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2021 (10) TMI 1097 - AT - Income TaxDisallowance u/s 14A read with Rule 8D - As submitted assessee had sufficient money of its own for making all the investments - HELD THAT - We are in agitation with the contention of the ld. AR. However, assessee should prove the availability of interest free funds to make such investments by filing necessary cash flow statements on the date of investment in view of decision by the Hon ble Supreme Court in the case of Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT - Respectfully following the same, we direct the Ld.AO to carry out necessary verification based on the documents filed by assessee in accordance with law. For disallowance under section Rule 8D(iii) needs to be computed as assessee has not even disallowed suo moto expenditure that could be attributable to earning of such income. In our view it would be fair enough to restrict the disallowance at 0.5% of investment that yielded dividend income. Ld.AO is directed to compute the disallowance under Rule 8D (iii) as directed here in above. Disallowance of proportionate interest u/s 36 (1) (iii) - AO disallowed interest expenditure incurred on bank overdraft and interest payable to financial institutions - as submitted advances were given to the sister concern due to commercial expediency who also engaged in the same business as that of assessee - HELD THAT - The audited accounts filed by assessee revealed that there were sufficient funds with assessee as on 31/03/2013. The argument that assessee had sufficient own funds cannot be the only reason to allow the claim of assessee. And we also note that, when assessee had sufficient funds, why should it depend on borrowed funds. In any case, if at a given point of time assessee has own funds and they have advanced it as interest-free loans to sister concerns for meeting their business needs, in which assessee also has an interest, then such advances should not lead to disallowance of interest paid on borrowings. In other words, unless the assesses establishes with cash flow statements about availability of its own funds at the time of making the interest-free advances. For this reason a cash flow statement needs to be verified for the period under consideration. We therefore remit this issue back to Ld.AO for due verification. Assessee is directed to file the cash flow statement during the period under consideration which shall be verified by the Ld.AO in accordance with law. Disallowance u/s 35D - expenses claimed by assessee is 1/5 of total expenses which has been amortised over a period of time -HELD THAT - These expenses were incurred by assessee during financial year 2008-09 towards converting Brigade Enterprises Pvt.Ltd., to Brigade Enterprises Ltd., that is conversion of private limited company into public limited company. Authorities below have rejected the claim of assessee by following the decision of Hon ble Supreme Court in case of Brooke Bond India Ltd. 1997 (2) TMI 11 - SUPREME COURT We note that in the said case it was also held that the expenditure incurred on public issue for the purpose of expansion of the companies are to be treated as capital expenditure. However by virtue of the provision of section 35D of the Act, amortisation of such capital expenditure is allowable. As in the preceding four assessment years, the Ld.AO did not disallow the expenses under section 35D. As the nature of expenditure is not disputed by the Ld.AO, and that the section allows amortisation of such expenses that have been incurred towards expansion/extension of the undertaking, it could not be denied in the subsequent period also. Disallowance of deduction claimed u/s 80 IB - Whether loss of one eligible undertaking is to be set off against the profits of another eligible undertaking? - Whether when the gross total income is positive, the deduction u/s. 80IA can be worked out independently without setting off of losses of other eligible units? - HELD THAT - This question stands already answered by the Hon ble Madras High Court in the case of Chamundi Textiles (Silk Mills) Ltd. 2012 (6) TMI 317 - MADRAS HIGH COURT held that only an assessee having positive profits from eligible undertaking could claim such deduction. Their Lordships also held that, for arriving at such profit, income from various units had to be calculated, and if one of the unit was running at loss, gross total income had to be arrived at considering such loss also. In the present case, the table extracted at page 14 of this order shows that there were loss in certain eligible units. However, the gross total income computed after setting off losses from eligible units was positive - In our view, the computation of gross total income in respect of the eligible units u/s. 80IB in the present facts of the case is to be consonance with the above principles approved by the Hon ble Supreme Court in the case of IPCA Laboratories Ltd. 2004 (3) TMI 9 - SUPREME COURT We direct the Ld.AO to compute the profits under the head business income from eligible undertaking by netting of the losses earned by assessee from other eligible undertaking for determining the deduction to be computed under section 80IB(10) of the act. Whether the deduction claimed can be only against the business profits or can it be against the other heads of income? - If the gross total income was loss, deduction u/s. 80IA/IB was to be rejected. Section 80IA/IB for that matter, are controlled by 80AB of the Act. Gross total income means gross total income computed as per the provisions of the Act. This was clearly interpreted by the Hon ble Supreme Court in the case of Synco Industries Ltd 2008 (3) TMI 13 - SUPREME COURT and it was held that gross total income had to be arrived at after making deduction as per appropriate computation provisions including income u/s. 60 to 64, adjustment of interest losses and after setting off of brought forward losses and unabsorbed depreciation. Only if resultant gross total income is positive the assessee was entitled for deduction under chapter VIA of the Act. Same proposition is upheld by the Hon ble Supreme Court in the case of Reliance Energy Ltd. 2021 (4) TMI 1237 - SUPREME COURT Respectfully following the ratio laid down by Hon ble Supreme Court , we remand this issue back to the Ld.AO to recompute the deduction under section 80IB(10) of the Act, on the principles laid down in case of Reliance Energy Ltd. (supra), as explained hereinabove. Appeal of assessee stands partly allowed.
Issues Involved:
1. General Ground 2. Disallowance under section 14A read with Rule 8D 3. Disallowance under section 36(1)(iii) 4. Disallowance under section 35D 5. Disallowance of deduction under section 80-IB 6. Restriction of deduction under section 80-IB Issue-wise Detailed Analysis: 1. General Ground: The general ground of appeal, which claimed that the order passed by the CIT(A) was prejudicial to the appellant and bad in law, was acknowledged as general in nature and did not require adjudication. 2. Disallowance under section 14A read with Rule 8D: The assessee contested the disallowance of ?2,02,22,837/- under section 14A comprising of disallowances under Rule 8D(2)(ii) and Rule 8D(2)(iii). The assessee argued that it had sufficient interest-free funds for making investments and that no expenditure was incurred in relation to exempt income. The tribunal referred to the Karnataka High Court's decision in the assessee’s own case for AY 2009-10, which held that where interest-free funds exceed the value of investments, no disallowance under Section 14A towards any interest expenditure can be made. The tribunal directed the AO to verify the availability of interest-free funds and compute the disallowance under Rule 8D(iii) at 0.5% of the investments that yielded dividend income. 3. Disallowance under section 36(1)(iii): The assessee challenged the disallowance of ?5,32,41,623/- as interest on borrowed funds, arguing that the advances to sister concerns were for commercial expediency. The tribunal noted that the assessee had sufficient own funds and directed the AO to verify the availability of these funds through a cash flow statement. If it is found that the assessee had sufficient funds at the time of making the advances, no disallowance should be made. 4. Disallowance under section 35D: The assessee claimed a deduction of ?13,20,000/- under section 35D for expenses incurred towards the initial public offer. The tribunal noted that these expenses were incurred for converting a private limited company into a public limited company and were amortized over a period of time. The tribunal held that since the nature of the expenditure was not disputed and the section allows amortization of such expenses, the deduction should be allowed. 5. Disallowance of deduction under section 80-IB: The assessee claimed a deduction of ?29,03,88,814/- under section 80-IB, which the AO restricted to ?19,95,90,524/-. The tribunal addressed two issues: - Issue (a): Whether the loss of one eligible undertaking can be set off against the profits of another eligible undertaking. The tribunal held that the gross total income must be computed after adjusting losses from other eligible units, following the principles laid down by the Supreme Court in Synco Industries Ltd. vs. AO. - Issue (b): Whether the deduction can be set off against the gross total income or only against business income. The tribunal referred to the Supreme Court decision in CIT vs. Reliance Energy Ltd., which held that the deduction under section 80-IA should be set off against the gross total income. The tribunal remanded the issue back to the AO to recompute the deduction based on these principles. 6. Restriction of deduction under section 80-IB: The AO restricted the deduction to ?19,95,90,524/- and disallowed ?8,07,80,427/-. The tribunal directed the AO to recompute the deduction under section 80-IB in accordance with the principles laid down by the Supreme Court in Reliance Energy Ltd. Conclusion: The appeal was partly allowed, with directions to the AO to verify and recompute the disallowances and deductions as per the tribunal’s findings and the principles laid down by the higher courts.
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