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TMI Blog2012 (8) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... s getting only some service charges for rendering certain services in that connection. Hence, this receipt can be said to be attributable to the business of proving long term finance but cannot be said to be derived from the business of providing long term finance. - Decided against the assessee. Alternative contention of the assessee that entire receipt on account of bank interest cannot be reduced from business profit for the purpose of calculating deduction u/s 36(1)(viii) allowable to assessee. - held that:- AO directed to work out the net profit which is liable to be disallowed as deduction u/s 36(i)(viii) after considering the assessee’s contention. In view of these facts, this issue is restored to the file of the Assessing Officer. Disallowance u/s 14A read with rule 8D - held that:- Sub-ss. (2) and (3) of s. 14A as well as r. 8D are prospective and not applicable retrospectively; however, even prior thereto, s. 14A required the AO to first reject the claim of the assessee with regard to the extent of such expenditure; for cogent reasons and then to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment - matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation to section 36(1)(viii) to mean any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years: This leads to the question whether a preference share can be held to be a loan or advance. Section 85 of the Companies Act, 1956 provides for two kinds of share capital of a company; preference share capital and equity share capital Section 80 makes detailed provisions for the issue by a company of redeemable preference shares. Clause (a) of the proviso to sub-section (1) thereof says that no such share shall be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of share capital made or the purpose of redemption. The investment in redeemable preference shares cannot be considered as a loan or advance made by the assessee to the company for interest. The basic characteristic of a loan is that the person advancing the loan has the right to sue on the debt, whereas the preference shareholders cannot sue for the money due on the shares undertaken to be redeemed and as of right claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for higher interest. In view of the factual position, no substantial question of law arises. In view of aforesaid, the assessee s appeal was to be dismissed. There is no change in facts of the case for the year under consideration. In view of these facts and respectfully following the decision of Hon'ble Delhi High Court, we dismiss the assessee s appeal. 4. The grounds raised by the revenue in ITA No.1463/Del/2012 read as under :- 1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in granting a relief of ₹ 11.72 crores against ₹ 18.44 crores claimed by the assessee on account of deduction u/s 36(i)(viii) of the Income-Tax Act ignoring the fact that the disallowance was made based on the similar methodology adopted by the Ld. CIT(A) in the assessee's own case during A.Y.1999-2000 and A.Y.2004-05. 2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in restricting the disallowance to ₹ 55080/- out of ₹ 1 07518/- made u/s 14A r.w. rule 80 as expenses incurred in relation to earn the tax free income during the year when the same was mandatory in toto. 3. The appellant c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided for in the following clauses shall be allowed in respect of matter dealt with therein computing the income referred top in sec. 28 -(i) .. (viii) In respect of any special reserve created and maintained by a financial corporation which is engaged in providing long term finance for industrial or agricultural development or development of infrastructure facility in India ., an amount not exceeding forty per cent of the profits derived from such business of providing long term finance (computed under the head Profits and gains of profession before making any deduction under this clause Explanation in this clause (a) . (e) long term finance means any loan or advance where the terms under which money are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years. 12. After reproducing the provisions of sec. 36(1)(viii), it has been noted by the CIT(A)that the deduction will be available to the assessee to the extent of 40% of profits derived from business of providing long term finance. It has been held by the CIT(A) that these three incomes are not profits derived from business of providing long ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified in this section. 13. When we compare the provisions of sec. 36(1)(viii) and sec. 80IB(1), we find that in both cases, deduction is allowable in respect of profits derived from relevant business. In that case also, the duty drawback receipt and DEPB benefits are received by the assessee in connection with sale proceeds of goods produced by the industrial undertaking in the course of export. But still it was held by Hon ble Apex Court that duty drawback receipts/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purpose of sec. 80I/80IA/80IB of I.T. Act. Hon ble Apex Court has drawn difference between income derived from industrial undertaking and profits attributable to industrial undertakings. It was held by Hon ble Apex Court that the words derived from are narrower in connotation as compared to the words attributable to . It was further held that by using the expression derived from, Parliament intended to cover source not beyond the first degree. By applying the same logic, we are of the considered opinion that these three receipts can be said to be part of profit/income attributable to business of providing long term fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nged and as per the changed provisions, deduction was allowable to the extent of 40% of the profits derived from such business of providing long term finance. Even after this amendment in sec. 36(1)(viii), the department has allowed deduction u/s 36(1)(viii) with regard to these three receipts also in A.Y. 1996-97, 1997-98 and 1998-99 and for this reason it is the claim of the assessee that by applying the rule of consistency, such deduction should be allowed in the present years also. In this regard, we find that in the present year i.e. A.Y.1999-2000, the assessment was reopened by the AO u/s 147/148 and such notice u/s 148 was issued on 30.3.06. By that time, time limit had expired for issuing such notices u/s 148 for earlier years because more than six years have already elapsed by that time. As per the provisions of sec. 149, no notice u/s 148 can be issued after expiry of six years from the end of the relevant assessment year and hence the department was debarred from reopening these old assessments and hence under these facts, it cannot be said that department cannot reopen the assessments for those years also, for which time limit has not expired only because the department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igible business. Hence, we find that due care has been taken by us to find out that the fact situation, in the present case and in the case of Liberty India (supra) are identical although the section involved in both the cases are different and hence, we feel that the objection raised by the assessee in this regard is without merit and deserves to be rejected. We reject the same. 16. One alternative argument was raised by the assessee that even if interest income from bank has to be excluded from the profit of the assessee for the purpose of calculation of deduction allowable to the assessee u/s 36(1)(viii), the gross receipt cannot be excluded and only after deducting interest expenditure from profit of business because the assessee is claiming deduction u/s 36(1)(viii) from net profit and not from gross receipt. Against this, it was the objection of ld. DR of the revenue that COD has permitted the assessee to pursue the issue in connection with allowability of deduction u/s 36(1)(viii) with regard to these three receipts and COD has not permitted the assessee to raise the dispute regarding the quantum of exclusion made by the AO from profit of business for the purpose of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... light of the above said judgment of Hon ble Delhi High Court. 8. Since the issue has already been decided by the coordinate bench of the Tribunal and the facts and circumstances of the present case are identical to the facts in the assessment years 1999-2000 and 2004-05 as decided by the Tribunal, we uphold the order or the CIT(A) in holding that the assessee is not entitled to get deduction u/s 36(1)(viii) on the items involved in this ground of appeal. We, therefore, uphold the order of the CIT(A) on this issue. 9. However, in the course of hearing of this appeal, the ld. Counsel for the assessee pointed out that even if disallowance u/s 36(1)(viii) is called for in respect of interest income, dividend, interest on advances oar deposits, miscellaneous receipts and service charges of SDF loans, only the net profit is to be considered for the purpose of disallowance u/s 36(1)(viii) of the Act. This alternative contention was also raised by the assessee before the Tribunal in earlier years i.e. assessment years 1999-2000 and 2004-05 and this alternative contention has been decided by the Tribunal vide para 16 17 of the order which has already been reproduced hereina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hearing, we hold that this issue needs re-examination in view of the decision of the Hon'ble jurisdictional High Court in the case of Maxopp Investment Ltd. vs. CIT, cited supra, wherein the Hon'ble High Court has held as under :- Held: Contention that a narrow meaning aught to be ascribed to the expression in relation to appearing in s.14A is not sustainable. The context does not suggest that a narrow meaning aught to be given to the said expression. It is pertinent to note that the provision was inserted by virtue of the Finance Act, 2001 with retrospective effect from 1st April; 1962. In other words, it was the intention of Parliament that it should appear in the statute book, from its inception, that expenditure incurred in connection with income which does not form part of total income ought not to be allowed as a deduction. The factum of making the said provision retrospective makes it clear that' Parliament wanted that it should be understood by all that from the very beginning, such expenditure was not allowable as a deduction. Of course, by introducing the proviso it made it clear that there was no intention to reopen finalised assessments prior to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the total income under the Act and sub-s. (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the AO, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination; of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-s. (2) of s. 14A. It is only if the AO is not satisfied with the correctness of the claim of the assessee, in both cases, that the AO gets justification to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act in accordance with the prescribed method, the prescribed method being the method stipulated in r. 8D. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the AO would have to indicate cogent reasons for the same. Rule 80 also makes it clear that where the AO, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st. yr. 2007-08 onwards . It is, therefore, clear that sub-ss. (2) and (3) of s. 14A were introduced with prospective effect from the asst. yr. 2007-08 onwards. However, sub-s. (2) of S. 14A remained an empty shell until the introduction of r. 80 on 24th March, 2008 which gave content to the expression such method as may be prescribed appearing in s. 14A(2). In effect, the provisions of sub-ss. (2) and (3) of s. 14A would be workable only with effect from the date of introduction of r. 80. This is so because prior to that date, there was no prescribed method and sub-assessee. (2) and (3) of S. 14A remained unworkable .. Sub-s. (2) of s. 14A stipulates that the AO shall determine the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with such method as may be prescribed . Of course, this determination can only be undertaken if the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of S. 14A(2) which explicitly requires the fulfilment of a condition precedent is also implicit in S. 14A(1) (as it now stands) as also in its initial Avatar as s. 14A. It is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim and state the reasons for doing so. Having done so, the Assessing Officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment.- CIT vs. Walfort Share Stock Brokers (P) Ltd. (2010) 233 CTR , (SC) 42 : (2010) 41 DTR (SC) 233 : (2010) 326 ITR (SC) relied on. Conclusion : Sub-ss. (2) and (3) of s. 14A as well as r. 80 are prospective and not applicable retrospectively; however, even prior thereto, s. 14A required the AO to first reject the claim of the assessee with regard to the extent of such expenditure; for cogent reasons and then to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. Considering the decision of the Hon'ble jurisdictional High Court, we restore the issue to the file of Assessing Officer to be decided afresh. 12. In the result, the appeal of the assessee is dismissed and the appeal of the revenue is partly allowed for statistical purposes. Order pronounced in open court on this 31st day of May, 2012. - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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