TMI Blog2014 (6) TMI 1041X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee of producing its accounts - Remanded back for statistical purpose. Disallowance under the head assets written off on the ground that the same is not a revenue expenditure - HELD THAT:- Items in question are drills, tools and equipments which do not have life of more than a year has to be verified from the account books and documents of the assessee as they are not available on record. Therefore, we set aside the order of the Commissioner of Income Tax (Appeals) and restore the matter back to the file of the Assessing Officer for adjudication of the issue afresh in the line of the decision of ADI Artech Transducers (P) Limited [ 2013 (8) TMI 1105 - GUJARAT HIGH COURT] after allowing reasonable opportunity of hearing to the assessee. Thus, this ground of appeal is allowed for statistical purpose. Disallowance of prior paid expenses - HELD THAT:- Various claims in respect of transmission charges, tariff, additional capacity charges, building charges etc raised by National Thermal Power Corporation Limited, Power Grid Corporation of India Limited, Gandhar Power Station, Maharashtra State Electricity Board etc. were settled during the year and the liability to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions of the Departmental Representative, we set aside the order of the Commissioner of Income Tax (Appeals) and restore the matter back to the file of Assessing Officer for adjudication of the issue afresh after allowing reasonable and proper opportunity of hearing to the assessee. Thus, this ground of appeal is allowed for statistical purpose. - ITA No. 1874/Ahd/2010, 1821/Ahd/2010 - - - Dated:- 20-6-2014 - Shri D.K. TYAGI, Judicial Member And Shri N.S. Saini, Accountant Member Revenue by: Shri T.P. Kishankumar, Sr. DR Assessee(s) by: Shri J.P. Shah, AR ORDER Shri N.S. Saini, These are the cross appeals filed by the assessee and Revenue against the order of the Commissioner of Income Tax (Appeals), Baroda dated 25.02.2010. 2. Ground no. 1 of the assessee s appeal is directed against the order of the Commissioner of Income Tax (Appeals) confirming the addition of ₹ 1,97,80,00,000/- made out of the interest expenditure considering the same as attributable to exempt dividend income by invoking the provisions of section 14A of the Income Tax Act, 1961. 3. The brief facts of the case are that the Assessing Officer observed that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 119 TTJ 289. The Hon'ble ITAT has held therein that so far as onus is concerned, the burden lies on the assessee to prove that the expenditure was incurred in the taxable business operations and not in the exempt income operations. Secondly, it has been held that Parliament in its wisdom had enacted section 14A with retrospective effect from 1.4.1962 in order to clarify the already existing position that only those expenses could be claimed which were relatable to taxable income. Sub-sections (2) (3) of Section 14A were inserted by the Finance Act, 2006 w.e.f. 1.4.2007. However, these are only machinery provisions intended to provided a basis for computation of the disallowance to be made u/s 14A. Since the main section itself was retrospectively inserted in the statute book w.e.f. 1.4.1962, the machinery provisions providing that the disallowance should be computed as per Rule 8D would also be deemed to have been in force w.e.f. 1.4.1962. Following the decision of the Special Bench as above, it is held that the provisions of Rule 8D would be applicable on the facts of the instant case. The AO is directed to work out the disallowance as per the provisions of Rule 8D. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 already on record, therefore, the additional ground deserves to be admitted for adjudication. 4. After hearing both the sides, the additional ground of the Revenue Department is hereby admitted for adjudication. At the outset, it is worth to mention that the impugned addition of ₹ 18796.82 lacs was made by the AO without having any discussion in respect of the applicability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not allowable expenditure. 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 ₹ 65725.17 lacs on investments of ₹ 547709.74 lacs. However, the assessee has claimed interest expenditure of ₹ 19360.59 lacs and has shown interest income of ₹ 55.59 lacs and dividend income of ₹ 508.18 lacs. Hence, against the interest expenditure of ₹ 19360.59 lacs assessee has grown interest and dividend income of ₹ 563.77 lacs. Thus, net disallowance is made of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and the investments were in the form of shares of subsidiary companies which 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case as also the law pronounced in this regard. 6. As far as the Assessing Officer's 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(l)(iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h retrospective effect from 11/05/2001 , however Rule 8D was inserted by the Income Tax (Fifth Amendment), 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of 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 24th 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd machinery and after allowing depreciation thereon, disallowed the net amount of ₹ 1,04,52,500/-. 11. Before the Commissioner of Income Tax (Appeals), the assessee submitted that the assessee company has written off assets only if its value was less than ₹ 5,000/-. Regarding the nature of assets, it was submitted that these were in the nature of office equipments. The Commissioner of Income Tax (Appeals) after considering the submissions of the assessee held as under: I have considered the submission of the ld. Authorized Representative of the assessee and the facts of the case. It is pertinent to note in this regard that the earlier provision allowing write-off of tools and equipment costing less than ₹ 5000/- at the rate of 100% is no longer on the statute book. Now, after 01.04.1996, all such items of office equipment would form part of plant and the expenses in this regard would be capitalized. Accordingly, it is held that the Assessing Officer was justified in making the disallowance of ₹ 104 lakhs. This ground thus fails. 12. The Authorized Representative of the assessee relied on the decision of Hon ble Gujarat High Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Income Tax (Appeals) and restore the matter back to the file of the Assessing Officer for adjudication of the issue afresh in the line of the decision of the Hon ble Gujarat High Court in the case of ADI Artech Transducers (P) Limited (supra) after allowing reasonable opportunity of hearing to the assessee. Thus, this ground of appeal is allowed for statistical purpose. 17. Ground no. 3 of the appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals) in confirming enhancement of book profits computed u/s. 115JB of the Income Tax Act by ₹ 1,97,80,00,000/- on account of disallowance made u/s. 14A of the Income Tax Act. 18. At the time of the hearing, the Authorized Representative of the assessee submitted that this ground of appeal of the assessee is consequential to ground no. 1 of the present appeal. 19. As we have set aside ground no. 1 of the appeal of the assessee relating to disallowance of expenditure u/s. 14A of the Income Tax Act for earning exempt dividend income back to the file of the Assessing Officer for adjudication afresh, therefore this ground of appeal of the assessee is also set aside to the file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenses, it is seen that the bulk of the expense i.e. interest and other financial charges, related to bank charges debited by the various banks in the earlier years. These charges were disputed and on resolution of the disputes through negotiations, the assessee has agreed to pay such charges aggregating to ₹ 227.04 lakhs. These expenses had not been claimed in the earlier years. Similarly, the administrative expenses, employee cost etc. also were crystallized during the year. For example, the payment made to legal heirs of deceased employee crystallized during this year after the decree of the Labour Court. Similarly advertisement expenditure, consultancy legal fees and expenses incurred on repairs, although pertaining to earlier ears, got crystallized only during this year. Further, various claims in respect of transmission charges, tariff, additional capacity charge, building charges etc. raised by various parties like National Thermal Power Corporation Ltd., Power Grid Corporation of India Ltd., Gandhar Power Station, Maharashtra State Electricity Board etc. were settled during this year, and the liability to pay got crystallized only during this accounting year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stallized during the year. Further, various claims in respect of transmission charges, tariff, additional capacity charges, building charges etc raised by National Thermal Power Corporation Limited, Power Grid Corporation of India Limited, Gandhar Power Station, Maharashtra State Electricity Board etc. were settled during the year and the liability to pay got crystallized only during the accounting year. The Departmental Representative has relied on the order of the Assessing Officer. He could not bring any material on record to show that the finding of the Commissioner of Income Tax (Appeals) that various expenses claimed by the assessee under the head prior paid expenses got crystallized during the year and therefore were claimed as deduction during the year under consideration was incorrect. Neither has it been shown by the Revenue that the expenses claimed by the assessee are not genuine. It is the claim of the Revenue that since the assessee is following mercantile system of accounting, therefore expenses relating to the year under consideration are only allowable to the assessee. 29. In our considered opinion, even in the case where assessee is following mercantile system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then distributed to the farmers. In order to compensate the GEB for high cost of purchase of Naphtha based power, the Government of Gujarat announced subsidy of ₹ 354 crores which was payable to GEB. This was duly accounted for by the GEB as its income in Assessment Year 2003-04 on accrual basis, although not actually received. The same was reflected in power purchase schedule 6 to the profit and loss account. Thus, entire amount of ₹ 354 crores had already been offered for tax in that year. Subsequently, after the unbundling of GEB into seven companies including the assessee, it was informed by GoG that instead of subsidy amount of ₹ 354 crores, subsidy would be restricted to ₹ 150 crores only. Hence, the assessee company wrote off out of the already taxed amount the balance amount of ₹ 153.32 crores. If the same was disallowed in this year, it would amount to double taxation of the same amount. The Commissioner of Income Tax (Appeals) after considering the submissions held as under: I have considered the submissions of ld. Authorized Representative of the assessee and facts of the case. Schedule 6 to the Profit Loss Account for AY 2003-04 sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the claim for deduction to the assessee. The Departmental Representative has submitted that the additional evidences in the form of a letter dated 27.07.2007 of the Under Secretary, Energy Petrochemicals Department through which the assessee was informed that the amount of subsidy was restricted to ₹ 150 crores in place of ₹ 354 crores was not filed before the Assessing Officer and was filed before the Commissioner of Income Tax (Appeals) for the first time who relying on the same deleted the addition without calling for a remand report from the Assessing Officer. It was thus his submission that the Commissioner of Income Tax (Appeals) has violated Rule 46A of the Income Tax Rules, 1962. The Authorized Representative of the assessee could not controvert the above submission of the Departmental Representative. 34. In our considered opinion, the Assessing Officer should also get an opportunity to verify the documents which were filed before the Commissioner of Income Tax (Appeals) for the first time by the assessee. In view of the above submissions of the Departmental Representative, we set aside the order of the Commissioner of Income Tax (Appeals) and restore th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consultancy Charges 76.123 305.76 3 Technical Fees 76.124 3.67 4 Other Professional fees and expenses 76.125 12.26 5 Honorarium 76.127 0.12 6 Exp. for paper setting/ checking 76.128 0.01 TOTAL 353.84 So far as the first four items are concerned, tax has been deducted at appropriate rates and also paid into Government account within due dates. So far as item at 5 and 6 are concerned, the payments have been made in each instance of sum less than ₹ 5,000/- and therefore there was no legal requirement for deducting tax at source. In view of the above, it is held that disallowance of ₹ 3.5384 crore was not justified and is accordingly directed to be deleted. 39. We have heard the rival submissions and perused the orders of lower authorities and materials available on record. ..... 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