TMI Blog2012 (12) TMI 1215X X X X Extracts X X X X X X X X Extracts X X X X ..... filed its return of income declaring ₹ 27,56,74,120/-. During the assessment proceedings u/s 143(3) of the Act, the AO called for various details and after examination of the same, came to the conclusions that certain disallowances are called for.. 3. From the financials of the assessee, the AO observed that the assessee company has earned exempted income of ₹ 2,44,33,380/- The assessee was asked to explain as to why the expenditure incurred for earning exempted income by applying the provisions of sec. 14A read with rule 8D of IT Rules should not be disallowed. In response to the same, the assessee company stated that the investments are made out of additional capital raised and no specific expenditure has been incurred for earning the exempted income. The AO was however not convinced with the said submissions of the assessee and held that whether the investments is made out of additional capital raised or otherwise, the cost of expenditure incurred for earning such exempted income has to be worked out as per the provisions of sec. 14A read with Rule 8D and has to be disallowed. He further observed that the reasons as to why the assessee company has not utilized th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, he placed reliance upon the decision of ITAT Delhi Bench in the case of 1) Wimco Seedings Ltd., Vs. DCIT (2007) reported in 293 ITR (Del Trib) and 2) M/s Civil Engineers Enterprises Pvt. Ltd., Vs. DCIT reported in 859/Kol/2010 dated 19.8.2010 3) ITO Vs. M/s B.P Securities Pvt. Ltd. in ITA No.123/Kol/2010 dated 19.8.2010, wherein it was held that even if the assessee claims that no expenditure had been incurred to earn exempted dividend, still 1% of exempted income has to be disallowed u/s 14A of the Income-tax Act as indirect and invisible expenditure relatable to the exempted income. Thus, he confirmed the disallowance made by the AO and the assessee is in second appeal before us. 5. The learned AR while reiterating the submissions made by the assessee before the authorities below submitted that the assessee s paid up capital and resources during the relevant assessment year exceeded ₹ 124 crores while the investments aggregating to ₹ 35 crores were made out of the additional share capital raised during the assessment year 2006-07. He submitted that prior to raising of such additional capital, the assessee s investment was not significant. He submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngalore Benches in the case of Khoday Distilleries and.. the decision of the Hon ble Supreme Court in the case of Walfort Shares and stock Brokers reported in 326 ITR 1 (SC). He submitted that the judgments on which assessees has placed reliance upon relate to the period prior to insertion of Rule 8D of IT Rules and, therefore, are not applicable to the facts of the case before us. 8. Having heard both the parties and having considered their rival contentions, we find that the undisputed facts are that the assessee has invested the additional capital raised by it in mutual funds and has earned dividend income which is exempt from tax. In such a circumstances, the provision of sec. 14A come into play. Wherever an assesee earns exempted income, the expenditure incurred for earning such income is to be disallowed. For the purposes of convenience and clarity, the provision of sec. 14A are reproduced hereunder: (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, 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)The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) In a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :- B A X ___ C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii) An amount equal to one-half percent o the average of the value of investment, inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rather than the amount of exempt income. Under Portfolio Management Schemes (PMS) the free charges ranges between 2 and 2.5 percsent, of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed administrative expenses were excluded, on the ground that in the case of a large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment. The justification that has been offered in support of the rationale for Rule 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this court to hold that there is writ on the statue or on the subordinate legislation perversity, caprice or irrationality. There is certainly no madness in the method. Therefore, even where there is no direct expenditure relatable to the exempt income, a part of administrative/managerial expenses have to be attributed towards such income and for this purpose only clause (iii) of Rule 8D(2) is provided. The AO has applied clause (iii) of 8D(2) and hence is justified. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arging off the cost of the tool in two years and has been following this practice for the last 14 years and the Revenue has accepted this method. He submitted that this is the only year in which the Revenue has made the disallowance. He submitted that some of the details called for by the AO could not be furnished as the volume of tools purchased and used was very high and the details were called for by the AO was not possible to furnish. The details available with the assessee was furnished but the AO failed to appreciate the same in proper prospective. He submitted that the AO having held the expenditure to be capital in nature has failed to allow depreciation on the same which shows the unreasonableness of the order. In support of his contention that uniform stand has to be taken by the AO with regard to the same assessee in allowing or disallowing a particular item of expenditure, he placed reliance upon the decision of the Supreme Court in the case of Radhasoami Satsang Vs. CIT reported in 193 ITR 321. On allowability of expenses on tools which wear-out easily, the learned counsel for the assessee has placed reliance upon the decision in the case of CIT Vs. Metalman Auto Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vanced an amount of 64,38,730/-, which is very small portion of its own funds. In support of its contention that any advances given to sister concern in commercial expediency are to be treated as business expenditure and no disallowance of interest is called for, the learned counsel for the assesee has relied upon the decision of the Hon ble Supreme Court in the case of S.A Builders Ltd., reported in 288 ITR 1. In support of its contentions that where the assessee has its own interest free funds and interest bearing funds or mixing funds then no disallowance on interest is called for on interest free advances, the learned counsel for the assessee has placed reliance upon the decision of Supreme Court in the case of Reliance Utilities and Power Ltd., reported in 313 ITR 340. The learned counsel for the assessee prayed that in the above circumstances no disallowance is called for. 17. The learned DR, however supported the orders of the authorities below. 18. Having heard both the parties and having considered their rival contentions, we find that there is no finding by the AO that there is nexus between the interest bearing funds of the assessee and the interest free advances o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure and ought to have been allowed as such. He submitted that both the AO as well as the CIT(A) have not considered the issue in the proper perspective and have erroneously held it to be capital in nature. He submitted that the Revenue authorities have to examine the exact nature of expenditure and not go by the presentation of the accounts by the assessee. He submitted that the issue of whether the said amount represents salaries paid to R D employees can be verified by the AO and the same has to be allowed as Revenue expenditure. 20. As regards the expenditure incurred for acquisition of designs, he submitted that the designs are not of enduring nature and keep changing as per the requirements of the assessee and, therefore, it cannot be said to be capital in nature. In support of this contention, he placed reliance upon the decision of Apex Court in the case of CIBA of India Ltd, 69 ITR 692, wherein it was held that when the assessee did not acquire any asset or advantage of enduring nature for the purpose of its business, it cannot be held to be capital in nature. 21. The learned DR on the other hand supported the orders of the authorities below. 22. Having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 95-96 to 2004-05 by issuing a notice dated 28.3.2005. The assessee objected to the said demand and approached the courts. By the direction of the courts including the Hon ble High Court of Karnataka, the assesee had to deposit certain amounts towards the demand till the issue is adjudicated by the courts. The assessee claimed amount deposited into the courts as expenditure u/s sec. 43B of the Income-tax Act. The AO held that the liability has not crystallized as it is subject to outcome of the litigation and, therefore, it is not an expenditure incurred during the relevant financial year and he disallowed the same u/s 43B. 27. On appeal, the CIT(A) held that the liability is certain and if the assessee succeeds that it is in the litigation, will show the amount as revenue in the year of receipt. 28. Against the relief given by the learned CIT(A), the revenue is in appeal before us. The learned counsel for the assessee has placed reliance upon the orders of the CIT(A) while the learned DR supported the order of the AO. 29. Having heard both the parties and having considered their rival contentions, we find that the assesee is liable to pay property tax to BBMP and the only ..... X X X X Extracts X X X X X X X X Extracts X X X X
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