TMI Blog2022 (2) TMI 159X X X X Extracts X X X X X X X X Extracts X X X X ..... s it stood before the amendment. See KMC SPECIALITY HOSPITALS INDIA LTD.[ 2021 (7) TMI 868 - MADRAS HIGH COURT] and M/S. HARVEY HEART HOSPITALS LTD. [ 2021 (1) TMI 296 - MADRAS HIGH COURT] as held unabsorbed depreciation pertaining to the assessment year can be carry forward and adjusted after the lapse of eight assessment years in view of the section 32(2) as amended by the Finance Act, 2001. - Decided against revenue. Disallowance u/s. 14A r.w.r. 8D - Mandation of recording satisfaction - assessee had earned exempt income and already offered suo-moto disallowance - AO was directed to make the aforesaid disallowance while computing income under normal provisions as well as while computing Book-Profits u/s. 115JB - HELD THAT:- AO has failed to record any objective satisfaction as to why the assessee's stand was not acceptable, having regards to the accounts of the assessee, as per the mandate of Sec.14A. This jurisdictional requirement was not satisfied by Ld. AO in the present case and Ld. AO straightway proceeded to compute disallowance as per Rule 8D. The application of Rule 8D, in our considered opinion, was not mechanical or automatic. It is also settled law th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment of unabsorbed depreciation of earlier years beyond eight Assessment Years. Ground No. 1 relating to nature of expenditure to set up new unit was decided against the revenue. The subject matter of assessee's appeal was disallowance u/s. 14A. 3. The issue of unabsorbed depreciation as raised in revenue's appeal was remitted back by Hon'ble Court to Tribunal with following observations:- 6. The second substantial question of law raised by the Revenue is regarding unabsorbed depreciation for the previous years. 7. The Revenue contends before us that the eight years limitation in respect of carry forward of the depreciation had expired and therefore, the assessee was not permitted to carry forward. This order was reversed by the CIT(A) on an erroneous ground, which was confirmed by the Tribunal without considering the fact that Section 32(2) of the Act is a substantive provision and not a procedural one. 8. It is further contended by the Revenue that the finding rendered by the Tribunal is not acceptable, as, in the case of Peerless General Finance and Investment Company Limited Vs. CIT [reported in (2016) 380 ITR 165], the Hon'ble Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 1997-98 is set aside and the matters are remanded to the Tribunal for a fresh decision on merits and in accordance with law. Accordingly, substantial question of law No. 2 raised by the Revenue is left open. It is evident that the matter has been remitted back to us for re-adjudication in the light of factual matrix after considering all the applicable decisions including the decision of Hon'ble Supreme Court in Peerless General Finance and Investment Co. Ltd. V/s CIT (380 ITR 165). 4. Pursuant to these directions, we have heard the arguments made by both the sides and also considered the various decisions as applicable to the facts of the case. Having heard rival submission and after due consideration of applicable judicial decisions including the orders of lower authorities, our adjudication would be as under. 5. The grounds raised by the revenue for AY 2008-09 read as under:- 3.1 The CIT(A) has erred in directing the AO to allow set off of carried forward losses pertaining to Assessment years 1997-98, 1998-99 and 1999-2000 against this AY 2008-09 even though 8 years lapsed without considering that sub-section (2) of section 32 it is clear that it is a substan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be set-off during any number of years. The said position was approved by Hon'ble Gujarat High Court in the case of General Motors India (P) Ltd. V/s DCIT (354 ITR 244) wherein Hon'ble High Court referred to Board's Circular No. 14 of 2001 and held that any unabsorbed depreciation as available to the assessee as on 01.04.2002 shall be dealt with in accordance with the provisions of Sec. 32(2) as amended by Finance Act. 2001 and not by the provisions of Sec. 32(2) as it stood before the amendment. Reliance was also placed on the other decision of Hon'ble Gujarat High Court in Synbiotics Ltd. V/s ACIT (370 ITR 119), the decision of Hon'ble Karnataka High Court in Karnataka Co-op Milk Producers Federation Ltd. V/s DCIT (53 DTR 81) and the decision of Hon'ble High Court of Madras in CIT V/s S S Power Switch Gears Ltd. (218 CTR 701) to support the same. 8. The Ld. CIT(A) concurred with assessee's submissions that the issue stood covered in assessee's favor by the decision of Hon'ble Gujarat High Court in the case of General Motors India (P) Ltd. V/s DCIT (354 ITR 233). In the Board circular also, it was held that the unabsorbed depreciation ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 2001 and held that any unabsorbed depreciation as available to the assessee as on 01.04.2002 shall be dealt with in accordance with the provisions of Sec. 32(2) as amended by Finance Act. 2001 and not by the provisions of Sec. 32(2) as it stood before the amendment. The relevant observations were as under:- 30. The last question which arises for consideration is that whether the unabsorbed depreciation pertaining to A.Y. 1997-98 could be allowed to be carried forward and set off after a period of eight years or it would be governed by Section 32 as amended by Finance Act 2001? The reason given by the Assessing Officer under section 147 is that Section 32(2) of the Act was amended by Finance Act No. 2 of 1996 w.e.f. A.Y. 1997-98 and the unabsorbed depreciation for the A.Y. 1997-98 could be carried forward up to the maximum period of 8 years from the year in which it was first computed. According to the Assessing Officer, 8 years expired in the A.Y. 2005-06 and only till then, the assessee was eligible to claim unabsorbed depreciation of A.Y. 1997-98 for being carried forward and set off against the income for the A.Y. 2005-06. But the assessee was not entitled for unabsorbed d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (b) if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed: Provided that the time limit of eight assessment years specified in sub-clause (b) shall not apply in case of a company for the assessment year beginning with the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Company (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year relevant to the previous year in which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation.- For the purposes of this clause, net worth shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed depreciation allowance on all imported motor cars acquired on or after 1st April, 2001. 30.5 These amendments will take effect from the 1st April, 2002, and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent years. 37. The CBDT Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and accordingly the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The amendment is applicable from assessment year 2002-03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 32(2) as it stood before the said amendment. Had the intention of the Legislature been to allow the unabsorbed depreciation allowance worked out in A.Y. 1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by Finance Act, 2001 it would have incorporated a provision to that effect. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once the Circular No. 14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from A.Y. 1997-98 upto the A.Y. 2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever. Similar is the ratio of decision of Hon'ble Gujarat High Court in Synbiotics Ltd. V/s ACIT (370 ITR 119), the decision of Hon'ble Karnataka High Court in Karnataka Co-op Milk Producers Federation Ltd. V/s DCIT (53 DTR 81) and the decision of Hon'ble High Court of Madras in CIT V/s S S Power Switch Gears Ltd. (218 CTR 701). 11. So far as the case law of decision of Hon'ble Supreme Court in Peerless General Finance and Investment Co. Ltd. V/s CIT (380 ITR 165) is concerned, we find that the Special Leave Petition (SLP) of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 32 of the Act. 5. The revenue is before us by referring to the decision of the High Court of Calcutta in the case of Peerless General Finance Investment Co. Ltd. v. CIT [2016] 73 taxmann.com 257/242 Taxman 209 and submitting that an identical issue was considered by the Calcutta High Court wherein the assessee was not granted relief. It is further submitted that the said decision of the Calcutta High Court was tested for its correctness by the Hon'ble Supreme Court and the special leave petition filed against the judgment of the Calcutta High Court was dismissed in the decision in Peerless General Finance Investment Co. Ltd. v. CIT [2016] 73 taxmann.com 258/242 Taxman 173/380 ITR 165 (SC). 6. After elaborately hearing the learned Senior Standing Counsel appearing for the appellant - Revenue, we are of the considered opinion that the reliance placed on the decision in the case of Peerless General Finance Investment Co. Ltd. (supra), would, in no manner, assist the case of the Revenue. We say so after referring to Circular No. 14/2001 dated 22-11-2002 issued by the Central Board of Direct Taxes, which are Explanatory Notes on Provisions relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Division Bench of the Gujarat High Court in the case of General Motors India (P.) Ltd. v. Dy. CIT [2012] 25 taxmann.com 364/210 Taxman 20/[2013] 354 ITR 244 wherein the relevant portions are as follows: 37. The CBDT Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and accordingly the amendment dispenses with the restriction of 8 years for carry forward and set-off of unabsorbed depreciation. The amendment is applicable from assessment year 2002-03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 32(2) as it stood before the said amendment. Had the intention of the Legislature been to allow the unabsorbed depreciation allowance worked out in A.Y. 1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by Finance Act, 2001 it would have incorporated a provision to that effect. However, it does not contain any such provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce with the provisions of section 32(2) as amended by Finance Act, 2001. And once the Circular No. 14 of 2001 clarified that the restriction of 8 years for carry forward and set-off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from A.Y. 1997-98 upto the A.Y. 2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set-off against the profits and gains of subsequent years, without any limit whatsoever. 11. A similar issue was considered by a Division Bench of the Bombay High Court in the case of CIT v. Bajaj Hindustan Ltd. [IT Appeal Nos. 134 to 136 and 140, 141 and 148 of 2018, dated 13-6-2018] following the decision in the case of CIT v. Hindustan Unilever Ltd. [2016] 72 taxmann.com 325/[2017] 394 ITR 73 (Bom.). The special leave petition filed by the Revenue against the above decision was dismissed by the Hon'ble Supreme Court in the decision in Pr. CIT v. Bajaj Hindustan Ltd. [SLP (C) Diary No. 48020 of 2018, dated 25-1-2019]. 12. In the decision of the Punjab Haryana High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have observed that the current year's depreciation is allowed to be set-off against the income from business as well as against the other heads of income and unabsorbed depreciation in carry forward and become part of the depreciation of the subsequent year and the total depreciation becomes current year's depreciation as per section 32(1) of the Act, which is allowed to be set-off against the income under any head of income. As per the provisions of section 32(2) of the Act r.w.s. 70, 71 and 72 of the Act, it becomes very clear that the total depreciation comprising of the depreciation of the relevant assessment year along with the unabsorbed depreciation of the earlier years becomes the total current year's depreciation which is allowed to be set off against income under any head of income including long term capital gain. Accordingly, we find no reason to interfere with the order of CIT(A) qua this issue and the same is hereby upheld. We also hold that as per provisions of section 72 of the Act, the unabsorbed business loss (other than speculative loss) of earlier years shall be allowed to be set-off only against the profits and gains from business carried on by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set-off against the profits and gains of subsequent years, without any limit whatsoever. 14. In our considered view, the above decisions will clearly enure to the benefit of the respondent - assessee. 15. Accordingly, the above tax case appeal is dismissed and the substantial question of law is answered against the Revenue. No costs. Same view has been taken by Hon'ble Court in subsequent decision of CIT V/s KMC Speciality Hospitals India Ltd. (130 Taxmann.com 315; 06/07/2021) as well as in Harvey Heart Hospitals Ltd. V/s ACIT (127 Taxmann.com 805; 06/01/2021). Therefore, respectfully following the binding judicial precedents, we do not find any infirmity in the impugned order. The grounds raised in revenue's appeal, for all the years, stand dismissed. Disallowance u/s. 14A 13. One of the issues raised in assessee's appeal as well as revenue's appeal was disallowance u/s. 14A. We find that this issue was also remitted back by Hon'ble Court to Tribunal with following observations:- 14. Substantial question of law Nos. 3 and 4 raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the correctness of the claim that the expenditure made by the assessee in relation to income, which does not form part of total income under the Act. 19. It is further contended by the assessee that the assessee already disallowed an expenditure for the relevant assessment years for earning dividend income and hence, no further notional expenditure could be deducted from the said income. He again submits that the Assessing Officer is bound to give cogent reasons in terms of Section 14A(2) of the Act with regard to his satisfaction with the correctness of the claim of the assessee in respect of such expenditure, which does not form part of the total income. 20. The learned counsel for the assessee has placed reliance on the decision of the Hon'ble Supreme Court in the case of Godrej Boyce Manufacturing Co. Ltd. Vs. DCIT [reported in (2017) 394 ITR 449] wherein it has been held as follows: We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-Sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be taken. 24. With these submissions, the learned counsel for the assessee contends that specific questions of law were raised before the Tribunal. However, the Tribunal has not considered the same, but disposed of the matter by following the decision of the Delhi High Court in the case of M/s. Joint Investments Private Limited. 25. In our considered view, the disallowance under Section 14A of the Act has been a point of dispute in several cases. Therefore, we opine that the Tribunal shall reconsider the said issue factually taking note of the precedents relied upon by both the Revenue as well as the assessee and take a reasoned decision so that they could be applied in future cases as well. Considering the above, we are of the view that substantial question of law Nos. 3 and 4 raised by the Revenue i.e. the issue pertaining to disallowance under Section 14A of the Act for all the assessment years requires to be redone. 26. For all the above reasons, the appeals filed by both the Revenue as well as the assessee are allowed and the matters are remanded to the Tribunal to take a fresh decision on the said issue after sufficient opportunity to both the Revenue as wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y bound to deal with assessee's explanation on merits which was not done. The Ld. AO did not prove that there was proximate connection between any particular expenditure and earning of tax-free income. Another argument was that the disallowance could not exceed the exempt income earned by the assessee. Further, the investment which did not yield any exempt income was to be excluded while computing disallowance as per Rule 8D. The Ld. CIT(A) concurred with assessee's submissions that own funds of ₹ 30456.14 Lacs including depreciation as available with the assessee far exceeded the year-end investment of ₹ 5397.85 Lacs and therefore, it not be said that the borrowed funds were utilized for the purpose of business. Further, major portion of investment was made in earlier years and only a part of investment was made in one scrip during the year. Also, as per settled legal position, in the absence of exempt income, no disallowance could be made u/s. 14A. Considering all the aspects Ld. CIT(A) concluded that the disallowance was to be restricted to the extent of exempt income earned by the assessee. Since the assessee had earned exempt income of ₹ 260.21 Lacs a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores whereas the investments during the year was only ₹ 14.76 Crores, evidencing the fact that the investment was made wholly out of the own funds and that no borrowings were used for the same. 2.7 The Commissioner of Income Tax (Appeals) failed to appreciate that as per Rule 8D(2)(ii), only the amount of expenditure by way of interest which is not directly attributable to any particular income or receipt alone should be considered while working out the disallowance. In the present case, the interest expenditure is directly attributable for earning its business income and hence disallowance u/s. 14A r.w. Rule 8D is unwarranted. 2.8 Where assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investments made by the assessee would be out of interest-free funds available with the assessee and no disallowance was warranted u/s. 14A-CIT v. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom), CIT V. Reliance Utilities and Power 313 ITR 340 (Bom) and CIT v. Hotel Savera 239 ITR 735 (Mad). 2.9 The Commissioner of Income Tax (Appeals) ought to have appreciated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rated by us in the preceding paragraphs, it could be seen that the assessee has earned exempt dividend income of ₹ 260.22 Lacs during the year and offered suo-moto disallowance u/s. 14A for ₹ 2.22 Lacs. The said disallowance was worked as by taking a portion of staff salary which could be said to have been dedicated by the assessee towards investment activity. However, Ld. AO, without recording any objective satisfaction, having regards to the accounts of the assessee, as to why the disallowance u/s. 14A was not sufficient, proceeded to compute the disallowance u/s. 14A read with rule 8D. The said action, in our considered opinion, was against the statutory mandate of Sec. 14A r.w.r. 8D. The failure to record an objective satisfaction would make the disallowance unsustainable in law. It is settled legal position that the application of Rule 8D is not automatic as held by Hon'ble Supreme Court in Godrej Boyce Manufacturing Co. Ltd. V/s DCIT (2017 394 ITR 449). Upon perusal of assessment order, we find that Ld. AO has failed to record any objective satisfaction as to why the assessee's stand was not acceptable, having regards to the accounts of the assessee, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of share capital and reserves far exceeded the investments made by the assessee. Therefore, unless nexus of borrowed funds vis- -vis investments made by the assessee was established by Ld. AO, a presumption was to be drawn in assessee's favor that the investments were sourced out of own funds. We find that no such finding has been recorded by Ld. AO. Therefore, interest disallowance, in our considered opinion, could not be made in such a case. This proposition is duly supported by the decision of Hon'ble High Court of Bombay in CIT V/s HDFC Bank Ltd. (366 ITR 505) as well as another decision of same court in CIT V/s Reliance Utilities Power Ltd. (313 ITR 340). The ratio of decision of Hon'ble High Court of Madras in CIT V/s Hotel Savera (239 ITR 795) is also applicable to the facts of the case wherein it was held that in case own funds and borrowed funds were inextricably mixed up in such a way that it was impossible to delineate which funds were advanced to group concern, no interference could be made in the Tribunal's finding that no disallowance u/s. 36(1)(iii) would be called for. 20. It is also settled law that disallowance made u/s. 14A could not exceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) directed Ld. AO to restrict the disallowance to the extent of exempt income earned by the assessee. The disallowance was to be made while computing income under normal provisions as well as while computing Book-Profits u/s. 115JB. Aggrieved, the assessee as well as revenue is in further appeal before us. In AY 2010-11, the assessee earned exempt income of ₹ 569.75 Lacs and offered suo-moto disallowance of ₹ 2.80 Lacs. However, Ld. AO computed aggregate disallowance of ₹ 643.78 Lacs and added the differential of ₹ 640.97 Lacs to the income of the assessee. The Ld. CIT(A) directed Ld. AO to restrict the disallowance to the extent of exempt income earned by the assessee. The disallowance was to be made while computing income under normal provisions as well as while computing Book-Profits u/s. 115JB. Aggrieved, the assessee as well as revenue is in further appeal before us. In AY 2011-12, the assessee earned exempt income of ₹ 611.95 Lacs and offered suo-moto disallowance of ₹ 3.45 Lacs. However, Ld. AO computed aggregate disallowance of ₹ 399.47 Lacs and added the differential of ₹ 396.01 Lacs to the income of the assessee. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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