9911796707
TMI Blog2012 (12) TMI 1047X X X X Extracts X X X X X X X X Extracts X X X X ..... ss Objection. 2. The Revenue has raised following grounds of appeal: 1. That the action of the Ld. CIT(A) to allow relief for statistical purposes is pre-matured keeping in view the fact that the order of Hon ble ITAT against the order u/s 263 of CIT, J K has not attained finality, as the department has preferred an appeal before the Hon ble High Court of J K, Jammu and the decision is awaited. 2. That the Ld. CIT(A) has erred in directing the A.O. to restrict the disallowance u/s 14A to the extent of ₹ 8.10 lacs by applying the yard stock of making pro-rata disallowance based on the cost inflation index and quantum of exemption on the basis of disallowance confirmed in A.Y.1992-93 without appreciating that the exempt income u/s 10(15), 10(23) and 10(23G) amounting to ₹ 36,10,19,907/- has been earned after investment. 3. That the ld. CIT(A) has failed to appreciate that the assessee has utilized funds available with bank for earning of the said exempt income and therefore, the AO has rightly worked out the disallowance of ₹ 7,05,00,000/- and ₹ 2,26,00,000/- on account of proportionate interest and management expenses attributable to ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtionate allocation of interest and management expenses vis-a-vis exempt and taxable income but restricted to those expenses which were directly incurred in relation to earning exempt income of ₹ 36,10,19,907/-. It was also submitted before the AO that there was no related cost which could be stated to have been incurred to earn the exempted income. However, the A.O. did not accept this reasoning dismissing it to be pure guess work. He also dubbed this explanation that only assessee s own funds were enough to be invested in the exempted income as empty argument . The Assessing Officer s argument is based only on the reason that assessee bank is having both interest bearing and as well as own funds in a common pool. The AO also did not accept assessee company s reliance on number of judicial pronouncements delivered by Income Tax Appellate Tribunal and Hon ble High Courts. The AO s dismissal of these authorities was that these decisions were delivered in terms of the then prevailing section 80M of the Act. He also observed that some of these decisions rather confirm the view that proportional disallowance on the expenditure incurred for earning of exempted income has to be ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempted income. The Ld. CIT(A) further observed that he was of the view that the expenditure has to be allowed which is incurred by the assessee in relation to income which does not form part of the total income under this Act. The AO has to establish the fact that the expenditure has been incurred by the assessee. The same can be established by establishing nexus between investment made and exempted income earned from same and then expenditure if any. The statute has not left it to the wishes and ideas of the AO to determine what the expenditure was without establishing and identifying the same. The CIT(A) relying upon the judgment of various courts of law and remand report of the AO was of the view that part of the expenditure can be disallowed in the form of notional proportionate interest and allowed the appeal of the assessee against disallowance of ₹ 7.05 crores made by the AO. 6. As regards the disallowance of ₹ 2.26 crores, the Ld. CIT(A) following the order of the ITAT in assessee s own case retained disallowance of ₹ 8.10 lacs out of total disallowance of ₹ 2.26 crores made by the A.O. 7. The Ld. DR, Mr. Tarsem Lal, mainly relied upon the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detail of the investment out of interest free fund is given by the assessee and the AO could re-assess the same after verifying such details to be submitted by the assessee as an alternative proposition. 9. On the other hand, the ld. counsel for the assessee, Mr. R.K. Gupta, CA, at the outset argued that ground No.1 of the Revenue is infructuous as the addition made in this respect has already been deleted by the AO by giving effect to the order of the ITAT and therefore, needs to be dismissed. 10. As regards ground No.4, it was argued before us with respect to ground Nos. 2 3 by the ld. counsel for the assessee Mr. R.K. Gupta, CA that there is no doubt that there is amendment in section 14A but the same is with effect from assessment year 2007-08 and not for the year prior to the said assessment year. He referred to the clarificatory note to the Finance Bill 2006 is specific reference to clause 7 which was placed on record. He further argued accordingly that this amendment in section 14A will take effect from Ist April, 2007 and will accordingly apply to the assessment year 2007-08 and subsequent years. The method as indicated in section 14A(2) stands notified through Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the submissions made before the A.O. which are available at pages 16 to 22 of AO s order in particular at page 21 being data for total funds available with the bank, , non interest bearing funds, total investment and advances, investment in tax free securities and infrastructural advances and amount invested in earning taxable income but has also utilized the excess in other advances and investments the income earned from which forms part of the total income under Chapter-IV of the Act. The figures are factual and no controversy has been raised on the issue. The nexus between borrowed funds and infrastructural advances can be said to be established only where it is shown that interest free funds are not available with the assessee bank. He invited our attention to the investment in tax free securities and infrastructural advances at the beginning of the year and closing of the year. 13. Mr. R.K. Gupta, CA the ld. counsel for the assessee referred to the order of the A.O. and the ld. CIT(A) and argued that the order of the CIT(A) in para 9 is very relevant where each and every contention of the AO has been discussed to arrive at the conclusion that the order of the AO is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) in the head note is reproduced for the sake of clarity as under: Sub-section (2) and (3) of section 14A were inserted by an amendment brought about by the Finance Act of 2006 w.e.f. April 1, 2007. Under sub-section (2) , the AO is required to determine the amount of expenditure incurred by a assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. Sub-section (2) was inserted so as to provide a uniform method applicable where the A.O. is not satisfied with the correctness of the claim of the assessee. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the AO when the arrives at his satisfaction under sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that it had not incurred any expenditure for earning the dividend income and that no disallowance was warranted. The Assessing Officer made a disallowance ₹ 6.92 crores towards expenses attributed to the earning of the dividend income. The Commissioner (Appeals) following earlier decisions in the case of the assessee for assessment year 1998-99 and 1999-2000 held that no expenditure was attributable to the earning of the dividend received and consequently deleted the disallowance. The assessee claimed that a major portion of its dividend amounting to ₹ 19.86 crores was received from group companies and of the total shares, 95 per cent. Consisted of bonus shares for which no cost had been incurred. The shares of GS were stated to have been acquired several year earlier, the assessee being a promoter of that company. During the year in question, the assessee claimed that it has not invested any amount in investments on which income was exempt under section 10(33) and it had disposed of some of its investments at a substantial profit. The Tribunal noted that the Assessing Officer had not examined the correctness of the claim of the assessee with reference to the account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted in the exempt securities. This approach of the AO cannot be accepted especially for the reasons that the assessee has submitted that the assessee is having interest free funds of ₹ 2265.25 crores at the beginning of the year and ₹ 2736.65 crores at the end of the year, which indicates an increase of interest free funds to the extent of ₹ 471.40 crores. Besides, this a clear explanation was given before the AO that the profits of the year after declaring dividend and dividend tax amounting to ₹ 237.52 crores were also pumped in such accounts. Thus, interest free funds to the extent of ₹ 708.92 crores were available to assessee bank for making investment which far exceeded investment in tax free securities can be said to be established only when it is shown that interest free funds are not available with the assessee bank whereas reverse is true in this case, the borrowed funds are not available for investment in tax free securities and infrastructural advances. The AO has not brought on record that interest free funds are not available with the assessee bank. The assessee is having borrowed funds to the extent of ₹ 11058.54 crores whereas inv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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