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TMI Blog2014 (4) TMI 269X X X X Extracts X X X X X X X X Extracts X X X X ..... nce under Rule 8D(iii) made by the AO and upheld by CIT(A) is not correct In view of the fact that AO had included the value of total investments for calculation of disallowance whereas the value of those investments should have been included which were made for the purpose of earning exempt income – the assessee had made significant investments in the shares of subsidiary companies which are definitely not for the purpose of earning exempt income – thus, the value of strategic investments should be excluded for the purpose of disallowance under Rule 8D(iii) – the AO is directed to calculate the disallowance under Rule8D(iii) by excluding the value of strategic investments in the calculation of disallowance – Decided partly in favour of Assessee. - I.T.A. No.1362 & 1032/Del/2013, I.T.A. No.1580/Del/2013 - - - Dated:- 4-4-2014 - Shri U. B. S. Bedi And Shri T. S. Kapoor,JJ. For the Petitioner : Shri Ajay Vohra Advocate Shri Shaily Gupta, C.A. For the Respondent : Shri Satpal Singh, Sr. DR ORDER Per TS Kapoor, AM: This is a group of three appeals consisting of two filed by the assessee for assessment year 2008-09 2009-10 and one filed by revenue for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r upholding the disallowance under Rule 8D(iii), the assessee is in appeal before us. 4. At the outset, the Ld AR invited our attention to the unintended mistakes in Ld CIT(A) s order and further on merits the Ld AR submitted that there was no expenditure incurred to earn the exempted income. He further submitted that interest expense was incurred for vehicle loans. The Ld AR submitted that the assessee was a cash rich company and it had made investments of its surplus funds in the units of mutual funds in debt oriented schemes wherein no specific expertise is required and where a fixed income in the form of dividend is distributed by mutual funds. It was submitted that the assessee had deployed its surplus funds in tax efficient schemes of mutual funds and since the mutual funds were not equity oriented no expertise was required and therefore no expenses were incurred for earning exempt income. In this respect our attention was invited to paper book page 219 wherein the break of investment in mutual funds was placed. Regarding other investments in equity shares our attention was invited to paper book page 204A for assessment year 2008-09 and it was submitted that out of a total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the same were for debt oriented schemes, and therefore disallowance u/s 14A was not warranted. Reliance in this respect was placed on the case laws as relied upon before Ld CIT(A) as mentioned at paper book page 8 17. Without prejudice to the above, it was submitted that addition was excessive and in any case it cannot exceed the dividend income and in this respect reliance was placed in the case law of Sahara India Financial Corporation in I.T.A. No.3199/Del/2013 wherein the Delhi Tribunal had held that disallowance u/s 14A cannot exceed exempt income. 6. Ld DR, on the other hand, relied upon the order of Assessing Officer and detailed findings of Ld CIT(A) in respect of upholding of addition were relied. 7. We have heard the rival submissions of both the parties and have gone through the material available on record. First, we take up the appeal for assessment year 2008-09. In this year, the assessee had three type of investments one relating to investment in subsidiary companies the amount of which is Rs.101.74 crores. The second category relates to long term unquoted shares the amount of which is Rs.31.53 crores. The third category is of equity shares the valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... row meaning ought 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 01/04/1962. 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 finalized assessments prior to the assessment year beginning on 01/04/2001. Furthermore, as observed by the Supreme Court in Walfort (supra), the basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure and on the same analogy the exemption is also in respect of net income. In other words, where the gross income would not form part of total income, it's associated or related expenditure would also not be permitted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer had included the value of total investments for calculation of disallowance whereas in our opinion the value of those investments should have been included which were made for the purpose of earning exempt income. The assessee had made significant investments in the shares of subsidiary companies which are definitely not for the purpose of earning exempt income. The Hon'ble Tribunal in I.T.A. No.3349/Del/2011 in the case of Promain Ltd., after relying upon a Kolkatta judgment of Tribunal in I.T.A. No.1331 has held that strategic investment has to be excluded for the purpose of arriving at disallowance under Rule 8D(iii). The Tribunal had relied upon the findings of Kolkatta Tribunal in the case of Rei Agro Ltd. v. DCIT in I.T.A. No./ 1331/Del/2011 dated 29.7.2011. The relevant portion of Tribunal findings as contained in the Kolkatta Tribunal are reproduced below:- (iii) Further in Rule 8D(2)(ii), the words used in numerator B are the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance sheet as on the first day and in the last day of the previous year . The Assessing Officer was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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