TMI Blog2024 (3) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... advances has been contended as was of business exigencies on the assessee, it has not been able to be demonstrated by the assessee that the nature of this income is from business activities particularly when separate head for interest income in the return of income has been shown which is to be included in other income. Neither the miscellaneous income has been able to be shown from routine business activities of the assessee. The assessee failed to demonstrate that the income which is not revenue from operations as required to be treated in the other heads which includes income from other sources and capital gain. The impugned amount of 33.23 lakhs on account of interest income from other loans and advances and miscellaneous income of 9.46 lakhs are rightly been treated as income from other sources. We, therefore, quash the order passed by the Ld. CIT(A) in granting relief to the assessee and confirm the order passed by the AO. Hence, this ground of appeal raised by the Revenue is allowed. Disallowance u/s. 14A for the purpose of computation of book profit u/s. 115JB is hereby deleted. - SHRI WASEEM AHMED, ACCOUNTANT MEMBER Ms. MADHUMITA ROY, JUDICIAL MEMBER For the Appellant : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1961. 4.0 The appellant craves leave to add to, alter, delete or modify any of the grounds of appeal either before or at the time of hearing of this appeal. 4. Ground No.1:- This ground relates to disallowance under Section 14A of the Act. 5. The Ld. A.O. disallowed a sum of Rs. 77,58,44,809/- on account of expenditure attributable to exempt dividend income invoking the provision of Section 14A of the Act. 6. At the time of hearing of the instant appeal the Ld. Counsel appearing for the assessee submitted before us that the issue is duly covered by assessee s own case for A.Y. 2015-16 by the Coordinate Bench in ITA No. 406/Ahd/2019 which has been remanded to the Assessing Officer for fresh adjudication a copy whereof has been filed before us. 7. We find that the Coordinate Bench on the identical issue disposed of the ground by remitting the same to the file of the Ld. AO to adjudicate de novo with the following observation: 4.1. Regarding grounds no. 1.0 to 1.2 namely disallowance u/s. 14A. Both the parties submitted that this issue is squarely covered in assessee s own case by Co- ordinate Bench of this Tribunal in ITA Nos. 11 37/Ahd/2013 dated 22.10.2020 wherein the Hon ble I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appreciating the fact that in view of Section 106 of the Indian Evidence Act, it was up to the assessee company to adduce evidence that all the borrowings were used for the purposes of business and its is assessee' s own surplus fund that were invested in the shares and deposits earning exempted income, and, even in case of mixed funds, the disallowance of interest could be made. 1(b) As an alternate plea, the Id. CIT(A) erred in not upholding the addition u/s. 14A on account of interest attributable to investment in shares to the extent in view of provisions of section 14A read with Rule 8D. 3. Learned DR has pleaded that an addition of Rs. 187.97 crores which was made u/s 14A was deleted by learned CIT(A), however, it was not adjudicated as per the grounds of appeal. Learned DR has also argued that the assessee was required to adduce evidence that all the borrowings were used for the purpose of the business and the assessee's own surplus funds were invested in the shares. Learned DR has also informed that in A.Y. 2007-08, the addition of similar nature was upheld by learned CIT(A). He has thus pleaded that the issue being legal in nature which has emerged from the facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure. The assessee was required to give the rates of interest paid to various sources. The assessee vide its reply did not furnish the rates of interest paid. It simply submitted that loans from various banks with varying interest rates were obtained. During the year under consideration, the market rate of interest was 12%. Therefore, interest at the rate of 12% works out to Rs. 65725.17 lacs on investments of Rs. 547709.74 lacs. However, the assessee has claimed interest expenditure of Rs. 19360.59 lacs and has shown interest income of Rs. 55.59 lacs and dividend income of Rs. 508.18 lacs. Hence, against the interest expenditure of Rs. 19360.59 lacs assessee has grown interest and dividend income of Rs. 563.77 lacs. Thus, net disallowance is made of Rs. 18796.82 lacs. 5. Being aggrieved the matter was carried before the First Appellate Authority who has decided the issue in assessee's favour in the following manner: Thus, the only test to be applied is that of commercial expediency . In the instant case, it is seen that no investment was made by the assessee company by using borrowed funds.The entire investment, except minor investment of Rs. 11.25 lacs was inherited in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was an integral part of the demerger arrangement. Therefore, it was nothing but commercial decision. 6.2 According to us, the issue has been mixed up by the Revenue Department. The first step should be to examine the scheme of demerger and thereafter the issue could have been streamlined. As per the definition of demerger prescribed u/s. 2(19AA) means; the transfer pursuant to a scheme of arrangement by a demerged company of its one or more undertakings to any resulting company in such a manner that all the property of the undertaking/unit being transferred by the demerged company immediately before the demerger, which becomes the property of the resulting company by virtue of the demerger. Therefore, it was necessary for the AO to examine the balance sheet of the demerged company and the position of the accounts of the undertaking which is demerged with the resulting company. The AO has to examine the liabilities related to the said undertaking whether being transferred under the scheme of arrangement which were in existence immediately before the demerger. The AO has to examine the value of the property in the books of accounts immediately before the demerger which was transferre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action is concerned, the disallowance has been made on the basis of a calculation of the proportionate interest alleged to be attributable to the investment earning exempted dividend income. It is also to be noted that while doing so for the years under consideration the A.O. has not followed the past method of calculation of the disallowance. As per AO it was seen that the working of disallowance was wrong because while calculating the proportionate interest attributable to dividend income the ratio of dividend income and total sales have been taken though there was no direct relation between the two. The Assessing Officer had thus made the calculation after taking into account the proportion of the interest on the ratio between the investment in shares and total assets including investment in shares. Apart from this, there is nothing in the assessment order which can establish the nexus of utilization of borrowed interest-bearing funds diverted towards investment in debentures. But there are other discussions in this very assessment order wherein the provisions of section 36(1)(iii) of the Act have also been touched upon. The Assessing Officer was expected to correlate the said d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Rules, 2008 by publication in the Gazette dated 24/03/2008; reproduced below:- a) The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallow ability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the present case, no such exercise has been carried out and, therefore, the Tribunal was justified in remanding the matter. b) Section 14A was introduced by the Finance Act 2001 with retrospective effect from 1 April 1962. However, in view of the proviso to that Section, the disallowance thereunder could be effectively made from assessment year 2001-2002 onwards. The fact that the Tribunal failed to consider the applicability of Section 14A in its proper perspective, for assessment year 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis; iii) The provisions of sub sections (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid; iv) The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution;; v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 th March, 2008 shall apply with effect from Assessment Year 2008-09; (vi) Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 2. New Rule 8D : 2.1 In exercise of the powers given in S. 14A(2) C.B.D.T. has issued a Notification No. S.O. 547(E) on 24-3-2008 (299 ITR (ST) 88). This notification amends the Income-tax Rules by insertion of a new Rule 8D providing for a Method for determining amount of expenditure in relation to income not includible in total income . Reading this Rule it is evident that the Rule provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... felt appropriate to applying the method of Rule 8D but did not look into the following facts :- (i) As on 1.7.205 when the company was given a balance sheet duly notified by the State Govt., the company had total investment of Rs. 5580.20 crores considering all investment in subsidiary companies at Rs. 5336.43 crores, investment in other companies at Rs. 243.69 crores and balance in petty investment. (ii) Opening balance of investment as on 1.4.2007 stood at Rs. 5477.16 crores. (iii) Few investments were made during Financial Year 2005-06 to 2007-08 and in subsidiary companies and funds for the same were partly received from State Government as equity and remaining from net profit earned. (iv) Interest expenditure of Rs. 131.32 crores represents mostly the interest paid on bill discounting of IPPs and working capital loan from banks which are specifically meant for the business purpose; and (v) Total exempt income earned by assessee during the year stood at Rs. 249 crores. 13. We observe that ld. Assessing Officer has made disallowance u/s 14A of the Act without examining the facts referred above which were very crucial to reach at the final disallowance u/s 14A of the Act. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he statistical purposes. 4.2. Respectfully following the above decision of our Co-ordinate Bench, for this assessment year 2015-16, we set aside the matter back to the file of Assessing Officer for fresh adjudication by examining the facts and figures and calculate the disallowance u/s. 14A of the Act. 8. Respectfully relying upon the order perused by the Coordinate Bench we are disposing of the ground by setting aside the issue to the file of the Ld. AO for de novo adjudication in the light of the observation made by the Co- ordinate Bench as reproduced hereinabove upon giving an opportunity of being heard to the assessee and upon considering the evidence which the assessee may choose to file at the time of hearing of the matter. This ground is allowed for statistical purposes. 9. In the result, Ground No. 1 of the assessee s appeal is allowed for statistical purposes. 10. Ground Nos. 2, 3 4 of the assessee s appeal are general in nature and does not require any specific adjudication. ITA No. 414/Ahd/2020 for A.Y. 2016-17 11. The Revenue has raised the following grounds of appeal:- (a)(i) Whether on the facts and in circumstances of the case, the learned CIT(A) has erred in law an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance to be triggered. Also, section 14A of the Act does not use the words income of the year but income under the Act , which also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. (b) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in directing the Assessing Officer to treat the interest income on loan/advances and miscellaneous receipts of Rs. 76.05 lacs as business income instead of income from other sources without appreciating that the nature of the income is of purely interest and not from any activities of business or profession of the assessee. (c) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in holding that adjustment made on account of disallowance u/s 14A of the Act in computation of Book Profit u/s 115JB of the Act is not as per law without appreciating that the amount disallowable under section 14A is covered under clause (f) of Explanation 1 to section 115JB(2) and it is required that any expenditure in relation to the exempt income also to be taken in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount (in Rs.) Receivable (after TDS) from Chhatisgarh Surguja Power Ltd. on deposits with them 33,23,630 TOTAL 33,23,630 From the above, it can be seen that the Company was mandatorily required to place a Deposit with M/s. Chhattisgarh Surguja Power Ltd. towards Gujarat s share of power in Chhattisgarh Ultra Mega Power Project. Hence, interest on the same has been earned in the normal course of business and is exclusively incidental to the business activities. Miscellaneous Income The details of Miscellaneous Income aggregating to Rs. 9.46 lakhs are as under: Particulars Amount (in Rs.) Income from Staff Welfare Activities 47,250 Income from Rentals-staff quarters 1,43,123 Income from water charges received from employee contribution 9,332 Recovery for Transport Vehicle Exp. (other than Staff) 31,917 Sale of tender forms 60,500 Registration fees suppliers, Contractors 2,00,000 Penalty against ADV for Employees 28,802 Other Miscellaneous Receipts 4,03,491 Ins. Premium recovered from HBA Loan 21,260 Total 9,45,675 Considering the nature of income which has purely arisen out of routine business activities, the same cannot be treated as Income from Other Sources. The entire interest i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business and should be considered as income derived from its essential business activities. Likewise, the late payment by GRIDCO for the electricity supplied, is sought to be made up by GRIDCO by issuing bonds on which the Assessee earns interest. This also therefore, has a direct nexus with the essential business activity of the Assessee. 16. The case made out by the assessee therein is not akin to the case made out by the assessee before us. Though interest on other loans and advances has been contended as was of business exigencies on the assessee, it has not been able to be demonstrated by the assessee that the nature of this income is from business activities particularly when separate head for interest income in the return of income has been shown which is to be included in other income. Neither the miscellaneous income has been able to be shown from routine business activities of the assessee. The assessee failed to demonstrate that the income which is not revenue from operations as required to be treated in the other heads which includes income from other sources and capital gain. In that view of the matter, the impugned amount of 33.23 lakhas on account of interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Gujarat High Court in Assessee's own case for A.Y. 2010-11 in Tax Appeal No.63 of 2020, judgment dated 17.02.2020.Recently, the ITAT by following the aforesaid judgment of Hon'ble Gujarat High Court, in assessee's own case for Asst. Years 2013-14 2014-15 in ITA Nos.281 282/Ahd/2018 323 324/Ahd/2018 has deleted the addition made on the aforesaid issue of adjustment in book profit under Section 115JB for disallowance made under Section 14A of the Act. 23. Such contention made by the Ld. AR has not been controverted by the Ld. DR with all his fairness. 24. We have perused the order passed by the Co-ordinate Bench in ITA Nos.281 282/Ahd/2018 323 324/Ahd/2018 in assessee s own case, wherein issue has been discussed and decided in favour of the assessee upon deleting the addition made by the Ld. AO. The relevant portion whereof is as follows: 16. Ground no. 5 namely adjustment made on account of disallowance u/s. 14A to be added in the computation of book profit u/s. 115JB of the Act. Ld. Counsel submitted that this issue is also held against the Revenue by the High Court of Gujarat in Tax Appeal No. 63 of 2020 as follows: .4 The question No.2[b] proposed by the Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Gujarat High Court in the case of CIT Vs. Alembic Ltd. in Tax Appeal No.1249 of 2014 as well as decision of Hon ble Bombay High Court in the case of CIT Vs. Bengal Finance Investment P. Ltd. in Tax Appeal No.337 of 2013. He placed on record copies both these decisions. Apart from the above, he placed upon reliance Special Bench decision of the ITAT in the case of CIT Vs. Vireet Investment P. Ltd. 165 ITD 27. On the other hand, ld. CITDR relied upon the order of DRP. 18. We have duly considered rival contentions and gone through the record carefully. We find that ld. DRP has relied upon the order of the ITAT, Mumbai in the case of DCIT Vs. Viraj Profiles Ltd., (2016) 46 ITR (Trib) 0626 (Mum) and held that addition required to be made in the book profit could be calculated as per Rule 8D of the Income Tax Rules. The ld. DRP thereafter made reference to decision of Hon ble Delhi High Court in the case of CIT Vs. Geotze India Ltd., 361 ITR 505. According to the ld. DRP, this decision has been considered by the Special Bench in the case of Vireet Investment P. Ltd. (supra) but placed reliance upon Hon ble Bombay High Court in the case of Vodafone India Services P. Ltd. ACIT, 361 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is pertinent to mention that Hon ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. Vs. Additional Commissioner of Income Tax Ors. (2014) 264 CTR 0030 (Bom) : (2013) 96 DTR 0193 (Bom) : (2014) 361 ITR 0531 (Bom) : (2014) 221 Taxman 0166 (Bom); has held that the proceedings before DRP are extension of assessment proceedings. Therefore, they are not bound by the decision of Tribunals unlike CIT(A) as long as the issue is not acceptable on merit and/or the issue is being contested by the department. In this case, the decision of Hon ble Delhi High Court in the case of Goetze (India) Ltd cited above is also in favour to the department on this issue which also shows that the view of AO confirmed by the Panel is a plausible view. 19. There were contradictory orders at the end of the Tribunal. Therefore, Special Bench was constituted to consider the following question: Whether expenditure incurred to earn exempt income computed under section 14A could not be added while computing book profit under section 115JB of the Act. 20. When the Special Bench has considered this question, it was confronted with two decisions of the Hon ble Delhi High Court diagonally opposite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Alembic Ltd. (supra) is as under: Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that adjustment made on account of disallowance u/s.14A of the Act in computation of book profit u/s. 115JB of the Act is not as per law without appreciating that the amount disallwable under section 14A is covered under clause (f) of Explanation to section 115JB(2) and, thus, said amount has to be added back while computing amount of book profit? 22. The Hon ble Gujarat High Court has replied this question as under: 7. So far as issue Nos.(iii) and (iv) are concerned, the learned counsel for the assessee has relied on the decision of this court in the case of Commissioner of Income tax-I v. Gujarat State Fertilizers Chemicals Ltd., reported in (2013) 358 ITR 323 (Gujarat) Where this court has held in paragraph Nos.6 to 6.5 this court has observed as under: 6. So far as the fourth question is concerned, it pertains to addition of Rs. 1,14,43,040/under Section 115JB of the Act being the expenditure estimated on earning of dividend income under Section 14A of the Act. 6.1 The Assessing Officer on referring to the said provision of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l ofrevenue is dismissed. 23. Similarly, Hon ble Bombay High Court has formulated following question in the case of Bengal Finance Investments P. Ltd. (supra) and replied as under: (b) Whether on the facts and in the circumstances of the case, and in law, the ITAT is justified in deleting the addition of Rs. 78,84,387/- under clause (f) of Explanation 1 to Section 115JB relying upon the decision in the case of Goetze (India) Ltd. Vs. CIT (2009) 32 SOT 101 (Del.), which has been followed by ITAT, Mumbai in the cases referred to in para 5 of the impugned order without appreciating that the above decision in the case of Goetze (India) Ltd. was rendered by the ITAT, Delhi Bench on completely distinguishable set of facts, peculiar to the said case? ... 4. So far as question (b) is concerned, the impugned order of the Tribunal followed its decision in M/s. Essar Teleholdings Ltd. Vs. DCIT in ITA No.3850/Mum/2010 to held that an amount disallowed under section 14A of the Act cannot be added to arrive at book profit for purposes of Section 115JB of the Act. The Revenue s Appeal against the order of the Tribunal in M/s. Essar Teleholdings (supra) was dismissed by this Court in Income Tax Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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