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TMI Blog2013 (4) TMI 864X X X X Extracts X X X X X X X X Extracts X X X X ..... Reserve Bank of India; and ii) the application of Rule 8D of Income-tax Rules in computing disallowance u/s.14A of the Act. in arriving at the income under the regular provisions of the Income-tax Act, 1961; and iii) not allowing the appellant s claim for deduction of ₹ 23,40,00,000/- transferred to Reserve Fund; and iv) confirming the applicability of Rule 8D of Income-tax Rules in computing the disallowance u/s.14A of the Act. in arriving at the income u/s.115JB of the Income-tax Act, is against law and facts of the case. But for the above, the ground is similarly worded in the case of assessee Shriram Transport Finance Company Ltd. as well. Learned A.R. of the assessees, at the outset, submitted that the issues were covered by order of this Tribunal in assessees own case for assessment year 2008-09 in I.T.A. No. 701/Mds/2012 and I.T.A. No. 702/Mds/2012. According to him, very similar grounds were raised in the said appeals. Learned D.R. fairly agreed that similar issues were dealt with by this Tribunal in assessees appeals for 2008-09. 3. Vis- -vis the disallowance made under Section 14A of the Act, learned D.R. pointed out that the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatutory Reserve as per Reserve Bank of India guidelines. 3. At the time of hearing, the learned counsel for the assessees relied on the grounds of appeal and reiterated the same as his submission. 4. On the other hand, the learned D.R. filed on record copies of the orders dated 6th February, 2009 and 6th May, 2009 of ITAT, Chennai in I.T.A. Nos. 570, 571, 806 807/Mds/2008 and I.T.A. Nos. 1944 to 1946/Mds/2008 respectively, in the assessees' own case. By placing the above orders, the learned D.R. submitted that an identical issue has been considered by the Tribunal in the said orders and the assessee s appeals were dismissed by upholding the orders of the lower authorities. 5. We have heard the rival submissions and considered the facts and material on record including the orders of this Tribunal cited supra. We find that an identical issue had been considered by this Tribunal in the said orders and the appeals of the assessees were dismissed. In I.T.A. Nos. 570, 571, 806 807/Mds/2008, while dismissing the appeals of the assessee, the Tribunal has observed as follows: 2.11 Now, we examine the present case on the anvil of above. By no stretch of imaginat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and is lying in its business. Hence, in the background of aforesaid discussion and precedents, we uphold the well reasoned order of the learned Commissioner of Income Tax (Appeals) in this regard and decide the issue against the assessees. 6. Since the facts in the present case on our hand are identical to that of the case dealt with by the Tribunal in the said orders, following the same, we are dismissing the appeals of the assessees. 7. In the result, the appeals filed by the assessees are dismissed. 6. Respectfully following the order of this Tribunal in I.T.A. No. 235/Mds/2009 dated 16.07.2009, we dismiss the grounds of appeals of both the assesses on these issues both under regular computation and while computing the book profit under section 115JB of the Act. Following the above order, we dismiss the grounds of appeal of the assessees, both on the issue of regular computation and for computation of book profit insofar as it concerns transfer to Statutory Reserve and transfer to Reserve Fund respectively. 5. As far as the issue regarding application of Rule 8D for computing disallowance under Section 14A of the Act is concerned, argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that Rule 8D of the I.T. Rules was not applicable for that year; that however, in the year under consideration, no satisfaction has been recorded by the AO as to how the assessee s calculation is not correct; that however, the AO still went on to apply Rule 8D to the case; that the ld. CIT(A) also applied Rule 8D but gave only part relief to the assessee by reducing the interest, whereas regarding 0.5% of exempt investments, he approved the action of the AO; and that once Rule 8D cannot be applied, the assessee s working is to be accepted. 11. The ld. DR, on the other hand, has strongly supported the impugned order in this regard also, contending that the ld. CIT(A) has excluded security taken from customers . 12. The ld. CIT(A), it is seen, restricted the disallowance u/s 14A to ₹ 19,43,022/-, calculating the disallowance of expenditure in terms of section 14A read with Rule 8D of the Rules as follows:- a) Direct expenses attributable to earning of exempt income: NIL b) Average exempt investments 37,82,57,180/- c) Average assets 157,64,90,333/- d) Interest payments made by the assessee 2,15,625/- e) Interest disallowed: (d) x (b)/(c) = ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en shown by the AO that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an ad hoc disallowance was made. The onus was on the AO to establish any such expenditure This onus has not been discharged. In CIT v. Hero Cycles (P H) 323 ITR 518, under similar circumstances, it was held that the disallowance u/s 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions in ACIT v. Eicher Ltd. 101 TTJ (Del)369 , that it was held that the burden is on the AO to establish nexus of expenses incurred with the earning of exempt income before making any disallowance u/s 14A of the Act. In Maruti Udyog v. DCIT 92 ITD 119(Del), it has been held that before making any disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. In Wimco Seedlings Limited v. DCIT 107 ITD 267 (Del) (TM), it has been held that there can be no presumption that the assessee must have incurred expenditure to earn tax free income. Similar are the decisions in: 1. Punjab National Bank v. DCIT, 103 TTJ 908(Del); 2. Vidyut Inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture in relation to exempt income and paragraphs 11.1 and 11.2 explained the basis and logic behind the introduction of sub-section (2) of Section 14A of the said Act. Paragraph 11.3 specifically provided for applicability of the provisions of sub- section (2) and it clearly indicated that it would be applicable from the assessment year 2007-08 onwards . 39. It is, therefore, clear that sub-sections (2) and (3) of Section 14A were introduced with prospective effect from the assessment year 2007-08 onwards. However, sub-section (2) of Section 14A remained an empty shell until the introduction of Rule 8D on 24.03.2008 which gave content to the expression such method as may be prescribed appearing in Section 14A(2) of the said Act. 40. From the above discussion, it is clear that, in effect, the provisions of sub- sections (2) and (3) of Section 14A would be workable only with effect from the date of introduction of Rule 8D. This is so because prior to that date, there was no prescribed method and sub-sections (2) and (3) of Section 14A remained unworkable. 15. The Hon ble High Court held that it is a condition precedent for the Assessing Officer while determine th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2008-09 and subsequent assessment years also. Further the Delhi Bench of the Tribunal in the case of DCIT v. Jindal Photo Limited (supra) has rendered its decision for the assessment year 2008-09 and is applicable for the assessment year under appeal. In the circumstances, we hold that in the assessees case, the Assessing Officer has not given any finding as to how the calculation made by the assessee and disallowing ₹ 66,55,225/- in its computation of income towards expenditure incurred in relation to income, which does not form part of total income is incorrect. Therefore, in the absence of any such finding by the Assessing Officer, we hold that the Assessing Officer is not correct in making further disallowance of ₹ 53,64,488/- by invoking the provisions of section 14A(2) of the Act. Therefore, we delete the disallowance made under section 14A while computing income both under normal provisions as well as under the provisions of section 115JB of the Act. The satisfaction that has to be recorded by the Assessing Officer has to be relevant and reasonable enough for a common man to come to a conclusion that the disallowance suo motu made by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue are that the assessee has claimed total bad debts of ₹ 83,24,39,801/-. The Assessing Officer has disallowed a sum of ₹ 13,57,58,000/- out of the total so claimed on the ground that in the books of account maintained under the provisions of Income-tax Act, the entire bad debts had been written off, but in the books maintained under the Companies Act, debts to the tune of ₹ 6964.47 lakhs have been written off and a provision is made for Non-performing Assets of ₹ 1357.58 lakhs totaling to ₹ 8322.05 lakhs. Meaning thereby an amount of ₹ 1357.58 lakhs has not been written off in these books. The case of the assessee is that the entire bad debt has been written off as per the requirements of section 36(1)(vii) of the Act. According to the assessee, the Hon'ble Tribunal, in assessee s own case for earlier years, it has clearly held that bad debt amount written off as per income tax books has to be allowed, even if the assessee has been maintaining two sets of accounts. According to the assessee, mixing of entries in the income-tax books with those in the Company Law books is not permissible. As per the assessee, no provision for bad debts has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We find that the assessee has prepared profit loss account for the purpose of income-tax which was duly audited u/s.44AB and report in Form 3CB along with details specified in Form 3CD was filed. Some sample copies of such forms in case of three companies have been filed before us. Section 44AA requires every assessee to maintain books of accounts and if the same is read with section 145, then it emerges that the purpose of preparation of such books of accounts is to determine true profit or loss in case of every assessee. Whenever such true profit or loss cannot be determined, the assessing authority has got power u/s.145(3) to reject such books and estimate the profits. In fact, section 145(3) reads and under: 145 (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144 . 19. Further we find that there is no prohibition in the Incometax Act that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause it is not a case of individual businessman who will exercise his judgment and therefore no intentions for claiming the bad debt just for the purpose of taxation can be imputed to the assessee. We have also gone through the decision in the case of Tamil Nadu Power Finance Infrastructure Development Corporation Ltd., vs. JCIT(280 ITR 491) (Mad) and find that decision is not applicable in this case because the assessee company has not written off debts merely on the basis of prudential norms prescribed by the RBI, but as discussed above, a detailed procedure has been adopted and the bad debts are being written off only after ascertaining that the same have become bad . Following the order dated 21.4.2006(supra), the Tribunal dismissed the Revenue s appeal on the same issue in assessee s own case for assessment year 2002-03 in I.T.A.No. 971/Mds/2006 vide its order dated 19.12.2007. Coming to the assessment years 2003-04, 2004-05 2005-06, we find the Assessing Officer made similar additions in the regular assessments and also while computing book profit for 115 JB assessment. The first appellate authority deleted the additions and though the Revenue filed appeals to this T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n off as irrecoverable in the accounts of the assessee and it is not necessary for the assessee to establish that the debt has in fact become irrecoverable. 9. For the foregoing reasons, we have no hesitation in upholding the deletion of ₹ 13,57,58,000/-. Consequently, the ground raised by the Revenue is dismissed. Following the above order of Tribunal, we are of the opinion that Revenue s ground in this regard cannot be entertained. 12. Ground No.2 of the Revenue is dismissed. 13. Vide its ground No.3, grievance of the Revenue is regarding disallowance of royalty. When the issue came up, learned A.R. submitted that this Tribunal in assessees own case in I.T.A. No. 726/Mds/2010 dated 16.10.2010 for assessment year 2006-07 and in I.T.A. No.22/Mds/2011 and I.T.A. No. 23/Mds/2011 dated 10.10.2011 for assessment year 2007-08, had held this issue in favour of assessee. Learned D.R. fairly agreed with this, but, according to him, Department had filed appeal before Hon'ble jurisdictional High Court against the orders relied on by the CIT(Appeals). 14. We have perused the orders and heard the rival submissions. The question is regarding disallowance of royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed further appeal before the ITAT for assessment years 2004-05 and 2005-06. 18. The ld.DR has relied on the decision of Hon'ble Supreme Court in the case of Jonas Woodhead and Sons (India) Ltd vs CIT, 224 ITR 342, in support of his ground. The ld.AR has supported the order of the ld. CIT(A). 19. We have gone through the decision relied upon by the ld.DR and have found that their Lordships of Supreme Court were actually considering a case of Composite Agreement which involved an agreement to implement a turnkey project right from providing design, etc. in establishing the factory and user of the technical know-how. Thereafter. Their Lordships of Supreme Court have clearly held that payment made for the user of the logo is always revenue in nature. While coming to the above conclusion, the Hon'ble Supreme Court has referred to its various decisions in this judgment which also favour the case of the assessee. We, therefore, do not find any force in this ground of Revenue as well. For the reasons mentioned above, we are of the opinion that disallowance of royalty was not warranted. CIT(Appeals) had justly deleted such disallowance. No interference is called f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival submissions, we are of the considered opinion that the derivative contracts, foreign exchange swap transactions against fluctuations in interest rate are hedge transactions. The loss computed on market to market basis is revenue loss as per the Accounting Standards and is allowable as business loss. The decision of Hon'ble Delhi High Court rendered in the case of CIT vs Industrial Finance Corporation of India Ltd, 185 Taxman 296, is relevant. In this case, it has been held as under: Held : The Tribunal rightly held that the assessee was entitled to claim deduction of ₹ 67.06 crores incurred in connection with swapping of foreign currency funds in the year under consideration, i.e. the asst. yr. 199596. The assessee had raised foreign currency borrowings and swapped such foreign currency into Indian rupees in order to augment its rupee resources for meeting its lending requirements. The foreign currencies borrowed were repayable to the foreign lenders on later dates falling within the current previous year ending on 31st March, 1995 and in some cases falling in the next previous year relevant to subsequent assessment year. In order to ensure that it is able to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. vs. CIT (1959) 37 ITR 1 (SC), Metal Box ComRany of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC) and Bharat Earth Movers vs. CIT (2000) 162 CTR (SC) 325 : (2000) 245 ITR 428 (SC) applied; Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC) distinguished and explained. 26. Therefore, the decision in the case of Goetz (India) Ltd (supra) does not apply to the type of claims made by the assessee in the course of assessment proceedings since what has been wrongly offered for assessment by the assessee in the adjustment statement is sought to be rectified by the letter during assessment proceedings. This claim cannot tantamount to a claim of fresh deduction. The CBDT had also clarified this aspect vide its Circular No.14XL-35 of 1955 dated 11.4.1955, which reads as under: Officers of the Department must not take advantage of the ignorance of an assessee as to his rights. It is one of their duties to assist a tax payer in every responsible way, particularly in the matter of claiming and securing relief and in this regard the officers should take the initiative in guiding a tax payer where proceedings or other p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market prices and the price at which the option is exercised by the employees is to be debited to the Profit Loss Account as an expenditure. The Tribunal pointed out that what had been adopted was not notional or contingent as had been submitted by the Revenue. Pointing out to the Employees Stock Option Plan, the Tribunal in its order stated that it was a benefit conferred on the employee. So far as the company is concerned, once the option was given and exercised by the employee, the liability in this behalf got ascertained. This was recognized by SEBI and the entire Empoyees Stock Option Plan was governed by guidelines issued by SEBI. On the facts thus found, the Tribunal held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability, thus the expenditure incurred being on lines of the SEBI guidelines, there could be no interference in the relief granted by the Assessing Authority for the expenditure arising on account of Employees Stock Option Plan. This expenditure incurred as per SEBI guidelines and granted by the Officer could not be considered as erroneou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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