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TMI Blog2013 (9) TMI 531X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon’ble jurisdictional High Court in the case of Commissioner of Income-tax v. Reliance Utilities and Power Ltd. [2009 (1) TMI 4 - HIGH COURT BOMBAY ]. During the year under consideration, half of the total investments of Rs.23.81 crores made by the assessee from the total sales of investment; therefore, issue of disallowance u/s 14A on account of interest expenditure had to be decided after taking into consideration the available funds from sale of investments and other own funds - As we have already made it clear that upto the Assessment Year 2001-02, the issue had been allowed by the Tribunal and therefore, no disallowance can be made for the investments made upto Assessment Year 2001-02. Disallowance of Interest Expenses - Whether CIT(A) erred in deleting the disallowance out of interest expenses in respect of interest free advances to subsidy company without appreciating that the issue of business expediency was not proved by the assessee - Held that:- The assessee made interest free advance to its subsidiary company which was incorporated for doing life insurance business - The assessee’s group was carrying general insurance business and the main activity of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest free advances to subsidy company without appreciating that the issue of business expediency is not proved by the assessee 3. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored. 3. Ground no.1 is regarding disallowance made u/s 14A of the I T Act. 3.1 In the return of income, the assessee has claimed an amount of Rs.104,19,59,188/- as interest exempt u/s 10(23G) and Rs.16,09,63,502/- as dividend exempt u/s 10(34) of the I T Act. 3.2 During the course of assessment proceedings, the Assessing Officer asked the assessee to furnish the details and the expenditure incurred in view of the provisions of sec. 14A of the IT Act. The assessee furnished the details as well as the submissions as recorded by the Assessing Officer in para 4.2 of the assessment. It was mainly contended by the assessee before the Assessing Officer that the assessee has not incurred any interest expenditure for earning the tax free income. It was further submitted that the assessee has sufficient funds to source the fresh investments made during the year from the sale of investments and the income thereon. As rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free funds. He has further submitted that just because the flow of funds cannot be traced from the borrowed funds to the investments, it is not correct to say that borrowed fund was not used for acquiring the investments when there is a common pool from all sources put together which was utilised for all activities of its business including acquiring shares, bonds and securities, then apportionment of common expenditure against different source of income is justified. He has relied upon the order of the Assessing Officer and submitted that the Assessing Officer has pointed out that the total investments of Rs. 572.64 crores have been made from a mix of borrowed funds as well as the assessee s own funds. The Assessing Officer has worked out the year wise percentage of borrowed funds and come to the average of 53.54%. Accordingly, the Assessing Officer has taken 53.54% of the total investment from the borrowed funds and applied the average rate of interest at 11.50%. Hence, the Assessing Officer has calculated the interest disallowance u/s 14A at Rs. 37.33 crores. 4.1 On the other hand, the ld AR of the assessee has submitted that no borrowed fund was used for investment in shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... July 2.7.04 Shriram Investments Ltd 2.7.04Shriram Transport Fin Co 5.74 6.25 Aug 17.8,94 Reliance Utilities Power Ltd 4.02 Sept Oct Nov Dec Jan Feb Mar: 4.3.05 Sale of Financial Technologies Ltd 7.56 25.3.05-Comat Lithographers Ltd 1.15 25.3.05-GMS Technologies Ltd 0.75 25.3.05 Him Techno Forge Ltd 1.60 25.3.05-Roots Indl Ltd 0.83 25.3.05-Taj Kerala Resorts Ltd 050 31.3.05-Reliance Petroinvvest Ltd(Sale) 4,44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he funds were generated by issuing preference shares to the extent of Rs. 800 crore but increase in tax free investments in the same year i.e. assessment year 2001-2002 is marginally higher than the profit before tax and preference share capital raised during the year. He further submits that in assessment years 1997-98, 1998-99 the investment in shares and securities was much below the total share capital, reserves and surplus. He submits that the tax free securities were also held as stock in trade and only the dividend is exempt and profit on the sale of stock in trade of shares and securities is taxable as the business income and hence section 14A is not attracted at all. He further submits that the ad hoc disallowance cannot be made as in fact all the details were filed before the A.O. in respect of the generation of funds ITA 3303/Mum/2003 other 7 group-appeals but the same were discarded. The learned Counsel relied on the following decisions:- (i) Punjab State Industrial Dev. Corp. Ltd. Vs. DCIT 102 ITD 1 (SB) (ii) Maruti Udyog Ltd. Vs. DCIT 92 TTJ (Del) 987 (iii) ACIT Vs. Eicher Ltd. 101 TTJ (Del) 369 (iv) Wimco Seedings Ltd. Vs. DCIT 107 ITD 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est expenditure attributable for earning dividend income at Rs. 1 crore. When the matter reached before the Tribunal, vide order dated 12.1.2007 the Tribunal held that ad-hoc disallowance of interest expenditure cannot be justified at any cost. 19. In the case of CIT Vs. Reliance Utility and Power Limited 313 ITR 340 (Bom.) the controversy was diversion of the interest bearing funds for making the investment. In the said case the A.O. recorded finding that the sum of Rs. 313 crore was invested out of their own funds and Rs. 147 crore were invested out of borrowed funds. The A.O. accordingly worked out the disallowance by taking interest rate at 12% per annum for three months. The assessee pleaded before the Hon ble High Court that the assessee had sufficient interest free funds as under:- (i) Share capital Rs. 180.00 crore (ii) Reserves and Surplus Rs. 120.80 crore (iii) Depreciation reserves Rs. 95.39 crore Total interest free funds Rs. 398.19 crore Their Lordship held as under:- If there be interest-free funds available to an assessee sufficient to meet its investments and at the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e distinguishable. Here we find that the assessee had sufficient own as well as interest free funds to make the investment in the shares, bonds and debentures. Moreover nothing has been controverted on said findings of the Ld. CIT(A) by the Revenue. So far as the finding of the learned CIT(A) is concerned, after giving anxious consideration the totality of the facts and figures placed before us, we find no reason to sustain any disallowance made by the Assessing Officer in respect of the dividend income claimed exempt u/s 10(33) as well as the interest income on the bonds and debentures claimed exempt u/s 10(23G) of the Act. Moreover it is clear from the orders of the A.O. that all the disallowances are made on ad hoc basis. We, therefore, delete the entire disallowances sustained by the learned CIT(A) in respect interest and other expenditure attributable for earning the dividend exempt u/s 10(33) and also of the interest income exempt u/s 10(23G) of the Act. In the result, the respective grounds of the assessee are allowed and the respective grounds taken by the Revenue are dismissed, in all these appeals. 21. The next issue is computation of book profit u/s 115JA a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the present case for the year under consideration, it is clear that on principle the issue is covered by the order of this Tribunal in assessee s own case for the AYs 1998-99 to 2001-02 (supra); because the most of the investments were already made in the earlier years; however, for the Assessment Years 2002-03 to 2004-05, the issue of disallowance u/s 14A is pending before the Assessing Officer as it was remanded by the Tribunal. Therefore, to this extent, the issue for the year under consideration is remitted to the record of the Assessing Officer to work out the availability of assessee s own funds, even if it is put into the common pool as held by the Hon ble jurisdictional High Court in the case of Commissioner of Income-tax v. Reliance Utilities and Power Ltd. reported in 313 ITR 340, which has been followed by the coordinate Benches of this Tribunal for the AYs 1998-99 to 2001-02 and then decide the issue as per law. 5.6 We may clarify that during the year under consideration, half of the total investments of Rs.23.81 crores made by the assessee from the total sales of investment; therefore, issue of disallowance u/s 14A on account of interest expenditure has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut of any specific borrowings but out of own funds. In the absence of any evidence to espouse the assessee s submission, the Assessing Officer held that the disallowance was called for. He, therefore, made an addition of Rs.13,67,800 towards interest as relatable to the interest free loan advanced to subsidiary company. The learned CIT(A) however ordered for the deletion of addition. 16. After considering the rival submissions and perusing the relevant material on record it is noted that the assessee made interest free advance to its subsidiary company which was incorporated for doing life insurance business. The assessee s group is carrying general insurance business and the main activity of the assessee is that of financing. The Hon ble Supreme Court in the case of S.A.Builders Ltd. Vs. CIT [(2007) 288 ITR 1 (SC)] has held that wherein interest bearing funds are lent to the sister concern without interest, the A.O. needs to examine the purpose of loan. If the loan is advanced for commercial expediency and not utilized by the Directors of the sister concern for their personal benefit, then the deduction of interest has to be allowed. In our considered opinion, the learned C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions I Ltd 106 ITD 193 iv) CIT vs Bhari Information Tech.Sys P Ltd Civil Appeall no.33750/2009 v) Al Kabeer Exports Ltd v CIT Civil Appeal No. 32274/2010 12.1 On the other hand, the ld DR has relied upon the orders of the authorities below. 13. We have considered the rival submissions as well as the relevant material on record. As regards the applicability of Rule of apportionment as embedded in the provisions of sec. 14A of the IT Act while computing the book profit u/s 115JB is concerned, the same cannot be ipso facto applied as it has been held by the Tribunal in various decisions as relied upon by the ld AR of the assessee. 13.1 In the case of Quippo Telecom Infrastructure Ltd (supra), the Tribunal has decided this issue in paras 10 11 as under: 10. We have heard both the parties and have carefully perused the material on record. 11. In the present case, the AO has also made addition of Rs.19,58,253/- on account of alleged expenditure incurred to earn exempt income while computing book profit u/s 115JB of the Act. The AO s action has been confirmed by the CIT(A). Both the authorities have applied Rule 8D of the Income-tax Rules while c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into clause (f) of the Explanation to Sec. 115JA of the Act. In this view of the matter, we therefore, delete the disallowance of expenses confirmed by the CIT(A) while computing book profit u/s. 115JB of the Act. In other words, no addition to the book profit shall be made on account of alleged expenditure incurred to earn exempt income while computing income u/s. 115JB of the Act. Thus ground No. 2 is decided in favour of the assessee. 14. Thus in view of the decisions of the coordinate Benches of the Tribunal, the principle of apportionment as provided u/s 14A cannot be applied while computing the book profit u/s 115JB. However, the Assessing Officer has power and jurisdiction to make the adjustment as provided under Explanation 1. Accordingly, in our view the amount of expenditure which is directly relatable to the income, which is exempt u/s 10, 11 and 12 shall be adjusted for the purpose of computing the book profit. Hence, this issue is required to be examined and considered afresh for making the adjustment only to the extent of actual expenditure incurred in respect of the earning of income claimed as exempt. 14.1 It is to be noted that an identical issue has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounting to Rs.4,17,99, 259. 2. The learned CIT(A) erred in holding that amendment in section 14A are procedural in nature and accordingly apply to A.Y.2006-07 and thereby confirming disallowance of Rs.417,99259. 3. The learned CIT(A) erred in applying the principles laid down by Rule 8D of the Income Tax Rules 1962 in working out the disallowance uls.14A and thereby confirming the disallowance of Rs.4,17,99,259. Your appellant submits that the disallowance u!s.14A ought to be deleted. 4. The learned CIT(A) erred in working out the disallowance u/s.14A of the Act based on the formula laid down in Rule 8D(2), and failing to recognize that recourse to Rule 8D(2) was permissible only when computation could not be satisfactorily made under Rule 8D(1). 5. The learned CIT(A) erred in confirming the addition of Rs.4,17,99,259 to the book profits computed under section 115JB being expenses disallowed u/s.14A. 18. Ground nos 1 to 4 are common to the ground no.1 of the Assessment Year 2005-06. In view of our findings for the Assessment Year 2005-06, this issue is remanded to the record of the Assessing Officer. 19. Ground no.5 is common to the ground no.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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