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TMI Blog2016 (11) TMI 256X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) has erred both on facts and in law in confirming the action of the AO in making disallowance under Section 14A of the Act. 3. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that provisions of Section 14A are not applicable to investment made in EOU covered under the provisions of Section 10B of the Act. 4(i)On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that the computation of disallowance under Rule 8D read with Section 14A is bad in law. (ii)On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that no disallowance is called for since all the investments are in subsidiary companies and there is no change during the year (except a small change in the valuation of mutual funds). (iii) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that interest on borrowed funds on which interest has been paid, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 10(33) of the Act. The Assessing Officer also observed that the assessee made investment in the unit eligible under section 10B of the Act, the income of which was exempt. According to the Assessing Officer, disallowance under section 14A of the Act was attracted in the case of the assessee. However, the assessee did not disallow any expenses relating to the investment in terms of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (in short "the Rules"). Accordingly, invoking Rule 8D of the Rules, the Assessing Officer computed total disallowance of Rs. 63,85,457/- as under: (i) interest expenses corresponding to the average value of investment, income from which does not or shall not form part of the total income of the assessee under Rule 8D(2)(ii), amounting to Rs. 53,75,318/- (ii) one half percent of the average value of investment, income from which does not or shall not form part of the total income of the assessee under Rule 8D(2)(iii), amounting Rs. 10,10,140/- 3.1 Before the learned Commissioner of Income-tax(Appeals), the assessee challenged the investment made in the unit covered under section 10B of the Act for the purpose of disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income, which is exempt and not in respect of the income for which deduction is available. He submitted that in the case, the assessee has claimed deduction under section 10B of the Act in respect of the export oriented unit. According to the learned Authorized Representative, it was settled law that section 10B is a deduction provision and not an exemption provision, and, therefore, provisions of section 14A of the Act were not applicable to the investment made in EOU covered under the provisions of section 10B of the Act. In support of the contention, he relied on the following decisions: (i) Decision of the Tribunal, Mumbai Bench in the case of Meditap Specialties Private Limited Vs. ACIT,Range-2(2), Mumbai in ITA No. 6835/Mum/2010. (ii) Decision of the Tribunal, Ahmedabad Bench dated 10/06/2011 in the case of CIT Vs. Net Square Solution in ITA No. 3145 and 3146/Ahd/2010. (iii) Decision of the Hon'ble Bombay High Court in the case of Hindustan Unilever Ltd. Vs. DCIT reported in (2010) 325 ITR 102. (iv) Decision of the Tribunal, Pune Bench in the case of Opus software solutions private limited versus ACIT, in ITA No. 584/Pune/2011 5.2 On the other hand, the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of section 10A provides for deduction and not exemption * Ostensibly, while denying the claim of carried forward unabsorbed loss/depreciation assessed under the normal provisions of the Act, the Assessing Officer has proceeded on the basis that section 10A provides an exemption and, therefore, loss suffered in such unit is not allowed to be set off or carried forward for further set off against other normal business income. In this context, it is found that section 10A was substituted by Finance Act, 2000 with effect from 1-4-2001. * From the perusal of amended provisions of section 10A, it is quite clear that the provision envisages and allows a deduction of profits and gains specified therein and it is no longer a provision which provides for excluding an income from the total income of an assessee. Therefore, there is weight in the plea set up by the assessee that in so far as the nature of section 10A with effect from 1-4-2001 is concerned, it is a section which seeks to allow a deduction of the prescribed profits while computing total income of the assessee and not a provision which provides for an exemption or to exclude certain income from the total income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at since the income of the unit was exempt from taxation, the loss of the unit could not have been set off against the normal business income. However, this was allowed by the assessment order and it is opined that the assessee's income to the extent of Rs. 1.33 crores has escaped assessment. 24. There is merit in the submission which has been urged on behalf of the assessee that the Assessing Officer has while re-opening the assessment ex facie proceeded on the erroneous premise that section 10B is a provision in the nature of an exemption. Plainly, section 10B as it stands is not a provision in the nature of an exemption but provides for a deduction. Section 10B was substituted by the Finance Act of 2000 with effect from 1-4-2001. Prior to the substitution of the provision, the earlier provision stipulated that any profits and gains derived by an assessee from a hundred per cent Export Oriented Undertaking, to which the section applies "shall not be included in the total income of the assessee". The provision, therefore, as it earlier stood was in the nature of an exemption. After the substitution of section 10B by the Finance Act of 2000, the provision as it now stands provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t make any difference to the assessee's claim in Black & Veatch Consulting (supra). Therefore, it cannot be denied that there is uncertainty and lack of clarity or precision in the language employed in sub-section (1). It is, therefore, not impermissible to rely on the heading or title of Chapter III and interpret the section as providing for an exemption rather than a deduction. 29. The key to the problem seems to lie in appreciating the difference between a provision which exempts an income and a provision which provides for a deduction of the income or a part thereof in computing the total income of the assessee. We have attempted to outline the difference between the two kinds of provisions in the light of the authorities cited above. The matter is not altogether free from difficulty. However, as S. Ranganathan, J. (as he then was) has pointed out in CIT v. Dalmia Cement (Bharat) Ltd. (supra): - "In the process of judicial assessment of such conflicting interpretations, there is no sensitive balance with which to weigh the pros and cons and determine with scientific accuracy which side is the weightier and, perhaps in the drawing of the ultimate inference one way or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income Tax (Appeals) on the issue in dispute. The ground No. 3 of the appeal of the assessee is accordingly, dismissed. 6. In ground No. 4 of the assessee's appeal, the assessee has challenged the upholding of disallowance under Rule 8D(2)(ii) in respect of shares and mutual funds. 6.1 Before us, the learned Authorized Representative of the assessee submitted that all the investments were made in the subsidiary company and there was no change during the year except small change in valuation of mutual funds. He further submitted that the borrowed funds, on which interest has been paid, were utilized for specific purpose and there was direct nexus between the loan and its utilization. 6.2 Referring to page 21 of the paper book, the learned Authorized Representative submitted that company had introduced capital of Rs. 15,01,00,200/- in the financial year 2006-07 and during that year, it earned a profit of Rs. 14,31,35,118/- (PB page-22) and out of these funds, a small investment of Rs. 12,49,980 (PB Page-21) was made in the shares. He further submitted that in the financial year 2007-08, the assessee company earned profit of Rs. 10,12,63,956/- (PB page 37). Its capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative submitted that investment in shares was not made out of borrowed funds and accordingly disallowance in respect of shares/mutual funds under Rule 8D2(ii) made by the Assessing Officer and upheld by the learned Commissioner of Income-tax (Appeals) was not justified. 6.5 On the other hand, the learned Sr. Departmental Representative relied on the findings of the learned Commissioner of Income Tax (Appeals) 6.6 We have heard the rival submissions and perused the relevant material on record including the paper book of the assessee. The issue in dispute before us is whether any borrowed funds have been utilized towards the investment in shares/mutual funds by the assessee. The learned Authorized Representative has demonstrated before us that as on 31/03/2007, investment in shares was of only Rs. 12,49,980/-, which was out of the owned capital of Rs. 15,01,00,200/- and profit of Rs. 14,31,35,118/-. During that year, the assessee also took unsecured loan of Rs. 10,21,65,762/- from Directors and Shareholders. These facts clearly demonstrate that the unsecured loan raised from the Directors and Shareholders were not utilized towards investment in shares/mutual funds. In the subsequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only, which showed that the assessee company has borrowed funds, which were utilised for mixed purposes. In view of the arguments, the learned Sr. Departmental Representative submitted that disallowance made by the Assessing Officer on the issue in dispute need to be confirmed. 9.2 The learned Authorized Representative, on the other hand, submitted that the Assessing Officer has assumed that the investment in EOU has come out of borrowed funds and taken the value of opening investment at Rs. 16,04,07,523/- and the closing investment at Rs. 15,45,31,633/-. To explain that no borrowed funds have been invested in EOU, the learned Authorized Representative submitted as under: (i) That the assessee company was having a capital of Rs. 1,00,200/- as on 31/03/2006 ( PB Page No. 21). (ii) In financial year 2006-07, the assessee introduced a capital of Rs. 15 crore and out of which an amount of Rs. 7,67,14,975/- was invested in EOU. In financial year 2006-07, the EOU, earned a profit of Rs. 5,18,85,665/-and thus making the capital of the EOU at Rs. 12,86,00,636/-. (PB Page 28) (iii) In financial year 2007-08, the EOU, further earned a profit of Rs. 2,49,76,052/- (PB Page No. 44). It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt under the head interest paid to bank loan, whereas, total amount of back interest shown in the profit and loss account of its EOU unit is Rs. 42.63 lakhs only, is thus not relevant to the facts for deciding whether any borrowed fund has been utilised in investment in EOU . Before us, the assessee has already explained that loans borrowed for specific purpose have been utilized towards those purposes only. In such circumstances, no disallowance could be made under Rule 8D2(ii) of the Rules. 9.6 We find that the learned Commissioner of Income-tax (Appeals) has also allowed relief to the assessee with following observations: "(ii) Whether disallowance under Section 14A is to be made on investments made by the head office in the EOU. The appellant has claimed that the investment in EOU has been assumed by the Assessing Officer to be out of borrowed funds. However, during Financial Year 2006-07, a capital of Rs. 15 crores was introduced out of which Rs. 7,67,14,975/- was contributed towards the EOU. Thus no borrowed funds were utilized for the purpose of EOU. The profits earned by the EOU contributed to the reserves & surplus. Thus, the entire amount of Rs. 15,45,31,633/- as o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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