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TMI Blog2011 (7) TMI 1150X X X X Extracts X X X X X X X X Extracts X X X X ..... d in confirming the learned AO's order disallowing a sum of Rs. 3,90,63,218, as expenditure attributable to exempt dividend income of Rs. 1,08,72,574 in terms of s.14A of the IT Act, 1961, read with r. 8D of the IT Rules,1962. 2.That on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of Rs. 3,90,63,218 under s.14A of the IT Act, 1961, by applying r. 8D of the IT Rules, 1962, disregarding the computation of disallowance made by the assessee at Rs. 1,49,995 duly supported by the certificate obtained from its statutory auditors. 7.That, on the facts and in the circumstances of the case, the learned CIT(A) erred in sustaining the addition of Rs. 3,90,63,218 being the disallowance under s. 14A of the Act/r. 8D of the Rules to the net profit of the assessee company for the purpose of computation of its book profit under the provisions of s. 115JB of the IT Act, 1961." 3. The brief facts leading to the above issue are that the assessee company is engaged in the business of manufacture and sale of sugar, industrial alcohol, bio-compost fertilizers and generation of power in the form of steam and electricity. Its head office is at Cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts in respect of exempted income and the fact that appellant has made its own estimation of expenditure to earn exempt income is sufficient reason for satisfaction of AO having regards to the accounts of appellant to estimate expenditure under s. 14A(2) of the IT Act read with r. 8D of the IT Rules. Further a certified estimate of such expenditure by a statutory auditor cannot override the estimation of expenditure as prescribed in IT Rules. In view of these facts and position of law, I hold that AO has rightly disallowed the expenditure of Rs. 3,90,63,218 consisting of interest of Rs. 3,38,47,524 and indirect expenditure of Rs. 52,15,694 to earn exempt income under s. 14A of the IT Act." Aggrieved, assessee came in appeal before Tribunal. 4. We have heard rival contentions and gone through facts and circumstances of the case. The first argument made by the learned counsel before us was that the assessee admittedly earned dividend income at Rs. 1,08,72,574 and claimed exemption under s. 34/35 of the Act. Learned counsel for the assessee stated that it has incurred expenditure to the sum of Rs. 1,49,995 as expenditure was relating to earning of exempt dividend income and this w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of funds for the entire financial year 2007-08 relevant to this assessment year. This calculation sheet is being reproduced as it is : "Balarampur Chini Mills Ltd. Asst. yr. 2008-09 Calculation sheet Sl. No. Particulars Calculation particulars Calculation workings (Rs in lacs) Amount (Rs in lacs) 1. Average owned capital employed (Op. share capital and reserves and surplus plus clause share capital and reserves and surplus)/2 (1,02,71,844 + 9,43.66.07)/2 98,542.26 2. Average rupee term loans 1-ECBs employed for projects (Op. secured loans + clause secured loans -excise loans and CC facilities from banks + deposit against conv. warrants)/2 (1,42,900.22 + 1,09,934.96 - 11,643-510-37,616.52 -1,359.52 -45,619.47 + 920)/2 78,503.34 3. Cash credit facilities/bank borrowings for working capital (including excise loans from bank) (Op. CC facilities + clause CC facilities + Op. unsecured loans from banks + clause unsecured loans from banks + excise loans from banks)/2 (45,619.47 + 38,976.04 + 7,500 + 34,000 + 11,643 + 510)/2 69,124.26 4. Book entry for deferred tax liability (Op. deferred tax liability + clause deferred tax liability)/2 (12,483.9+13,4 19.91)/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome qua administrative expenses, interest expenses or any other directly related expenditure. Learned counsel for the assessee accordingly stated that in the present case r. 8D of the Rules invoked by the lower authorities is without any basis. He stated that in view of the above facts the picture is very clear that there is no investment from interest-free or interest-bearing loans and there is no directly related expenses relating to exempted income i.e. dividend income. Hence, he urged the Bench to delete the addition. 5. On the other hand, the learned Departmental Representative stated that the r. 8D of the Rules is now mandatory and Hon'ble Bombay High Court in the case of CIT v. Godrej & Boyce Mfg. Co. Ltd. [2008] 2 DTR (Bom.) 36 has upheld the validity of this rule and it is applicable for and from asst. yr. 2008-09 as held by Hon'ble Bombay High Court. He stated that the AO and CIT(A) have rightly computed the disallowance by invoking the provisions of s. 14A of the Act and r. 8D of the Rules. But the learned Departmental Representative could not point out any defect in the statement showing sources of fund and its utilization filed by the assessee as also the calculatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t entire amount of investments, yielding tax-free dividend income to the assessee, were acquired from its owned funds represented by the share capital and free reserves and neither long-term borrowings in the form of term loans, ECBs etc. nor short-term borrowings in the form of cash credit facilities etc. were used for the purpose of acquisition of investments at any time during the previous year as is evident from statement prepared on the basis of audited balance sheet as at 31st March, 2008. 7. In view of the above facts, now we have to go to r. 8D of the Rules, which is being reproduced as it is : "8D. (1) Where the AO, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a)the correctness of the claim of expenditure made by the assessee; or (b)the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-r. (2). (2) The expenditure in relation to income which does not form part of the tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income under the provisions of this Act. The provisions of s. 14A were enacted by the Finance Act, 2001 by retrospective effect, w.e.f. 1st April, 1962, which postulated that for the purpose of computing the total income no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of total income under the Act by an assessee. The Memorandum Explaining the Provision in the Finance Bill, 2001 provides reasons for insertion of s. 14A in the Act and the same are reported in (2001) 166 CTR (St) 145 : (2001) 248 ITR (St) 192 and at pp. 195 and 196, which are as under : "Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant assessment year. In the absence of any such finding, facts of the present case show that the investment in shares was made out of own capital employed and not from borrowed funds, no disallowance on account of interest expenditure can be made by invoking r. 8D of the Rules. Accordingly, in the given facts and circumstances, we delete the addition and allow this issue of assessee's appeal. 9. The next issue in this appeal of the assessee is against the order of CIT(A) in confirming the action of AO in reducing the claim of deduction under s. 80-IA of the Act, by deducting proportionate head office expenses on turnover basis. For this, the assessee has raised following ground Nos. 3 to 6 : "3. That, on the facts and in the circumstances of the case, the learned CIT(A) erred in sustaining the learned AO's order reducing the assessee's claim of deduction under s. 80-IA of the IT Act, 1961, from Rs. 1,09,61,26,467 to Rs. 1,07,14,75,223 after deducting proportionate head office expenses of Rs. 2,46,51,244 on turnover basis. 4. That, on the facts and in the circumstances of the case, the learned CIT(A) erred in sustaining the learned AO's order reducing the assessee's claim o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of turnover of each eligible unit under s. 80-IA or 80-IB during the assessment proceedings. I therefore do not find any reason to disturb the allocation of head office expenses made towards eligible ss. 80-IA and 80-IB units during the assessment proceedings for running such units by the AO following my own appellate order for asst. yr. 2007-08 in appeal No 133/CC-XIX/CIT(A)-C-II/Kol/2009-10. I confirm the action of AO to allocate head office expenses of Rs. 2,46,51,244 being the proportionate head office expenses towards eligible s. 80-IA units and I also confirm the action of the AO in reducing the appellant's claim of deduction under s. 80-IB by its proportionate head office expenses of Rs. 50,35,637 and reducing the claim of deduction of appellant under s. 80-IB of the IT Act accordingly, I must add here that even after reducing the claim made under ss. 80-IA and 80-IB by the appellant, AO has determined the allowable claim under s. 80-IA at Rs. 107.14 crores and claim under s. 80-IB at Rs. 4.64 crores. The gross total income of appellant has been determined at a loss of (-) Rs. 1,89,13,04,166 by the AO and therefore such reduction in allowable claim of deduction und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct expenses incurred in the specific undertakings had already been reduced by the assessee from the profits of the said undertakings which was duly supported by the auditors report and Form No. 10CCB. It is also a matter of record that identical claims made by the assessee in an identical manner have been allowed to the assessee. For these very undertakings over the years at times as old as since 2000-01 assessment year. It is also an undisputed fact that the authorities have nowhere pointed out that any expenditure which had been incurred by the head office pertained directly to the undertakings for which deduction under s. 80-IA/80-IB of the Act had been claimed. It is seen that the tax authorities have proceeded on the footing that some expenses must have been incurred by the head office; suspicion cannot supplant evidence. Since there is no shortcoming pointed out in the accounting of the assessee no effort has been made to show that any specific expenditure incurred under the head office actually pertained to the undertakings for which deduction is being wrongly claimed. This action purely based on suspicion ignoring the facts on record is not in accordance with law. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent case all the relevant details are available before the AO before whom it is repeatedly agitated that expenses directly connected to the units have already been accounted for. Necessary evidences, auditors certificate, books of accounts separately maintained for the units and the head office are available the AO refuses to look into the same and insists on applying proportionate disallowance on a pro rata basis and when the assessee again agitates providing the details by way of a chart made available to the CIT(A) from the same evidence, the AO again refuses to look into it and insists that it is nearly impossible. This obdurate attitude of repeatedly refusing to look into necessary facts is unfortunate. No doubt if the accounts of an assessee are unreliable or are not in the manner as per the requirements of the law then in such a situation at times it becomes incumbent to resort to pro rata proportionate disallowance of expenses, as it may in certain situations be the best possible method. However in order to apply the same it is first and foremost necessary to hold that the accounts are not reliable/maintained as per law which is not the fact in the present proceedings. To a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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