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TMI Blog2014 (10) TMI 616X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod of his own, nor indeed has the assessee, and is bound to adopt the prescription of rule 8D. The assessee has in restricting the disallowance to ₹ 4 lacs, i.e., the interest on borrowed capital availed to fund its investments made during the year, confused between the interest cost directly relatable to such investment, which is a subject matter of rule 8D(2)(i), and that indirectly relatable to such investment, estimation of which is governed by rule 8D(2)(ii) – relying upon The Commissioner of Income Tax Versus Reliance Utilities & Power Ltd. [2009 (1) TMI 4 - HIGH COURT BOMBAY] - there was no basis to the Revenue's claim as made before it, so that the Revenue's appeal was dismissed. The assessee has also earned interest income – the income is on long term investments and on loans forming part of current assets - The entire interest income is offered as, and admittedly, business income - the fact of earning of interest income would in our view be by itself of little consequence - There is no claim, which would, where so, though need to be established, of the interest being on borrowings which stood relent on interest - no nexus had been established between borro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintain accounts so as to reflect the true and fair view of its affairs, and any future adjustment, if any, would therefore find due reflection therein – thus, the contention of the assessee is upheld. Computation of book profits u/s 115JB – Held that:- The write off to be in pursuance to an accounting policy which is in conformity with the fundamental accounting principles as advocated by the Accounting Standards issued by the ICAI (so that it is in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956) as well as by CBDT – there was no merit in confirming the adjustment in computing the book profit u/s 115JB – Decided partly in favour of assessee. - I.T.A. No. 3485/Mum/2012, I.T.A. No. 3944/Mum/2012 - - - Dated:- 17-10-2014 - Shri Sanjay Arora, AM And Shri Amit Shukla, JM,JJ. For the Petitioner : Shri D. V. Lakhani For the Respondent : Ms. Neeraja Pradhan ORDER Per Sanjay Arora, A. M. These are cross Appeals, i.e., by the Assessee and the Revenue, arising out of the Order by the Commissioner of Income Tax (Appeals)-17, Mumbai ('CIT(A)' for short) 02.03.2012 , partly allowing the assessee's appeal contesting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t) is made at 10% of the total administrative cost (including the employee costs), incurred at a total of ₹ 1556.31 lacs. However, certain costs, which have no bearing or relation whatsoever with the income, if any, on investments, i.e., provision for doubtful debts, loss on sale of fixed assets, etc., are excluded from the estimation process (PB pgs. 23-25). The assessee, though unsuccessful at the assessment stage, was partly successfully before the first appellate authority, who accepted its exclusion of certain expenditure (aggregating to ₹ 334.42 lacs) in estimating the administrative cost attributable to investments. Aggrieved, both the parties are in appeal. While the assessee appeals for sustaining of disallowance u/s. 14A at ₹ 92.44 lacs, the Revenue agitates the exclusion of certain expenses by the ld. CIT(A) while accepting in principle the Assessing Officer's (AO's) action in invoking and applying rule 8D as valid. 3. We have heard the parties and perused the material on record. 3.1 At the very outset, we find that the impugned order is unsustainable in law (on this ground, that is), with it in fact providing no relief to the assessee. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned, is primarily factual. 3.3 We next subject the assessee's method to an examination on merits. Certain expenditure (Rs. 334.42 lakhs) is excluded on the ground of it being divorced from the activity of making or managing investment in shares. The same is valid in principle inasmuch as only the expenditure having a bearing or relation to the tax exempt income could be subject to disallowance - wholly or partly, u/s. 14A. The nomenclature of the account being representative of its' nature, which stands explained by the assessee (PB pgs. 24-25), it is clearly possible to determine, one way or the other, i.e., the validity or otherwise of each exclusion. The ld. CIT(A) has, however, summarily held the same as being outside the purview of section 14A. Inasmuch as his order is not supported by any finding or even reason as to why he considers it as so, his order cannot be said to be a valid judicial order (also refer section 250(6)). We have in fact already noted his upholding of the said exclusion as inconsistent with his approving the application of rule 8D. We shall revisit this part of his order later. 3.4 Next, we shall consider the assessee's method, the basic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment activity, at 10%. The assessee's accounts are admittedly not maintained activity-wise. On what basis then, one may ask, does it arrive at the said estimation of 10%? Why not 20% (say), or even 5% for that matter. Rule 8D is statutorily prescribed (refer section 14A(2)) only to remove the estimation exercise from the realm of arbitrariness or any subjectivity. Arbitrariness at the end of the assessing authority cannot be substituted by that at the assessee's end, which is equally proscribed by law. The assessee speaks of the bulk, nay, almost the whole of its' investment being in shares in subsidiary companies, which it claims is for strategic reason/s and not for income generation. We have already noted that income on investment in shares is almost wholly extrinsic to the company's internal processes. An investee-company may do good, yet not declare dividend, or declare it at a rate which is nowhere compatible with the investment therein, finding it better to retain resources, being confident to being applied to propel future growth of the company. In fact, it's doing good is itself independent of the investment by the assessee therein, being dependent on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g but to obfuscate the issue at hand, i.e., whether rule 8D is to be applied in the facts and circumstances of the case, the conditions for which are clearly spelled out in section 14A(2) r/w s. 14A(3). Toward this, the assessee's argument is of the AO being precluded from proceeding to invoke rule 8D, otherwise mandatory for the current year, in view of his having not expressed his dissatisfaction with the assessee's suo motu disallowance. No specific format has been prescribed for communication of his dissatisfaction by the AO, which is immanent in the assessment order in the present case. The assessee's accounts are admittedly not maintained activity-wise, and its claim is de hors its accounts. We have already noted that the assessee's accounts do not in any manner support its claim of the organizational resources being dedicated to the extent of 10% toward the investment activity. Reference in this context may be made to the decision in the case of AFL P. Ltd. vs. Asst. CIT [2013] 28 ITR (Trib) 263 (Mum), rendered following the decision in Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom), where the tribunal has discussed this aspect of the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to the discussion at para 6.5 (pgs. 9-11) and para 20 (pgs. 698-700) of the said decision, which we reproduce as under for ready reference: 'Continuing further, the part of the rule prescribing the ratio in respect of indirect expenditure (r. 8D(2)(iii)) cannot be altered on account of hardship (reference is drawn to the section of the judgment in Godrej Boyce (supra) on the constitutionality of sub-sections (2) (3) of section 14A and rule 8D/pgs. 113 - 123). Even so, the rule prescribes the same as the ratio of indirect expenditure required to support an investment. We say so as the expenditure prescribed for disallowance is based only on one variable, i.e., the value of the investment (on an average). Investment activity, it may be appreciated, is much stabler in character in comparison to the trading activity, which involves continuous churning of funds and, thus, activity, requiring a much higher level of organizational support/expenditure. Investments, on the other hand, are long term and strategic, requiring only periodic review of performance with reference to the investment objective/s, besides on account of environmental changes, if any. Why, the prescribe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares so purchased may be held either as Stock-in-trade' or 'Investment'. The word 'investment' in this rule refers to the making of purchase of shares and not holding it as investment. We decide accordingly.' There is, in the facts of the case, apart from dividend on investments, also from shares held as stock-in-trade, both for the current and the subsequent years. The Revenue however has not reckoned the same while computing the disallowance of either the administrative expenses or the interest component of the disallowance u/s 14A(1). In view of the foregoing, we have accordingly no hesitation in upholding the disallowance of the indirect administrative expenditure, effected at ₹ 220.74 lacs (PB page 11) at 0.5% of the average investment during the year, i.e., in terms of rule 8D(2)(iii), as in effect confirmed by the ld. CIT(A). Further, in this view of the matter, we also do not consider it necessary to dwell on his direction for exclusion of certain expenses, qua which we find his order as seriously wanting in the absence of definite findings, or even other deficiencies in the assessee's claim inasmuch as expenditure viz. depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 73.71 crs. as on 31.03.2007. The interest cost suffered, as it appears, is on this line/s of credit, which has presumably fluctuated during the year, to be completely discharged by its end. Until and unless, therefore, there is material to show that no part of this capital finances the investment of ₹ 433.99 crs. as on 31.03.2007, it is difficult to say that no part of the interest cost thereon is not indirectly attributable to the investment. The basis, again, has to be with reference to the assessee's accounts, in the absence of which, the rule of apportionment shall apply, which assumes all assets as being financed proportionately in-as-much as all the funds go to form or constitute a common pool of funds, financing all the activities (and/or assets), i.e., both yielding income/s forming part, and not so, of total income, pro rata. The decision in the case of Reliance Utilities Power Ltd. (supra), rendered in the context of section 36(1)(iii), would be of little relevance. The disallowance u/s.14A, it needs to be appreciated, is a statutory disallowance, constituting a complete code in itself. The said decision was cited before, and stands discussed by the h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corded by the tribunal for the said years. In view thereof, in its view, there was no basis to the Revenue's claim as made before it, so that the Revenue's appeal was dismissed. In the instant case, on the other hand, we have found ourselves unable to issue any finding of fact on the basis of the material on record, with the position of the law being amply clarified by the hon'ble high court in the case of Godrej Boyce Mfg. Co. Ltd. (supra), after considering the decision in the case of Reliance Utilities Power Ltd. (supra), as also in Dhanuka Sons vs. CIT (supra), following it, that no presumption would obtain. Continuing further, so however, it may well be, that the line/s of credit availed of by the assessee by way of secured loans may be toward financing its current assets or for any specific asset/activity. This is as it is not usual for the businesses to avail of dedicated financing, i.e., dedicated funds for specific activity/s, viz. term loan for fixed asset. If that be so, surely no part of the interest cost can be attributable to the investments in view of the assessee having adequate capital/self generated resources, on which no interest is incurred. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the basis of the facts, on which it rests, rather than on presumptions. The decision by the tribunal in Karnavati Petro Pvt. Ltd. (in ITA No. 2228/Ahd.(D)/2012 dated 05.07.2013) (to which no specific reliance though was made before us) would have no bearing in the matter; our decision being guided by the decision by the hon'ble jurisdictional high court in Godrej Boyce Mfg. Co. Ltd. (supra) and Dhanuka Sons (supra), following it, besides applied by the tribunal in several cases cited supra. We may, if only to clarify matters further, reproduce from the said decision by hon'ble jurisdictional high court, as under (para 85, pgs. 135-136): 'In all these decisions, the Tribunal held that no nexus had been established between borrowed funds and investments by the assessee in dividend yielding shares/income yielding mutual funds. Now assuming that this is so, the only conclusion which emerges is that the assessee had utilized its own funds for the purpose of making the investments. The fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee had incurred expenditure in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis to the A.O.'s action, since confirmed by the first appellate authority. No specific argument in fact stood raised before us. It is the fallacy to consider that the expenditure disallowed u/s.14A is not debited to the profit and loss account. The disallowance u/s.14A is not qua notional, but actual expenditure. As explained, if not debited in accounts, where else would the same find reflection in? There is no scope for the application of the decisions referred in respect of determination of income under the regular provisions of the Act. The only adjustment in our view that shall obtain is that the expenditure shall have to be valued at the amount as per the assessee's books, so that where there is a difference, for example, as in the case of depreciation, or the loss on the sale of assets, etc., it is the latter, i.e., the book value, which shall prevail. Subject to this caveat, we confirm the adjustment of the expenditure disallowed u/s.14A, being only in relation to income not forming part of the total income, under Explanation 1(f) in computing the book profit u/s.115JB, in-as-much as it is exempt u/s.10 and, further, only debited to the assessee's profit and los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision by the tribunal in Goetze (India) Ltd. vs. CIT [2009] 32 SOT 101 (Del), followed, inter alia, by the tribunal in Ovira Logistics Ltd. (in ITA Nos. 2439 3230/Mum(C)/2012 dated 30.08.2013), stands since reversed by the hon'ble high court in CIT vs. Goetze India Ltd. [2014] 361 ITR 505 (Del); the relevant findings by the hon'ble court appearing at pgs. 529-531 of its' judgment. We decide accordingly. Revenue's Appeal (in ITA No.3944/Mum/2012) 6. Ground no. 1 stands already adjudicated per paras 2 3 of this order. 7. Ground no. 2 disputes the allowance of the assessee's claim of the loss of ₹ 50 lacs on write off of a receivable, claiming it to be not allowable u/s. 36(1)(vii) or section 37(1) of the Act. The write off is in respect of service tax. The same, paid by the assessee on input services, is reflected in its accounts as receivable, debited to an asset account titled 'service tax asset account'. This is for the reason that the credit in its respect is available to the assessee against the service tax payable on the output service/s as per the Cenvat Credit Rules, 2004 (PB 2, pgs. 28-37). To illustrate by way of an exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel and in view of the facts brought on record and the fact that by writing off the sum of ₹ 50 lacs, the appellant has not claimed any deduction which is not otherwise allowable - the A.O. is directed to allow the same. Hence, this ground of appeal is allowed.' 8. We have heard the parties, and perused the material on record. AS-I issued by the CBDT u/s.145(2) of the Act advocates and emphasizes the fundamental accounting principles of 'prudence', 'substance over form' and 'materiality', as informing the accounting policies of an enterprise; the relevant part reading as under (also refer AS-1 issued by ICAI): 'A. Accounting Standard I relating to disclosure of accounting policies: 1. .................. 2. ................... 3. ................... 4. Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purpose, the major considerations governing the selection and application of accounting policies are following, na ..... X X X X Extracts X X X X X X X X Extracts X X X X
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