TMI Blog2022 (1) TMI 927X X X X Extracts X X X X X X X X Extracts X X X X ..... es in Gujarat State Energy Generation Ltd. and the AO has not recorded his satisfaction regarding the expenditure sought to be disallowed is related to earning of exempt income - HELD THAT:- authorities below failed to appreciate that Rule 8D r.w.s.14A of the Act can be invoked only when the AO from the books of accounts of assessee placed before him is able to demonstrate that the expenditure sought to be disallowed, has been incurred for earning tax free income. It is stated that Rule 8D has been mechanically invoked by the AO without establishing such nexus. He further submitted that the assessee had demonstrated before the authorities below that the assessee was having sufficient interest free fund available to make investment wherefrom it had earned exempt income. We find merit on this contention of the Ld. Counsel for the assessee. The law is wellsettled that the section 14A would come into play, where the AO gives a clear finding regarding expenditure incurred for earning of income. Where the assessee is able to demonstrate that the investment was made out of own interest free fund in such cases, no disallowance would be called for regarding interest expenditure. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all those investments which has yielded dividend in the year under consideration are to be considered and similarly, the investments which though, have not yielded any income during the year should also be considered for arriving at the average of investment. 3. On the facts and in the circumstances of the case, the Ld. CIT has erred in restricting the aforesaid addition made by the AO by simply following the decision of the Hon'ble ITAT in ITA No.6785 6786/Del/2015 dated 09.03.2016 for A Ys 2010-11 2011-12 in assessee's own case without giving any reasons of his own other than the reference of Hon'ble Tribunal's decision wherein the Hon'ble ITAT has erred in allowing the appeals of the assessee and quashed the orders passed by the learned PCIT u/s 263 of the IT Act without appreciating the facts and cogent findings given by the PCIT in his order u/s 263 of the Act. 4. On the facts and circumstances of the case, the Ld. CIT(A) has erred in relying upon the decision of the Hon'ble ITAT in assessee's own case for the AY 2010-11 and 2011-12 against which the department has filed an appeal before the Hon'ble High Court of Delhi. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore or during the course of hearing of the appeal. It is prayed that the order of the Ld. CIT (Appeals)-10, New Delhi being contrary to the facts on record and the settled position of law, be set aside and that of the Assessing officer be restored. 3. Facts giving rise to the present appeal are that the assessee electronically filed its return of income at ₹ 1,45,28,50,930/- on 24.09.2010 and the same was processed u/s 143(1) of the Income Tax Act, 1961 ( the Act ). Subsequently, the case was selected for scrutiny assessment and the assessment u/s 143(3) of the Act was framed vide order dated 27.02.2014. The Assessing Officer ( AO ) noticed that the assessee during the year under consideration had claimed an amount of ₹ 38,43,091/- on account of Amortization of lease hold land . He further observed that on this issue the disallowance had been made in Assessment Years 2005-06, 2006-07, 2007-08, 2008-09, 2009-10. The AO observed that the appeal filed by the assessee on this issue has been dismissed by Hon ble Delhi High Court and addition made by the AO has been sustained. Therefore, the AO made this addition. The AO further observed that as per computati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that no such satisfaction is recorded by the AO. 9. We have heard the rival submissions and perused the material available on records and gone through the orders of the authorities below. We find that Ld.CIT(A) has given finding on facts by observing as under:- 3.2. I have carefully considered the submissions of Ld. AR, judicial pronouncements relied upon by them and assessment order passed by the AO. As per assessment order, AO has mentioned that assessee has claimed exemption u/s 10(34) being dividend received from domestic company i.e., Gujarat State Energy Generation Ltd. amounting to ₹ 1,64,90,006/-. However, against the above exempt income, AO calculated the disallowance to the extent of ₹ 8,63,35,560/- by invoking the provisions of Section 14A read with Rule 8D(2)(ii)and Rule 8D2(iii). AO has calculated the disallowance under Rule 8D2(ii) of ₹ 2,10,88,802/- in respect of interest of ₹ 5,18,30,831/- and disallowance under Rule 8D2(iii) being average value of investment was made at ₹ 6,52,46,758/- being one half per cent of the average value of investment ₹ 13,04,93,51,500/-. 3.2.1. Assessment order further revea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E of the appellant society, no expenditure is incurred to earn this income and hence investment is not to be included for the working of disallowance as per Rule 8D. At this juncture, it is pertinent to mention that whether the dividend income from OMIFCO-OMAN is entitled for relief u/s 90 of the Income Tax Act 1961 under the Indo-Oman Double Taxation Treaty has been a subject matter of revision u/s 263 of the Income Tax Act 1961 by the Pr. Commissioner of Income Tax, Delhi-10 for the AY. 2010-11 and 2011-12. The Pr.CIT-10 vide order dated 2.11.2015 for AY. 2010-11 and Order dated 29 Oct. 2015 for AY. 2011-12 has withdrawn the tax credit allowed to the assessee by the AO. The appellant filed appeal before the Hon'ble ITAT. The Hon'ble ITAT in ITA NO.6785 and 6786/0el/2015 vide order dated 9th March 2016 has allowed the deemed tax credit in respect of dividend income from Oman i.e. tax relief as claimed by the assessee. In other words the order of the AO was restored by the ITAT and the action of Id. PCIT u/s 263 was held to be without jurisdiction and on merits not sustainable in law. The relevant portion of the order of ITAT is reproduced below: 18. With r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, exempt in accordance with Article 8(bis) and such exemption is granted with the objective of promoting economic developments within Oman by attracting investments. In view of the facts stated above, we are of the considered view that on merits also the assessee-society is entitled to tax credit in respect of deemed dividend tax which would have been payable in Oman. Therefore, we hold that on merits also the learned PCIT was not justified in directing the Assessing Officer to withdraw the aforesaid tax credit. Further such credit was allowed by the Assessing Officer during several preceding assessment years and, therefore, when there is no change in the facts and the relevant provisions of law, following the well settled principle of consistency of approach, as emerging from a chain of decisions referred to above, credit for deemed dividend tax is clearly allowable in respect of the assessment year under appeal. Therefore, from the above decision of the ITAT, the appellant's case that the dividend income received from OMIFCO is forming part of the total income and only the claim for relief is allowed is confirmed by the ITAT in favour of the assessee, The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning Rule 4 of Second Schedule to the Companies (Profits) Surtax Act, 1964 and whether deductions under Chapter VIA were part of income not included in the total income computed under the Act. The said Rule 4 was as under:- Where a part of the income, profits and gains of a company is not includible in its total income as computed under the Income-tax Act, its capital shall be the sum ascertained in accordance with rules 1, 2 and 3, diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains. 29. The contention of the Revenue was that deductions once allowed under the said Section ceased to be part of profits included in the total income. This contention was rejected after recording the six substantive reasons given by the Karnataka High Court in Stumpp, Schuele Somappa Pvt. Ltd. vs. Second ITO (1976) 102 ITR 320, upheld by Division Bench vide decision reported as Second ITO vs. Stumpp, Schuele Somappa Put. Ltd. (1977) 106 ITR 399. The said six reasons recorded in Dalmia Cement (Bharat) Ltd. (supra) are:- (a) Any amount in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... II and Chapter VIII and which had been substantial or partly replaced and were placed under Chapter VIA. These were deductions which were reduced from the income computed in accordance with the earlier provisions/Chapters of the Act. These deductions were made in the computation of total income and, therefore, definition of gross total income , which was/is arrived at without reference to the deduction allowable under Chapter VIA, was introduced. The deductions available under Chapter VIA were either wholly or partly reduced from the gross total income . Contention of the Revenue that once deduction stands allowed, the income in view of the deduction ceases to be a part of the total income, was rejected by the Division Bench of this Court in Dalmia Cement (Bharat) Ltd. (supra), for the following additional reasons:- (1) The word part used in the Rule was to describe income fulfilling the description i.e. the category or class of the income. In other words it should indicate an identifiable section, category or class of income rather than mere portion or amount of such income. The question raised should be whether this income was included and not whether any deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome is included under the provisions of the Act by firstly including the entire receipts or incomes as stipulated in the charging section but after excluding the income stipulated in Chapter III. Thereafter, total income is computed under the Act by applying provisions of Chapter IV, V and VI. From this income, deductions are permitted and allowed in terms of Chapter VIA. Deductions do not mean that deduction allowed has the effect that the income, on which deduction is allowed, ceases to be part of the total income. This is not the scheme, effect and purport of the Act. The expression income which does not form part of the total income refers to the nature, character or type of income and not the quantum. 32. Section 14A states that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred in relation to the income which does not form part of the total income under this Act. It does not state that income which is entitled to deduction under Chapter VIA has to be excluded for the purpose of the said Section. The words do not form part of the total income under this Act is significant and important. As not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. 3.2.8 Further, from the assessment order, it is noted that the details of interest expenditure of ₹ 5,18,30,831/- was also provided by the appellant to the AO wherein it was claimed that short term loans/overdraft facility was availed by the appellant society to meet its working capital requirement with regard to payment for gas suppliers, wages, cost of inputs, railway freight, transportation charges, purchase of spares, etc. It has also been explained these loans/overdraft facilities were obtained from ICICI Bank, State Bank of Bikaner Jaipur, HDFC Bank, Yes Bank, Canara Bank, Vijaya Bank, State Bank of Saurashtra only and no unsecured loans were taken from any individual or any other institution other than these banks and loans were availed of for a limited period of time. Similar detail has also been furnished during the appellate proceedings. Complete detail in respect of interest expenditure of ₹ 5,18,30,831/- indicating the purpose and period of overdraft is mentioned in tabular statement reproduced above in the submissions supra (Para 4.2). 3.2.9 I have gone through the submissions and the case laws referred by the appellant. The rati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not form part of th total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. 3.2.11. The above formula has to be applied in respect of investment, GSEG income from which does not or shall not form part of the total income. Accordingly applying the rule to the appellant's case the disallowance under section 14A is calculated as under:- (i) the amount of expenditure directly relating to income which does not form part of total income Nil (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:- Ax B/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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermining the taxable income and should have been allowed. 2. The appellant contends that amortization of these expenses over the period of the lease is revenue expenditure and is in the nature of rent paid for the use of land. It is not in the nature of capital expenditure as the assessee does not get any legal title or any right over the land. 3. The ld. CIT(A) has erred in law and on facts in confirming the disallowance of ₹ 50,75,526/- u/s 14A r.w.r. 8D of the Income Tax Rule 1962. The disallowance is wrong and bad in law and should be deleted. 4. The ld. CIT(A) has failed to appreciate that the AO has not brought on record any material to show nexus between expenditure and earning of exempt income. No disallowance u/s 14A r.w.r. 8D can be made. 5. The CIT(A) has failed to appreciate that Rule 8D can be invoked only when the A.O. from the books of accounts is able to demonstrate that some expenditure has been incurred for earning tax free income. Rule 8D has been mechanically invoked by A.O. without establishing such nexus. Consequently, the disallowance u/s 14A r.w.r. 8D of ₹ 50,75,526/- should be deleted. 6. The above grounds are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the amount of ₹ 2,53 crore paid over 23 years ago did not ITA 205/10,163, 1215 1216/2011 page 17 constitute the true and real consideration for creating an interest in the property. We also notice that the terms of the lease agreement stipulated that the registration and stamp duty and charges were borne by the lesee (assessee). In this background, the restrictions imposed on the lessee, i.e. enjoining it not to transfer for a particular period, and granting liberty to transfer the right subject to certain conditions, and other restrictions regarding land use, are consistent with the nature of interest created, i.e. lease hold rights. The court is also conscious of the fact that the tenure of the lease is quite substantial, and virtually creates ownership rights in favour of the lessee, who is at liberty to construct upon the plot. Exclusive possession was handed over to the assessee at the time of creation of the lease. Having regard to all these factors this court is unpersuaded by the assesses submission that the amount of ₹ 2.53 crores paid in 1989 had to be treated as advance rent, which could be amortized annually, in equal installments, as is urged on its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paying nominal rent of ₹ 1 per sq. mtr. In respect of Port of Vishakapatnam and in the Tuticorin Port Trust, the annual rent payable is only ₹ 1/- per square meter. It is also being claimed that the vacant possession of the land is to be given back to the respective authorities on completion of the lease period Inter alia claiming that no ownership rights are given to the appellant and land was for limited purpose to enable carry on the business only. 3.1.6 From the perusal of copy of lease deeds in respect of above two lands, it is noted that both the lease are renewable. It is also a fact that all the charges - the registration and stamp duty with regard to entering into the above lease, were borne by the appellant. Though, some restrictions have been imposed on the lessee but overall it is noted that liberty has been granted to transfer the rights subject to certain conditions and other restrictions, which are consistent with the nature of interest created i.e., lease hold rights similar as in the case of Noida land. Therefore, considering the order of the Hon'ble Delhi High Court exactly on the same issue in respect of A.Y. 2004-05, relevant portion of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an amount of ₹ 518.31 lakhs has been claimed during the year as payment of interest. As per printed balance sheet, the assessee has shown total investment of ₹ 120,341.79 lakhs as at 31.03.2009 and ₹ 140645.23 lakhs as at 31.03.2010. The investment made by assessee as appearing in schedule 4 is quoted below:- S.No. Name of Investment Amount as on 31.03.2009 Amount as on 31.03.2010 1. Equity Investment in Nagarjuna Fertilizers and Chemicals Ltd. 10,00,00,000/- 10,00,00,000/- 2. Equity Investment in Indian Commodity Exchange Limited Nil 5,00,00,000/- 3. Equity Investment in OMIFCO 3,28,53,45,590/- 3,28,53,45,590/- 4. Equity Investment in Gujarat State Energy Generation Ltd. 72,75,00,000/- 80,68,00,000/- 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act can be invoked only when the AO from the books of accounts of assessee placed before him is able to demonstrate that the expenditure sought to be disallowed, has been incurred for earning tax free income. It is stated that Rule 8D has been mechanically invoked by the AO without establishing such nexus. He further submitted that the assessee had demonstrated before the authorities below that the assessee was having sufficient interest free fund available to make investment wherefrom it had earned exempt income. We find merit on this contention of the Ld. Counsel for the assessee. The law is wellsettled that the section 14A would come into play, where the AO gives a clear finding regarding expenditure incurred for earning of income. Where the assessee is able to demonstrate that the investment was made out of own interest free fund in such cases, no disallowance would be called for regarding interest expenditure. Therefore, in the absence of clear finding by AO and disallowance on the basis of guess work cannot be sustained. Hence, we direct the AO to delete the disallowance. These grounds of assessee s appeal are allowed. 21. In the result, appeal of assessee in ITA No.234 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 and 2011-12 against which the department has filed an appeal before the Hon'ble High Court of Delhi 5. On the facts and circumstances of the case, the Ld. CIT(A) has erred in relying upon the decision of the Hon'ble ITAT in assessee's own case for the AY 2010-11 without appreciating the fact that foreign tax credit is allowable only when tax has been actually paid in a foreign country (Oman) and the benefit of para-4 of article 25 of Indo-Oman DTAA is not available to assessee in view of the absence of any credible evidence to establish that mere non-taxation of dividend income in Oman can be construed to mean 'tax incentive designed to promote economic development' as required under article 25(4) of lndo -Oman DTAA. 6. On the facts and circumstances of the case, the Ld. CIT(A) has erred in relying upon the order of Hon'ble ITAT which is not in consonance with the decision of the Hon'ble Karnataka High Court in the case of CIT vs. Infosys Technologies Ltd., 341 ITR 293 wherein the Hon'ble High Court has dealt with issue of tax credit in DTAA between Canada and Thailand and decided the issue in favour of revenue holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en allowed. 2. The appellant contends that amortization of these expenses over the period of the lease is revenue expenditure and is in the nature of rent paid for the use of land. It is not in the nature of capital expenditure as the assessee does not get any legal title or any right over the land. 3. The ld. CIT(A) has erred in law and on facts in confirming the disallowance of ₹ 65,72,285/- u/s 14A r.w.r. 8D of the Income Tax Rule 1962. The disallowance is wrong and bad in law and should be deleted. 4. The ld. CIT(A) has failed to appreciate that the AO has not brought on record any material to show nexus between expenditure and earning of exempt income. No disallowance u/s 14A r.w.r. 8D can be made. 5. The CIT(A) has failed to appreciate that Rule 8D can be invoked only when the A.O. from the books of accounts is able to demonstrate that some expenditure has been incurred for earning tax free income. Rule 8D has been mechanically invoked by A.O. without establishing such nexus. Consequently, the disallowance u/s 14A r.w.r. 8D of ₹ 65,72,285/- should be deleted. 6. The above grounds are independent and without prejudice to one and a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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