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TMI Blog2014 (8) TMI 1106X X X X Extracts X X X X X X X X Extracts X X X X ..... r.w.r. 8D of I.T. Rules. In response the assessee submitted the details of interest and investments. It was further submitted that disallowance u/s 14A could not be made unless expenses have a nexus with the investment. Reliance was also placed on certain case laws. The Assessing Officer did not find force in the submissions and observed that the assessee had complicated flow of fund and it was difficult to identify which funds have been used where which means the assessee had mix funds. Accordingly he invoked the provisions of section 14A r.w.r. 8D and computed the total disallowance at Rs. 3759641/-. 4 On appeal the Ld. CIT(A) referred to various decisions including the decision of Chandigarh Bench of the Tribunal in case of CIT V Sunder Forging in ITA No. 1059/Chd/2011 and confirmed the disallowance made by the Assessing Officer. 5 Before us. the Ld. Counsel for the assessee submitted that the assessee has sufficient funds particularly from the profits and therefore it cannot be said that the interest bearing funds have been invested in purchase of shares. He particularly referred to the investment made in earlier year and the observation of the Tribunal in assessment year 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed 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 total income of the firm the same proportion as the amount of his share in the profits of the firm in accordance with the partnership deed bears to such profits ;] " In any case Bombay Bench of the Tribunal had an occasion to consider this issue in case of Dharma singh M . Popat V ACIT , 1 2 7 TTJ ( Mum ) 61. In that case it was held as under:- "Though the partnership firm is not a separate entity as per general law, for a specific purpose it may be treated as independent of its partners under the provisions of IT Act, 1961. To put it differently, the concept of partnership firm, being a compendium of its partners is subject to the modifying such concept of partnership law which means that if there exist no provision in the tax laws for a particular situation, then, the provisions of partnership law would be the guiding factor for adjudication of that issue. The current judicial thought is leaning towards t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 partner in respect of his share in the profits of such firm - CIT V. A.W. Figgies & Co. & Ors (1953) 24 ITR 405 (S.C), Dy CST (Law) V K. Kelukutty (1985) 155 ITR 158 (S.C), Bist & Sons, vs. CIT (1979) 8 CTR (SC) 152 : (1979) 116 ITR 131 (SC), QT vs. Kaluram Puranmal (1979) 12 CTR (Bom) 225 : (1979) 119 ITR 564 (Bom) and CIT vs. Chase Trading Co. (1998) 147 CTR (Bom) 228 *. (1999) 236 ITR 665 (Bom) applied; CIT vs. R,M, Chidambararn.Pillai 1977 CTR (SC) 71 : (1977) 106 ITR 292 (SC) distinguished." Therefore, it is clear that investment made in a firm is to be treated as investment for earning exempt income. 18 Coming to the second aspect of the issue that whether in any nexus is required between the investment and the disallowance to be made u/s 14A, we shall first refer to the decision relied on by the ld. counsel of the assessee in case of CIT V. Winsom Textile, 319 ITR 204. In that case following question of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 interest income than the expenditure and the funds flow position shows that only non interest bearing funds have been utilized for making the investment. 21 Before the Court, the Department also contended that Rule 8D provide that even where the assessee claimed that no expenses have been incurred, correctness of such claim can be gone into by the Assessing Officer. Hon'ble High Court held vide para 5 as under: "In view of the finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance u/s 14A was no sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T 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 different field. Similarly In case of Hero Cycles (supra) the Tribunal has given a categorical finding that the investment has been made out of non interest bearing funds. From these two decisions only it can be concluded that if investment has been made clearly out of non interest bearing funds then section 14A is not be applicable. In case before us, the situation is different which we shall see little later. We would also like to observe that even Hon'ble Punjab & Haryana High Court in a latter decision in case of CIT V. Punjab State Industrial Development Cooperative Ltd. has made observations which we will also like to discuss little later. 23 Hon'ble Bombay High Court considered the issues arising out of Section 14A as well as implications of Rule 8D. Hon'ble High Court reached the following conclusion at para 88 which reads as under: "88 Our conclusion in this judgment are as follows : (i) Dividend incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case." From above, it is clear that even the taxes paid u/s 115-O which is also known as dividend distribution taxes, would not make dividend income in the hands of shareholder as non-exempt. Similarly the taxes paid by a firm would be taxes on the profit of the firm and not in the hands of the assessee. The above decision also held that rule 8D would be applicable only from Assessment year 2008-09. In this decision the theory of apportionment of expenditure which was confirmed by the Hon'ble Supreme Court in case of CIT V. Walfort Share and Stock Brokers P Ltd (2010) 326 ITR 1 (S.C), was followed. In fact before introduction of Section 14A, the assessee had a right to claim all the expenses if such expenses could not be bi-furcated against no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 observations of the Hon'ble Supreme Court page 17) "The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened u/s 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)." Thus on the basis of above, it was held that after introduction of Section 14A, it was possible to apportion the expenditure between taxable income and exempted income. 25 As observed earlier, almost similar observations have been made by the Hon'ble Punjab & Haryana High Court in a recent judgment in case of CIT V. Punjab State Industrial Development Cooperation Ltd. in ITA No. 565 of 2006 vide order dated 18.7.2011. "11. Adverting to question No.(ii), learned counsel for the revenue submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dated 22.11.2001 K In other words, Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of Section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of Section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 'expenses incurred' occurring in Section 14A referred to tax, salary, interest etc. in respect" of which allowances are provided for under Sections 30 to 37 of the Act. 15. In all fairness to the assessee, in the judgments relied upon by the learned counsel for the assessee, Section 14A as incorporated by Finance Act 2001, with effect from 1.4.1962, was not under consideration and, therefore, the same do not come to the rescue of the assessee. 16. In view of the above, the substantial question No.(ii) is answered in favour of the revenue and against the assessee. Income Tax Appeal Nos. 565, 567 and 569 stand disposed of accordingly." 26 Thus theory of apportionment as approved by the Hon'ble Supreme Court in case of CIT V. Walfort Share and Stock Brokers P Ltd (2010) 326 ITR 1 (S.C) followed by Hon'ble Bombay High Court in case of Godrej and Boycee (supra) has also been approved by Hon'ble Punjab & Haryana High Court in case of CIT V. Punja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to be apportioned. In case before us, the assessee has provided sources of funds but they cannot be said to have been maintained separately. First of all it was conceded that the assessee is having mixed funds. The details of funds was stated to be as under before the ld. CIT(A): 31.3.2008 Rs. In Lakhs Share capital 78.36 Reserves and Surpluses 130.82 Own funds 209.18 Working capital borrowings 1779.62 Current assets 2243.45 Amount invested in excess of loan 463.83 Term loan borrowings 253.31 Fixed Assets 451.82 Amount invested in excess of loan 198.51 Amount invested in Chadha Motors 255.96 Consequently by simply saying that the funds invested in fixed assets and current assets are more than the borrowed funds, would not show that specific funds have been borrowed for specific purpose. For example it can be very easily said that the assessee supported its business with own funds and borrowed loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arded 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 certainly no "madness in the method." Thus above rule was found to be valid and rational. Coming back to the case in hand, 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." From above it is clear that in case of mixed funds disallowance has to be made u/s 14A r.w.r. 8D. 8 Further there is no force in the submissions that the Assessing Officer has not given any cogent reason for making dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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