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TMI Blog2012 (12) TMI 1036X X X X Extracts X X X X X X X X Extracts X X X X ..... 14A - Held that:- Investment made in a firm is to be treated as investment for earning exempt income - after introduction of Section 14A, it was possible to apportion the expenditure between taxable income and exempted income. The perusal of the assessment order shows as observed earlier, no where before the Assessing Officer or the ld. CIT(A), the assessee has made a specific mention to show which particular funds were borrowed for which particular requirement and in the absence of such specific utilization Rule 8D, would be applicable. Perusal of the assessment order shows that disallowance u/s 14A has been worked out on the basis of Rule 8D which is as observed earlier applicable in case of the assessee. Therefore, we set aside the order of the ld. CIT(A) and restore that of the Assessing Officer. X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed interest therefore, the Assessing Officer after relying on the decision of Hon'ble Punjab & Haryana High Court in case of CIT V. Abhishek Industries, 286 ITR 1 (PH), disallowed 12% interest which was worked out as under: Name Amount of loan No. of days Disallowance of interest @ 12% Shri Suresh Kumar 3,00,000/- 30 2,959/- M/s Panthur Farms Pvt Ltd 2,50,000/- 365 30,000/- M/s Balwindra Tools Pvt Ltd 15,00,000/- 365 1,80,000/- M/s Devbhumi Spinning & Weaving Mills 20,00,000/- 365 2,40,000/- Total disallowance 4,52,959/- 5. On appeal before the ld. CIT(A), it was contended that the assessee had given all the advances for business purposes. It was specifically stated that advances to Shri Suresh Kumar, M/s Panthur Farms Pvt Ltd and M/s Balwindra Tools Pvt Ltd. were given as advances for negotiating suitable piece of land on behalf of the assessee. Confirmation in respect of Shri Suresh Kumar and M/s Panthur Farms Pvt Ltd were also filed. In case of M/s Balwindra Tools Pvt Ltd, copy of Iqrarnama was filed. 6. After considering the submissions, the ld CIT(A) was of the opinion that the assessee has satisfied the need for giving advances to three part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty but no evidence was filed before us, therefore, in the absence of any evidence it has to be concluded that money has been diverted for non business purpose. Since the assessee has admittedly borrowed huge amounts on interest, the proportionate interest has to be disallowed in respect of the advances made to M/s Devbhumi Spinning & Weaving Mills in view of the decision of Hon'ble Punjab & Haryana High Court in case of CIT V. Abhishek Industries (supra). Accordingly we confirm the disallowance in respect of interest relating to advances made to M/s Devbhumi Spinning & Weaving Mills. 10 As far as advance to M/s Balwindra Tools Pvt Ltd is concerned, it was admitted before us that iqrarnama was filed before the ld. CIT(A) for the first time, therefore, even if the same is admitted by the ld. CIT(A) he should have allowed an opportunity to the assessee to examine this evidence. Therefore, in the interest of justice, we set aside the order of the ld. CIT(A) and remit the issue relating to the disallowance of interest on account of advance to M/s Balwindra Tools Pvt Ltd to the file of Assessing Officer to examine the iqrarnama filed before the first appellate authority and decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not form part of total income. (ii) Interest during the previous year which is not directly attributable to any particular income or receipt: A= amount of expenditure by way of interest other than the amount of interest included in cl. (i) incurred during the previous year = 21346266 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) = 21874356 Investment, Income from which does not or shall not form part of the total income As appearing in the balance sheet Average of Value Of the assessee On the first day of the Previous year On the last day of the previous Year 17302285 26446428 21874356 C (the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day and the last day of the previous year)= 197707785 Total assets as appearing in the balance sheet of the assessee Appearing in the balance sheet Average of value Of the assessee On the first day of on the last day of The previous year the previous year 171204857 224210720 197707785 Interest du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions quoted the provisions of Sec 14A(1) and ultimately decided the issue as under: "After perusing the abovesaid factual position, I am not inclined to agree with the appellant's contention that the provisions of Section 14A are not applicable in this case as the language of this section is very clear in this regard. However, another contention of the appellant is concerned that investments were made from available interest free advances and company's own funds, a chart regarding availability of funds with the appellant and investment made from the same has been furnished. In that chart, the company has own funds including reserves and surpluses amounting to ₹ 209.18 lakhs but the amount of investment is ₹ 255.96 lakhs. Therefore, I am of the view that it will be fair and justifiable to allow the relief to the extent of amount available with the appellant in the shape of own funds for this investment. Thus the disallowance of ₹ 4,51,629/- (24,71,119 X 209.18/255.96) is hereby confirmed and remaining 20,19,490/- (24,71,119 - 4,51,629/-) is directed to be deleted. Therefore, this ground of the appellant is also hereby partly allowed." 14 Before us, the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds. Once the funds are mix funds then Rule 8D is applicable. In fact Rule 8D was brought to deal with the situation where the mix funds are there. Rule 8D is applicable from Assessment year 2008-09 and in this regard he relied on the case of Godrej and Boyce Mfg V DCIT, 328 ITR 81 (Bom). 17 We have considered the rival submissions carefully and find that during the year the assessee has made investment in partnership and mutual fund. The profit from mutual fund in the form of dividend is exempt. As far as share profit from partnership firm is concerned, the same is also covered u/s 10(2A), therefore, there is no force in the submissions that the assessee has made investment in firm which itself is paying tax, therefore, it cannot be called that the investment has been made to earn exempt income. Section 10(2A) reads as under: "[(2A) in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm. Explanation.-For the purposes of this clause, the share of a partner in the total income of a firm separately assessed as such shall, notwithstanding anything contained in any other law, be an amount which bears to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance of such expenditure. Having regard to judicial opinion and also the legislative changes in the Act, a partnership firm is a separate entity than that of its partners under the IT Act and if there exists any specific provision in the income-tax law modifying the partnership law then, such specific provision shall be applied and if the tax law is silent on a specific issue, then a reference will have to be made to the provisions of partnership law for the adjudication of the same and in the present case, provisions of law sufficiently take care of the issue involved herein, hence, the issue is to be decided accordingly. There exist specific provisions for computing the income of the partnership firm as well as that of its partners, hence, total income of both is liable to be computed in accordance with such provisions. Since partnership firm, for the purpose of IT Act is a separate assessable entity and therefore partners vis-a-vis partnership firm would stand on the same footing of shareholders vis-a-vis company. Accordingly income charged in the hands of a partnership firm therefore, provisions of section 14A would be applicable in computing the total income of such part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present cased, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application." 19 Second decision relied on is that of CIT V. Hero Cycles (supra). In that case following question was raised before the Court: "Whether on the facts and in law, the Hon'ble Income-tax Appellate Tribunal was legally justified in deleting the disallowance of ignoring the evidence relied on by the Assessing Officer and holding that a clear nexus has not been established that the interest bearing funds have been vested for investments generating tax free dividend income." 20 In this case the Assessing Officer made disallowance u/s 14A(3) which was partly upheld by the ld. CIT(A). On further appeal, the Tribunal held that there was no nexus between the expenditure incurred and the income generated, therefore, disallowance cannot be made. It was also observed that main unit, Ludhiana had more intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erting the same to sister concern without having nexus with the business. Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application." In view of the above, we are of the opinion that no substantial question of law arise." 22 It is clear that both the above decisions pertain to Assessment year 2004-05 when Rule 8D was not even in statute book. Rule 8D has been introduced by I.T. Rules (5t h Amendment) w.e.f. 24.3.2008. Therefore, in both the above cases, Rule 8D could not have been possibly applied. In any case in a leading judgment the Hon'ble Bombay High Court in case of Godrej and Boycee Manufacturing V DCIT, 328 ITR 81 (Bom) held that rule 8D can not have retrospective application and the same can be applied only from Assessment year 2008 09. Further in case of CIT V. Winsom Textile, 319 ITR 204, the issue was whether the principles laid down in case of Abhishek Industries (supra) were applicable for the disallowance u/s 14A and the Hon'ble Court held that the decision of Abhishek Industries (supra) operates in a differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Rules which have been notified with effect from March 24, 2008, shall apply with effect from the assessment year 2008-09 ; (vi) Even prior to the assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer has to enforce the provisions of subsection (1) of section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record ; (yii) The proceedings for the assessment year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect retrospectively from April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent Assessment Year." 24 Hon'ble Bombay High Court noted this decision and then confirmed the theory of apportionment of expenses and held that same is very much applicable in Section 14A. At placitum 28 it has been observed as under: "During the course of this judgment, it would be necessary to revisit the decision of Hon'ble Supreme Court in Walfort. At this stage, however, it needs to be emphasized that the provisions of section 14A were construed in Walfort to evince Parliamentary intent not to allow deduction in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act against taxable income. Section 14A is clarificatory of the position that expense can be allowed only to the extent that they are relatable to the earning of taxable income. Only those expenses which are in respect of the earning of taxable income can be allowed. The section 14A broadens the theory of apportionment of expenditure between taxable and non-taxable income is evident from the following observa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d which was to be deducted from the dividend income for calculating the admissible deductions under Section 80M of the Act. It was urged that the plea of the Revenue that proportional expenses should also be reduced, was against the statute. 13. We have given our thoughtful consideration to the respective submissions of the learned counsel for the parties and find *force in the submissions of the learned counsel for the revenue. Finance Act 2001 had inserted Section 14A with effect from 1.4.1962. According to the said Section, any expenditure incurred by the assessee for earning income which did not form part of the total income under the Act was not to be allowed as expenses. This Court in the case of Punjab State Cooperative Milk Producer's Federation Ltd.'s case (supra) relying upon the decision of the Apex Court in Walfort Share and Stock Brokers's case (supra), wherein, while defining the scope of Section 14A of the Act, incorporated retrospectively w.e.f. 1.4.1962, it had laid down as under: The insertion of Section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expendiiure incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in Sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in part of total income could not be allowed against ore income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under Section 14A. Reading Section 14 in juxtaposition with Sections 15 to 59, it is clear that the words "expenditure incurred" in Section 14A refers to expenditure on rent, taxes, salaries, interest,etc. in respect of which allowances are provided for (see Sections 30 to 37)." ' 14. The apex Court had specifically recorded that the theory of apportionment of amount of expense* between taxable and non- taxable income stood widened by incorporation of Section 14A. It was further noticed that the expression 'expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 asset 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. (3) For the purposes of this rule, the 'total assets' shall mean, total asset as appearing in the balance sheet excluding the increase on account of revaluation of asset but including the decrease on account of revaluation of assets.)." 28 Clause (ii) of Sub-Rule (2) clearly shows that if the assessee show that interest has been incurred specifically for a particular item of income then it has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formula had to be adopted for attributing part of the administrative/managerial expenses to tax exempt investment income. The administrative expenses attributable to tax free investment income have a fixed component and a variable component. A view was taken that the disallowance should also be linked to the value of the investment rather than the amount of exempt income. Under Portfolio Management Scheme (PMS) the fee charged ranges between 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed administrative expense were excluded, on the ground that in the caase ofa large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment. The justification that has been offered in support of the rationale for rule 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Hon'ble Supreme Court it is not possible for this court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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