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TMI Blog2013 (9) TMI 446X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee from two projects, viz. 'Shreyas' and 'Coimbatore' be reduced from the profits of the other two units viz. 'Spandhana' and 'Samruddhi' for granting deduction u/s 80IB. Accordingly, the impugned orders of the lower authorities are set aside. The Assessing Officer is directed to allow deduction u/s 80IB on the profits derived by the assessee from two projects viz. 'Spandhana' and 'Samruddhi' of ₹ 2,23,22,237 - Following decision of CIT v. Canara Workshop (P.) Ltd. [1986 (7) TMI 5 - SUPREME Court] - Decided in favour of assessee. Disallowance u/s 14A - Held that:- unless the Assessing Officer reaches a satisfaction after examination of accounts on the basis of reasons recorded in the assessment order that the claim of quantum expenditure of the assessee as incurred in relation to the exempt income is not acceptable then, the Assessing Officer has no jurisdiction to invoke the provisions of Rule 8D of the IT Rules. In the instant case, in the absence of any reason for considering the claim of the assessee as unsatisfactory, in our considered view, the invocation of Rule 8D by the Assessing Officer was without jurisdiction and consequently unsustainable. We, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Memorandum of Association and hence the interest received from these companies is assessable under the head Profits and gains from Business . 8. The learned CIT (A) erred in relying on the Supreme Court judgment in the case of Tuticorin Alkali Chemicals Fertilisers Ltd v. CIT (227 ITR 172) to hold that the bank interest is assessable under the head other sources . In the case of Tuticorin Alkali Chemical and Fertilisers Limited, the company had not commenced its business and the interest income was earned on short term Investment of funds borrowed for setting up of a factory and during construction of the factory, whereas in the appellant's case the company is doing business and the interest received from bank was on deposits made out of share capital. 9. The CIT (A) ought to have appreciated that the interest income from the bank is assessable under the head business in the light of the Calcutta High Court judgment in the case of Eveready Industries India Limited v. CIT (323 ITR 312). 10. The learned CIT (A) ought to have appreciated that interest income was earned by the appellant in the course of its business activities and hence the interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 2,23,22,237/-. Since the assessee had shown a business loss, the Assessing Officer held that the assessee-company is not eligible to claim deduction un 80IB and hence, disallowed the same. 3. The assessee, being aggrieved by the said order of the Assessing Officer, filed appeal before the ld. CIT(A) and made the following submissions as quoted in the order of the ld. CIT(A): (i) The reason given by the Assessing Officer to deny deduction claimed under section 80IB(10) is not correct. If the appellant's claim to assess the interest income under the head 'business' is allowed there will be positive income under the head 'business' and hence the appellant is entitled to the deduction under section 80IB(10). (ii) As per section 80A(1), deductions specified in sections 80C to 80U shall be allowed from the gross total income. The gross total income of the appellant included income derived from two housing projects, which are entitled for deduction under section 80IB(10). Hence, the appellant is entitled to the deduction claimed under section 80IB(10). (iii) Even if the appellant's claim for treating the interest income as Business income is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aboratory Ltd. ( supra) wherein it has been held that for giving deduction under section 80HHC of the Act, the profits earned from export of both self-manufacturing goods and trading goods are to be considered and if after such adjustments there is a profit the assessee would be entitled to deduction under section 80HHC of the Act. It was held that if there is a loss, the assessee would not be entitled to deduction. Their Lordships of the Apex Court while deciding the above case of IPCA Laboratory Ltd. (supra) also considered provisions of sections 80AB and 80B(5) of the Act. We also observe on going through the provisions of sections 80A, 80AB and 80B(5) of the Act that computation of income of eligible business is to be made in accordance with provisions of the Act as if such eligible business was the only source of income of the assessee during the relevant assessment year for which determination of quantum deduction under Chapter VI-A is to be given. In the case before us, the assessee is entitled for deduction under section 80-IA of the Act and accordingly the assessee will be entitled to claim deduction under section 80-IA of the Act only if there is a gross total income .in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled for deduction under section 80-IA of the Act. Hence, we uphold the orders of the authorities below by rejecting grounds of appeal taken by the assessee. [Emphasis supplied]. The ratio of the above said decision of the ITAT in the case of Propene Products Ltd. (supra) scarcely applies to the appellant's case. The appellant's business income, admittedly, is a negative figure and hence the appellant is not entitled to deduction under section 80IB(10). The grounds of appeal numbering 1 to 5 are, therefore, dismissed.' 5.The ld. A.R of the assessee pointed out from the computation of income, a copy of which has been placed on record, that the assessee had computed the loss under the head 'profits and gains from business' at ₹ 64,49,445/-. The assessee, in the computation of income has shown interest income of ₹ 3,20,87,421/-under the head 'income from other sources. Thereafter, the gross total income of the assessee was computed at ₹ 2,56,37,975/-. It was the contention of the ld. A.R of the assessee that as the gross total income computed by the assessee in the computation of income was higher than the deduction of ₹ 2,23,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving built up area of less than 1500 sq ft. The ld. CIT(A) held that within composite building project, if there were both eligible and ineligible units, assessee would be eligible to claim deduction in respect of eligible units. However, the Tribunal held that a project could not be approved in piecemeal and blocks of residential units were parts of a project and not project by itself and thereby denied assessee's claim of deduction u/s 80IB(10). The Hon'ble High Court, on appeal by the assessee, held that housing projects u/s 80IB refers to any building other than road, bridge or other super structure. Each block in the larger project by name 'Agrini' and 'Vajra' has to be taken as an independent building and hence a housing project, for the purpose of considering a claim of deduction. Within a composite housing project, where there are eligible and ineligible units, the assessee can claim deduction in respect of eligible units in the project and even within the block, the assessee is entitled to claim proportionate relief in the units satisfying the extent of the built-up area. The assessee is entitled to claim deduction in respect of all blocks forming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the business income of the undertaking eligible for deduction under Chapter VI-A of the Act. The gross total income of the assessee was at ₹ 8,03,26,598/- after adjusting the losses suffered by it in the eligible as well as profits of the non-eligible units. There were no brought forward losses or unabsorbed depreciation. The claim of deduction under section 80IA was in respect of eligible unit wind energy division at ₹ 4,72,28,143/- and the deduction u/s 80HHC of the Act was claimed in respect of other units at ₹ 15,51,440/-. Even if both the deductions were added the sum total was obviously less than the gross total income. The ld. CIT(A) was wrong in holding that losses suffered by the assessee in the two eligible units be reduced from the income of the other eligible unit before granting the deduction u/s 80IA. 7. On the other hand, the ld. CIT/DR vehemently argued in support of the orders of the lower authorities. He submitted that the assessee has shown business loss of ₹ 64,49,445/- and interest income of ₹ 3,20,87,421/- under the head 'income from other sources'. Thus, if deduction u/s 80IB is allowed then it would be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11B), there shall be allowed, in computing the total income of the assessee a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. Sub-section (2) states that this section applies to any industrial undertaking which fulfills all the conditions stipulated in this sub-section. Sub-section (4) of section 80-IB states that the amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter . . In the instant case, it is not in dispute that the assessee has satisfied all other requisite conditions making the assessee eligible for deduction. On a cursory look at sub-section (4), it is apparently borne out that the amount of deduction is available in respect of the profits and gains derived from an industrial undertaking. If there is no profit fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. 12. Thus, a reading of the above provisions shows that for determining the amount which qualifies for deduction u/s 80IB(1), one has to compute the income from eligible business as if the eligible business was the only source of income of the assessee. In other words, the income or loss from other business or other activities are to be ignored for the purpose of determining the amount which is eligible for deduction u/s 80IB(1) of the Act. 13. Section 80A(1) provides that in computing total income of the assessee, there shall be allowed from the gross total income the deductions specified in sections 80-C to 80-U. Sub-section (2) further provides that the aggregate amount of deductions under this Chapter shall not in any case exceed the gross total income of the assessee. The gross total income has been defined under section 80B (5) to mean 'the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter.' It therefore follows that the primar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acture of automobile spares. The products manufactured by it were covered by the list in the Fifth Schedule to the Income-tax Act. During the relevant period, the assessee commenced another activity, that is the manufacture of alloy steels, which was also an industry covered in the Fifth Schedule. The assessee sustained loss in the alloy steel industry but profit in the other industry. It claimed deduction in respect of the profit without reducing the loss from the alloy steel industry. The ITO held that the assessee will be entitled to deduction under section 80E on the profits from the manufacture of automobile parts only after setting off the loss in alloy steel manufacture. The High court decided the point in assessee's favour. The revenue assailed the judgment of the Hon'ble High Court before the Hon'ble Supreme Court. While affirming the view taken by the Hon'ble High Court, it was held that in computing the profits for the purpose of deduction under section 80E, the loss incurred by the assessee in the manufacture of alloy steels (a priority industry) could not be set off against the profits of the manufacture of automobile ancillaries (another priority indus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure incurred to earn the exempt income. During the course of assessment, the Assessing Officer required the assessee to give the actual calculation of expenses incurred for earning the dividend income as per Rule 8D of the IT Rules. The assessee submitted that ₹ 15,000/- was the expenditure incurred to earn the exempt income. The Assessing Officer, however, disallowed ₹ 9,27,875/- u/s 14A of the Act. 20. On appeal, the ld. CIT(A) confirmed the disallowance observing that the amount offered for disallowance of ₹ 15,000/- in the course of assessment proceedings was substantially low when compared to the transactions of the assessee and also has no basis whereas the Assessing Officer has worked out the disallowance in accordance with the provisions of law. The applicability of Rule 8D to the present assessment year is also not under dispute. The assessee has also not challenged the working of disallowance made by the Assessing Officer under Rule 8D. 21. The ld. A.R of the assessee relied on the order of the Chennai 'A' Bench of the Tribunal in the case of the assessee's group concerns namely, Shriram Transport Finance Co. Ltd. v. Asstt. CIT in I.T.A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure had been incurred by the assessee company for earning the exempt income. In the absence of such evidence, it was wrong on the part of the AO to proceed to compute disallowance of the expenses u/s 14A of the Act by merely applying Rule 8D(2)(iii) of the Rules. The above view was taken by the Tribunal taking into consideration various decisions of the Tribunal including the decision of the Delhi Bench in the case of DCIT v. Jindal Photo Ltd. and the High Courts. 13. The Delhi Bench of the Tribunal in the case of DCIT v. Jindal Photo Limited in I.T.A. No. 814 (Del) 2011 by order dated 23.09.2011 for the assessment year 2008-09 also considered this issue and held that satisfaction of the Assessing Officer is a pre-requisite to invoke the provision of Rule 8D of the Income Tax Rules. While holding so, the Tribunal observed as under: 10. Now. Coming to ground No. 3, the Department alleges that the CIT(A) has erred in restricting the addition u/s 14A of the Act to ₹ 19,43,022, as against that of ₹ 31,01,542/- made by the AO. This issue was also there before the Tribunal in the assessee's case for assessment year 2007-08. On behalf of the assessee, it h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee was during the year, carrying on manufacturing activities at its manufacturing units at several places. Its head office was at Delhi. The assessee had maintained separate books of account for each unit. Common expenses incurred at the head office and the branches were attributed to all the units including the head office. Investment in mutual funds, which gave rise to exempt dividend income, was done through the head office. It was the case of the assessee that to earn such dividend income, no direct expenditure was required and no expenses were incurred to make investment of surplus amounts in mutual funds. The suo moto disallowance had, however, been made by the assessee keeping in consideration, the provisions of section 14A of the Act. 18. Now, as per section 14A(2) of the Act, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee's total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e., un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of section 14A read with Rule 8D for the assessment years prior to the assessment year 2008-09 and also the applicability of the said provision for the assessment years subsequent to assessment years 2008-09. The Hon'ble High Court in paras 29 to 31 and 36 to 40 held as under: 29. Sub-section (2) of Section 14A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, 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 the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------- ---------------------- 36. Insofar as sub-sections (2) and (3) of Section 14A are concerned, they have also been introduced by virtue of the Finance Act, 2006 with effect from 01.04.2007. This is apparent, first of all, from the Notes on Clauses of the Finance Bill, 2006 [Reported in 281 ITR (ST) at pages 139-140]. The said Notes on Clauses refers to clause 7 of the Bill which had sought to amend Section 14A of the said Act. It is specifically mentioned in the said Notes on Clauses that:- This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years. 37. Furthermore, in the Memorandum explaining the provisions in the Finance Bill, 2006 [281 ITR (ST) at pages 281-281], it is once again stated with reference to clause 7 which pertains to the amendment to Section 14A of the said Act that:- This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years. 38. We may also refer to the CBDT Circular No.14/2006 dated 28.12.2006 and to paragraphs 11 to 11.3 thereof. Paragraph 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) of section 14A are workable only with effect from the date of introduction of Rule 8D i.e. 24.03.2008 because prior to that date, there was no prescribed method and sub-sections (2) and (3) of section 14A remain unworkable. 16. Therefore, finding of the Assessing Officer that the claim of the assessee that it had not incurred any expenditure or it had incurred only so much expenditure is incorrect is a must for invoking the provision of sub-section (2) of section 14A of the Act.' 26. We find that in the course of assessment proceedings, the assessee filed a letter stating as under: ...With regard to expenses in connection earning dividend income we wish to submit that only 5 transactions were made during the year In connection with Investments in Mutual Fund (MF) and 8 transactions were made for redeeming the MF investments. Therefore, the expenses viz. salary and conveyance charges that could have Incurred would be about ₹ 15,000/- Only. Hence, we request you to kindly treat this amount of ₹ 15,000/- as expenses incurred In earning the exempt income. We therefore request you to appreciate that rule 8D of IT Rules 1962 does not apply . Further ..... X X X X Extracts X X X X X X X X Extracts X X X X
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