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TMI Blog2015 (9) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be the basis on which the AO can make disallowance u/s.14A read with Rule 8D of the Rules. The second reason given by the AO was that the assessee has taken working capital loan of more than ₹ 50 crores and paid interest thereon. According to the AO the Assessee when it liquidated investments which would yield income which is taxable, it ought to have used the proceeds on such liquidation to fund the working capital instead of investing such proceeds in investments which would yield income which is tax exempt. This cannot also be the basis on which the AO can reject the claim of the Assessee that no interest expenses were incurred to earn tax free income. The law is well settled that the AO cannot sit in judgment over the manner in which a businessman has to arrange his business affairs and decide as to what should be the manner in which a particular decision has to be made. He can invoke jurisdiction to make disallowance u/s.14A of the Act only on a finding that interest expenditure were incurred for earning tax free income. In our view the CIT(A) has rightly accepted the stand of the Assessee that no interest expenses whatsoever were incurred in respect of funds which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits of eligible business and not on eligible units and that the provisions of Section 80IA have to be understood alongwith the provisions of Section 80B(5) and 80AB of the I T Act, 1961. 4. The learned CIT(Appeals) has erred in allowing relief to the assessee based on the decision of the Hon ble Tribunal dt. 4.9.2009 in assessee s own case for AY 2006-07 without appreciating that the decision of the Tribunal has not reached finality and appeal u/s 260A has been filed before the Hon ble High Court against such order. 3. The assessee is a company engaged in the manufacture and sale of Aluminium extrusions, generation and sale of wind energy. It had four windmills at four different locations generating power. It is not in dispute that the activity of generating power by windmill and profits derived from such activity was eligible for deduction u/s. 80IA of the Act. The details of the four undertakings which generated power at different locations were as follows:- a) First wind mill (WM I 4.14 MW) is situated at village Madkaripura District Chitradurga. This mill was set up in the financial year 1997-98 . Deduction under section 80 IA of Income Tax Act 1961 was cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7-08 4,49,01,540 4,53,44,212 1,33,76,963 27,88,447 10,64,11,162 (-) 14,72,91,757 2008-09 4,60,89,154 4,28,51,989 1,28,81,501 - 10,18,22,644 (-) 4,54,69,113 Unit Net 4,60,89,154 8,97,53,104 73,44,761 22,79,50,234 5. As already stated, the assessee claimed deduction u/s. 80IA of the Act only in respect of undertaking Windmill-I (4.14 MW). It is not in dispute that the gross total income of the assessee was much greater than the total deductions claimed under Chapter VIA of the Act. It is also not in dispute that there was no carry forward loss available for set off in any one of the Assessment years referred to in the chart above. The loss referred to in the 6th and 7th column of the table give above, is only a calculation done by the AO by taking into consideration only the profits/loss of the various Sec.80IA units of the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was informed about the order of the Hon ble Tribunal in the assessee s own case for the AY 06-07 which was in their favour, the AO tried to distinguish the order and rejected the request. I have gone through the order of the Hon ble Tribunal and the facts of the case are similar to the issue on hand and the said order is applicable to the present AY with full force. The Hon ble Tribunal while deciding the issue relied on the decision of the Co-ordinate Bench of Bangalore dated 10-07-09 in ITA No.294/Bang/2009 in the case of M/s. Karnataka Power Corporation Ltd. Vs. CIT. Therefore, the A.O. is directed to allow the deduction u/s.80IA following the decision of Hon ble ITAT in the assessee s own case for AY 06-07 ( ITA No.448/Bang/2009 dated: 04-09-09). The grounds of appeal in this regard are allowed. 9. Before CIT(A), the Assessee has challenged the order of the AO whereby the AO held that in the event of deduction u/s.80-IA of the Act being allowed to Wind Mill-I (4.14MW) unit then the profits have to be reduced by ₹ 25 lacs on account of non-apportionment of common expenses to this unit. This ground of the Assessee was not adjudicated by the CIT(A). The Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit is required to be computed as if the profit making industrial undertaking was the only source of income would almost render the provisions of section 80A(2) of the Act nugatory. Sections 80A(2) and 80B(5) are declaratory and apply to all the sections falling in Chapter VI-A. They impose a ceiling on the total amount of deduction and therefore the non obstante clause in section 80-I(6) cannot restrict the operation of sections 80A(2) and 80B(5) which operate in different spheres. The gross total income of the assessee has first got to be determined after adjusting losses etc., and if the gross total income of the assessee is nil the assessee would not be entitled to deductions under Chapter VI-A of the Act. 11. The Tribunal thereafter examined the decision of the Hon ble Mumbai Bench in the case of Meera Cotton and Synthetics Mills Pvt. Ltd. Vs. ACIT 318 ITR (AT) 64 (Mumbai) and observed as follows:- 9. The Mumbai Bench of the Tribunal in the case of Meera Cotton and Synthetics Mills Pvt. Ltd. Vs. ACIT 318 ITR (AT) 64 (Mumbai) had an occasion to deal with a case similar to the case of the Assessee in this appeal. The facts were, the assessee filed its return for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... khs. 10. The Mumbai Bench of ITAT in the case of Meera Cotton and Synthetic Mills Ltd., (supra) distinguished the decision of the Hon ble Supreme Court in the case of Synco Industries Ltd. v. Assessing Officer [2008] 299 ITR 444 (SC) as follows: At this juncture it will be relevant to consider the judgment of the Hon ble Bombay High Court relied upon by the authorities below in Synco Industries Ltd. v. Assessing Officer [2002] 254 ITR 608 which now stands approved by the Hon ble apex court in Synco Industries Ltd. v. Assessing Officer [2008] 299 ITR 444. The facts of this case are that the assessee had a unit for oil division and also another unit for chemical division. The assessee earned profits in both the units in the year in question. However it had suffered losses in the oil division in the earlier years. The assessee claimed deductions under sections 80HH and 80-I by claiming that each unit should be treated separately and the losses suffered by the oil division in earlier years be not adjusted against the profits of the chemical division while considering the question of granting deductions under sections 80HH and 80-I. The Assessing Officer observed that the gross t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmine the gross total income, which, in turn, is computed by aggregating the income from all the sources in this year after adjusting the losses of the current year under any head. The brought forward loss or unabsorbed depreciation etc. are also reduced. The resultant figure is determined as gross total income. To put it simply gross total income is the income avail- able at the disposal of the assessee immediately before allowing deductions under Chapter VI-A. If the gross total income is say ₹ 100 and the assessee is entitled to deduction under section 80-IB at ₹ 150, then the amount of deduction under section 80-IB will be restricted to ₹ 100 as per the mandate of section 80A which provides that the deductions shall be allowed from the gross total income and the aggregate amount of all the deductions shall not in any case exceed the gross total income of the assessee. If however the amount of eligible relief under section 80-IB is say ₹ 90, then full amount will be eligible for deduction because the amount of the eligible relief does not exceed the gross total income. Therefore it is mandatory to work out the eligible amount of deduction under various se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Synco Industries Limited [2008] 299 ITR 444 (SC) lie in an altogether different compartment, we hold that the ratio of that case cannot be considered for application to the assessee s case. Accordingly the impugned order is overturned and the assessee is allowed deduction under section 80-IA on the profit derived by it from eligible unit 4.14 MW wind energy unit at ₹ 4,72,28,143. 12. In the present case, as can be seen from the computation of total income filed by the Assessee, which is given as an annexure to this order, there was no carry forward loss/depreciation to be set off. The deduction claimed u/s.80-IA of the Act is not greater than the gross total income. In such circumstances, we are of the view that the CIT(A) was justified in directing the AO to allow the claim of the Assessee for deduction u/s.80-IA in respect of Unit-I. Following the decision of the Tribunal referred to above, we uphold the order of the CIT(Appeals) and dismiss grounds No.1 to 4 raised by the revenue. As far as the grievance of the Assessee projected in Ground No.5 of its appeal are concerned, we are of the view that it would be just and proper to direct the CIT(A) to adjudicate the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at investment in shares and mutual fund were made with the intention of earning capital gain which is taxable under Chapter IV-E-Capital gains of the IT Act, 1961. 14. As per the Balance sheet, the assessee had declared a total investment of ₹ 37,37,85,384/-. Out of the above a sum of ₹ 5.05 crores was invested in bonds whose income was liable for taxation. Considering the above, the AO was of the view that the tax exempt investment of the assessee for the year was ₹ 32,32,85,384/-(37,37,85,384 5,05,00,000). Out of the above investments which would yield tax free income, the Assessee had also invested in Growth Scheme of Mutual Funds to the extent of ₹ 11.54 Crores. The Assessee claimed that investments in the Growth Scheme of Mutual Funds would only yield capital appreciation and not any dividend and therefore cannot be considered as investments which would yield tax free income. The AO however was of the view that though there was no income from these investments, yet capital gain on their transfer would yield tax free capital gain and therefore even this investment was to be considered as tax exempt investments attracted u/s. 14A of the Income Tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted income no expenditure has been incurred, disallowance u/s. 14A cannot stand.; (iv) The contention of the revenue even if the assessees has made investments in shares out of its own funds, the said own funds are merged with the borrowed funds in a common kitty and, therefore, disallowance u/s. 14A can be made, is also not justified. (g) As explained above, there is no disallowance under section 14A of the Income Tax in respect of our investment of ₹ 37.37 crores . 16. The AO after considering the above reply of the Assessee observed that from Asst. Year 07-08 to Asst. Year 08-09, the assessee has shifted the investments from taxable investments to tax exempt investments. In the previous years most of the monies were invested in bonds whose interest was taxable. However, in the current year, the assessee has liquidated these bonds and has made investments in Mutual funds to an extent of ₹ 32.32 crores. The AO also noticed from the schedule of secured and unsecured loans that assessee has taken working capital loan of more than ₹ 50 crores. When the assessee had investments in the form of bonds, he did not have any particular reason to keep working capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 296,55,34,533 25,29,03,187 647,15,24,443 E. Proportionate indirect to be disallowed interest B x C D 4,62,99,181 X 28,80,94,285 647,15,24,443 = 20,61,111 F. ₹ 14,40,471 G. Total disallowance attracted u/s. 14A read with Rule 8D A + E + F Rs.35,01,582 18. Before CIT(A), the Assessee reiterated contentions as were put forth before AO that no direct or indirect expenses were incurred for earning income which does not form part of the total income under the Act and therefore the provisions of Sec.14-A of the Act ought not to have been invoked by the AO. 19. The CIT(A) deleted addition made on account of disallowance of interest expenses of ₹ 20,61,111/- but confirmed the disallowance of indirect expenses of ₹ 14,40,471/-. The relevant observations of the CIT(A) were as follows: 9.3. After considering the detailed submissions of the appellant and re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised Grounds No.1 to 4 in their appeal preferred before the Tribunal. 21. We have heard the rival submissions. The learned DR relied on the order of the AO in so far as it concerns disallowance of interest expenses and the order of the CIT(A) in so far as it concerns disallowance of indirect expenses. The learned counsel for the Assessee reiterated submissions made before CIT(A) and the order of the CIT(A) in so far as it relates to disallowance of interest expenses. 22. We have considered the rival submissions. The Hon ble Bombay High Court in Income Tax Appeal No. 626 of 2010 in the case of Godrej Boyce Mfg. Co.Ltd. Mumbai. Vs. Dy. Commissioner of Income Tax, Range 10(2), Mumbai Anr. 328 ITR 81 (Bom) held as follows: Insertion of Subsections (2) and (3) to Section 14A : 25. Subsections (2) and (3) of Section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from 1 April 2007. Subsections (2) and (3) provide as follows: 14A(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such Income which does not form part of the total income under this Act in accordance with such method as may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub section (3) of Section 14A provides for the application of sub section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an Assessment Year beginni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely : B x A 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 balance-sheet 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 balance-sheet of the assessee, on the first day and the last day of the previous year. 24. In these appeals we are concerned with Rule 8-D(2)(ii) i.e., expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt (dispute in Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The law is well settled that the AO cannot sit in judgment over the manner in which a businessman has to arrange his business affairs and decide as to what should be the manner in which a particular decision has to be made. He can invoke jurisdiction to make disallowance u/s.14A of the Act only on a finding that interest expenditure were incurred for earning tax free income. In our view the CIT(A) has rightly accepted the stand of the Assessee that no interest expenses whatsoever were incurred in respect of funds which were used to make investments which yielded tax free income. We do not find any grounds to interfere with the order of the CIT(A). Consequently, grounds No. 5 to 7 of the Revenue s appeal are dismissed. 27. As far as Grounds No. 1 to 4 in Assessee s appeal are concerned, the disallowance is u/s.14A read with Rule 8D(2)(iii) of the rules. The Assessee has not taken any specific stand regarding expenses claimed as deduction while computing its income is only in relation to earning such income and that no indirect expenses can be attributed to the earning of tax free income. In this regard it is necessary that the Assessee should point out as to how each item of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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