TMI Blog2020 (6) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... t expenses needs to be capitalized. - Decided in favour of assessee Deduction u/s 35D - deduction of 1/5 of such expenditure - expenses incurred on the increase of authorized capital /stamp duty for allotment of shares - HELD THAT:- It is a fact on records that the expenditure in connection with the increase in authorized share capital was incurred before the commencement of the business. Therefore we hold that the assessee is eligible for deduction of the impugned expenditure under the provisions of section 35D of the Act. In view of the above, we set aside the finding of the learned CIT (A) and direct the AO to allow the claim of the assessee. Hence the ground of appeal of the assessee is allowed. Disallowance u/s 14A - Whether expenses relatable to earning exempt income cannot be allowed - HELD THAT:- Amount of disallowance of the expenditure cannot exceed the amount of exempted income in the case of CIT vs. Vision Finstock Stock Ltd. [ 2017 (7) TMI 1277 - GUJARAT HIGH COURT] - we hold that the disallowance of the expenses under section 14A read with rule 8D cannot exceed the amount of exempted income. Hence we do not find any reason to interfere in the order of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost incurred in connection with the acquisition of shares to be capitalized amounting to ₹ 1,61,81,506/-. 4. The facts in brief are that the assessee in the present case is a private limited company and engaged in the business of investments. The assessee in the year under consideration has acquired shares of a company namely Sterling Addlife India Limited for a value of ₹ 305,73,77,201/- only. The investment was made by the assessee out of its own fund as well as out of the fund borrowed from the bank i.e. Kotak Mahindra Bank Limited amounting to ₹ 105,00,00,000/-. The investment was made by the assessee in the aforesaid company on 14th of February 2014 whereas the amount of loan was borrowed by the assessee from the bank on 13th February 2014 which was utilized in such investments. The assessee in connection with borrowing of such loan from the bank has incurred the cost in the form of loan processing fees as well as interest expenses which was capitalized by adding the same in the value of the investments as on 31st March 2014. As such the assessee has capitalized the amount of loan processing fees and interest expenses up to 31st March 2014 aggregating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned CIT (A) further agreed that amount of interest expenses cannot be treated as revenue in nature in pursuance to the provisions of section 36(1)(iii) of the Act. It is because such interest expenses does not pertain to the business assets. However, the learned CIT (A) further held that such interest expenses cannot be capitalized and further directed the AO not to allow such expenses as revenue in nature. Thus, the appeal of the assessee was partly allowed. 7. Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us. 8. The learned AR before us filed a paper book running from pages 1 to 119 and submitted that the company was incorporated as Investment Company. As such there was no activity carried out by it other than making the investment in the shares of other companies. Accordingly, the interest expenses incurred by it are directly attributable to such investments and therefore the same needs to be capitalized. 9. On the other hand the learned DR vehemently supported the order of the authorities below. 10. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired to be capitalized. In this regard we find support and guidance from the judgement of Hon ble Madras High Court in the case of CIT versus Trishul Investments Ltd reported in 305 ITR 434 wherein it was held as under: As per the memorandum of association of the assessee company, it could be seen that the assessee company was incorporated on 24-1-1995 under the Companies Act, 1956 to engage in the business of investment. The finding given by the Tribunal was that the assessee had no intention to trade in shares. Hence, the purchase of shares could not be business asset in the hands of the assessee. The assessee had rightly offered the same under the head 'Capital gain'. The Tribunal also correctly arrived at a conclusion that it was only an investment activity and held that the profit derived from the sale of shares was subject to capital gain. The reasons given by the Tribunal were based on valid materials and evidence and there was no infirmity in the order of the Tribunal. Moreover, the interest paid for acquisition of shares would partake character of cost of share and, therefore, the same was rightly capitalized along with the cost of acquisition of shares. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly the assessee claimed that it is eligible for deduction of such expenditure under the provisions of section 35D of the Act. However, the AO disregarded the contention of the assessee by observing that the main object of the assessee is to make investment in the shares of other companies. As such the assessee has fulfilled its object by acquiring the shares of another company as discussed above but the same cannot be considered a new business activity of the assessee. However, the AO was of the view that the expenditure incurred at the time of incorporation of company by way of fees paid to the registrar of companies amounting to ₹ 4,12,908/- is eligible for deduction under section 35D of the Act. Thus the AO disallowed the claim of the assessee for the balance amount of the deduction claimed under section 35D of the Act, amounting to ₹ 25,59,701/- and added to the total income of the assessee. 14. Aggrieved assessee preferred an appeal to the learned CIT (A). 15. The assessee before the learned CIT (A) submitted that the company was registered dated 28th of November 2013 but it started activity by acquiring the shares in the company as discussed above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),- (i) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his 92 [***] undertaking or in connection with his setting up a new 92 [***] unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the 92 [***] undertaking is completed or the new 92[***] unit commences production or operation : 93 [Provided ********* (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely :- (a) expenditure in connection with- (i) preparation of feasibility report; (ii) preparation of project report; (iii) conducting market survey or any other surve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19/- under the provisions of section 14A of the Act. 22. The AO during the assessment proceedings found that the assessee has made investments in the shares of other companies which are capable of giving rise to the exempted income. But the assessee has not made any disallowance of the expenses claimed in the profit and loss account amounting to ₹ 1,47,813 under the provisions of section 14A read with rule 8D. The AO also observed that the assessee has incurred interest expenses on the acquisition of shares of the company namely Sterling Addlife Pvt. Ltd. out of the borrowed fund. Accordingly he was of the view that the expenditure incurred against the borrowed fund amounting to ₹ 1,61,81,506/- not eligible for deduction by virtue of the provisions of section 14A read with rule 8D of income tax rules. Accordingly he made the disallowance of ₹ 1,63,29,319/- and added to the total income of the assessee. 23. Aggrieved assessee preferred an appeal to the learned CIT (A) who has deleted the addition made by the AO by observing that there was nil income exempted received by the assessee in the year under consideration. Therefore there cannot be any disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in relation to the tax exempt income . This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. We also note that in the identical facts and circumstances the Hon ble jurisdictional High Court has decided that the amount of disallowance of the expenditure cannot exceed the amount of exempted income in the case of CIT vs. Vision Finstock Stock Ltd. In tax appeal No. 486 of 2017 vide order dated 31 July 2017. The relevant extract of the order is extracted below: 1. The Revenue has challenged the judgement of the Income Tax Appellate Tribunal dated 07.07.2016 raising following questions for our consideration: A. Whether on the facts and circumstances of the case and in low, the ITAT was justified in restricting the disallowance made of Rs. l,02,82,049/- u/s. 14A to the extent of exempt income of ₹ 55,6047- only? B. Whether on the facts and circumstances of the case and in law, the ITAT was justified in restricting the disallowance of ₹ 1,02,82,049/- made u/s. 14A of the Act to the extent of income earned of ₹ 55,6047- without appreciating that the assessee had paid interest o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Commissioner of Income Tax in ITA No. 6103/MUM/2018 vide order dated 14-5-2020 extended the time for pronouncing the order within 90 days of time by observing as under: 9. Let us in this light revert to the prevailing situation in the country. On 24th March, 2020, Hon ble Prime Minister of India took the bold step of imposing a nationwide lockdown, for 21 days, to prevent the spread of Covid 19 epidemic, and this lockdown was extended from time to time. As a matter of fact, even before this formal nationwide lockdown, the functioning of the Income Tax Appellate Tribunal at Mumbai was severely restricted on account of lockdown by the Maharashtra Government, and on account of strict enforcement of health advisories with a view of checking spread of Covid 19. The epidemic situation in Mumbai being grave, there was not much of a relaxation in subsequent lockdowns also. In any case, there was unprecedented disruption of judicial wok all over the country. As a matter of fact, it has been such an unprecedented situation, causing disruption in the functioning of judicial machinery, that Hon ble Supreme Court of India, in an unprecedented order in the history of India and vide order d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to interpreted. The interpretation so assigned by us is not only in consonance with the letter and spirit of rule 34(5) but is also a pragmatic approach at a time when a disaster, notified under the Disaster Management Act 2005, is causing unprecedented disruption in the functioning of our justice delivery system. Undoubtedly, in the case of Otters Club Vs DIT [(2017) 392 ITR 244 (Bom)], Hon ble Bombay High Court did not approve an order being passed by the Tribunal beyond a period of 90 days, but then in the present situation Hon ble Bombay High Court itself has, vide judgment dated 15th April 2020, held that directed while calculating the time for disposal of matters made time-bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly . The extraordinary steps taken suo motu by Hon ble jurisdictional High Court and Hon ble Supreme Court also indicate that this period of lockdown cannot be treated as an ordinary period during which the normal time limits are to remain in force. In our considere ..... X X X X Extracts X X X X X X X X Extracts X X X X
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