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TMI Blog2015 (2) TMI 895X X X X Extracts X X X X X X X X Extracts X X X X ..... oked, the disallowance is to be computed as per rule 8D of the rules. In the instant case, nothing has been brought on record to demonstrate that there was any incorrectness in the computation of disallowance as per rule 8D. It was simply contended that disallowance under section 14A of the Act cannot exceed the receipt of dividend income. This aspect has already been examined by us in the foregoing paragraphs. Since no dispute has been raised with regard to the computation of disallowance as per rule 8D, we find no infirmity therein and accordingly we confirm the order of the Assessing Officer after setting aside the order of the ld. CIT(A), as the ld. CIT(A) has granted relief to the assessee without looking to the mode of computation as per rule 8D of the rules. - Decided in favour of revenue. - ITA No.74/LKW/2014 - - - Dated:- 6-2-2015 - Shri Sunil Kumar Yadav And Shri. A. K. Garodia JJ. For the Appellant : Shri. R. K. Ram, D.R. For the Respondent : Shri. A. K. Gupta, C.A. ORDER PER SUNIL KUMAR YADAV: This appeal is preferred by the Revenue against the order of the ld. CIT(A), inter alia, on the following grounds:- 1. That Ld. CIT(A), Bareilly h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Income Tax Officer 2(1) vs. M/s Commercial Auto Centre in ITA Nos.156, 180, 315 157/LKW/2010, in which other judgments of the Tribunal and various High Courts were considered and it was held that in the light of the judgment of the Hon'ble Apex Court in the case of CIT vs. Rajendra Prasad Moody, [1978] 115 ITR 519 (SC), disallowance under section 14A of the Act is to be made despite the fact that the assessee has not earned any dividend income. Therefore, in the light of the aforesaid judgment of the Hon'ble Supreme Court, the computation of disallowance made by the Assessing Officer, having invoked the provisions of rule 8D, does not call for any interference. 6. The ld. counsel for the assessee, on the other hand, has placed reliance upon the order of the Tribunal in the case of ACIT vs. Iqbal M Chagala in I.T.A. No. 877/Mum/2013. Besides, reliance was also placed on the judgments of the Hon'ble Punjab Haryana High court in the case of CIT vs. Deepak Mittal [2013] 38 taxmann.com 83; Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. co. Ltd. vs. DCIT [2010] 194 TAXMAN 203 and the order of the Kolkata Bench of the Tribunal in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not appreciated the business connection with the sister concerns and commercial expediency , as argued by the appellant in respect of these transactions of investment. This aspect is important in the context of section 36 of the I.T. Act under which the claim of deduction of interest is made by the appellant. The ratio and decision in the case of CIT vs. Daliuia 254 ITR clarifies the position on this issue where it was held that. ''if there is an another connection between the assessee's business and that of the person to whom such advance is made, then such advance is to be regarded as being for business purposes and the interest on borrowings is deductible : Similarly, the business interest and business expediency has been defined in more wider terms in the context of section 36 in the decision in the cases of CIT vs. Rajeev 208 ITR, CIT vs. Jardine 210 ITR and Kejariwal vs. CIT 260 1TR where it was held that if borrowed money is used for acquiring controlling interest in other companies, and the same is in the assessee's business interests, interest on such borrowal is deductible'''. Thus, it can be seen that the business purpose and interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o dividends have been received during the year. I would observe that it was a hasty and general conclusion reached by AO because the distinction between investment and advance is very wide and both are two different transactions. The transacting parties have entered the transaction as investment which is properly, evidenced and documented without any defect and hence reason for suspicion. Under the circumstances, the nature of transaction cannot be doubted and any change effecting to the actual nature of transaction is not justified as per facts and law. Accordingly, the subsequent taxation on the basis of telescoping is also not justified. The appellant has pointed out that the investment and its accruals are taxable as and when the dividends/profits arise. Therefore, Assessing Officer has irrelevant grounds for disallowance of interest on the said investment. 16. I would conclude that the! investment made by appellant in the sister concerns prima-facie seem to be in the course of business as per business expediency and also that the investment have been made in the earlier years, at the time of available funds/profits in the hands of the appellant. That is to say the nexus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of S. A. Builders (Supra) is not rendering any help to the assessee. Investment in shares is made only to earn dividend income and as in case of any other investment, there may be capital gain or loss also at the time of sale of capital asset. Till the assessment year 2003-04, dividend income was taxable and therefore, deduction on account of interest on borrowed fund for making investment in share had to be allowed u/s 57(iii) of the Act as has been held by us while deciding the appeal of the Revenue for assessment year 2003-04 by following the judgment of Hon ble apex court rendered in the case of Rajendra Prasad Moody (Supra). In this case, it was held by Hon'ble Apex Court that if borrowed funds have been used for making investment in shares, then interest expenditure incurred on such borrowed fund has to be allowed as deduction u/s 57(iii) of the Act even if there was no dividend income earned during the year under consideration. The relevant para of this judgment of Hon'ble Apex Court in the case of Rajendra Prasad Moody vs. CIT as reported in [1978] 115 ITR 519 is reproduced below: What s. 57(iii) requires is that the expenditure must be laid out or expended w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to this process whether the expenditure is X or Y or nil; whatever is the proper expenditure allowed by the statute would be debited. Equally, it would make no difference whether there is any income and if so, what, since whatever it be, X or Y or nil, would be credited. And the ultimate income or loss would be found. We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of s. 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income. 40. There was an argument that since no Dividend income was earned during A.Y. 2004 - 05, no disallowance can be made u/s 14A. Reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now dividend income is not taxable under this head, deduction is not allowable u/s 57 (iii). Now, the only remaining section is section 36 (1) (iii) for allowability of interest expenditure. This is admitted position that the assessee is not dealing in shares as the assessee itself has shown it as investment in the balance sheet. Otherwise also, the assessee has not brought anything on record to establish that this investment in shares is a business of the assessee. Only contention of the assessee before lower authorities and before us is that since the investment is in shares of sister concerns engaged in connected business, it is for business expediency but we find no merit in this contention. The decision of learned CIT (A) is on this basis that it cannot be said that the amounts invested by appellant are for non business purpose, though same may be indirect business connection . In our considered opinion, the order of learned CIT (A) is not sustainable because deduction u/s 36 (1) (iii) is not allowable on the basis of a business connection. Deduction for interest u/s 36 (1) (iii) is allowable in respect of money borrowed for the purposes of the business. In the facts of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owable while computing capital gain. Hence, even if it is held that section 14A is not to be invoked for making disallowance in a year in which there is no actual dividend income as was held by Hon ble jurisdictional High Court and Hon ble Gujarat High Court, then also, it has to be seen as to whether deduction on account of interest expenditure is allowable under any provision of the Act. Since in the present case, such deduction on account of interest expenditure is not allowable u/s 36 (1) (iii) or 57(iii) of the Act, there is no need to invoke the provisions of section 14A of the Act for making disallowance because invoking the provision of this section is required where the deduction is otherwise allowable. 42. As per above discussion, we find that the order of CIT (A) on this issue is not sustainable because it is not as per law and facts of the present case because the decision of CIT (A) is on the basis that in his opinion, the investment made by the assessee in sister concern is in course of business as per business expediency but we have already seen that making investment in shares as a capital asset cannot be said to be in course of business or for business expedienc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the result, the appeal of the Revenue stands allowed. 8. The mode of computation as per rule 8D of the rules was also examined by the Tribunal in the case of Income Tax Officer vs. M/ Shruti Finsec Pt. Ltd. in I.T.A. No. 592/LKW/2012, in which it has been held that while adopting the procedure for computation of disallowance as per rule 8D of the rules, all aspects of direct and indirect expenses are to be considered. The relevant observations of the Tribunal in that case are also extracted hereunder:- 7. Before coming to the controversy involved in this case, we would like to prefer to examine the provisions of section 14A of the Act, according to which for computing the total income under Chapter-IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to the income which does not form part of the total income under this Act. In order to determine the amount of expenditure incurred in relation to such income, which does not form part of the total income of the assessee, the Assessing Officer has to follow the method prescribed, if he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income ; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :- A X-B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year ; C = the average of total assets as appearing in the balancesheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent. of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balancesheet of the assessee, on the first day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation with regard to the amount of expenditures directly relating to the investment made in earning dividend income. The other defect we find in the calculation is that as per definition (c) of rule 8D, the average of the total as appearing in the balance sheet of the assessee on the first day and the last day of the previous year is to be taken, but the Assessing Officer has taken the average of investment of the assessee-company as per balance sheet as on 31.3.2008 and 31.3.2009. The minor mistakes are noted in the calculation of the Assessing Officer following the method of rule 8D. We, however, did not agree with the order of the ld. CIT(A) restricting the disallowance to the extent of ₹ 16,544/- even without assigning any reason and in few lines he accepted the claim of the assessee. Therefore, we set aside the order of the ld. CIT(A), but so far as calculation of disallowance of expenditures are concerned, we restore the matter to the Assessing Officer with a direction to reverify the calculation of disallowance of expenditures as per rule 8D. Accordingly, the appeal of the Revenue is allowed for statistical purposes. 9. In the light of these facts, we are of the vi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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