acquire the controlling interest in the appellant s business division sold to its wholly owned subsidiary companies in the year under reference. 2. Whether on the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in ignoring the decision of Hon ble Bombay High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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