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TMI Blog2017 (11) TMI 963X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance u/s 14A keeping also in view the claim of the assessee that it is an investment company holding more than 99% investments in subsidiaries companies/strategic investments and also that the assessee is a single segment company being an investor and dealer in shares & securities and consequently all the business expenses ought to have been incurred towards this segment under normal circumstances unless otherwise shown, which shall also be kept in view by the AO while computing disallowance. Disallowance computed under section 14A cannot be added to book profits u/s 115JB for computing Minimum alternative tax - Held that:- We answer the question referred to us in favour of assessee by holding that the computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with Rule SD of the Income-tax Rules, 1962. See ACIT v. Vireet Investment P Ltd. [2017 (6) TMI 1124 - ITAT DELHI] Addition u/s 14A - A.O invoked Rule 8D r.w.s. 14A which led to disallowance of expenses which was higher than actual expenses incurred by the assessee as debited to Profit and Loss Account which disallowance was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch of seven appeals filed by the assessee as well as the Revenue for assessment year 2006-07, 2007-08, 2009-10, 2010-11 and 2011-12 . First we shall take up cross appeals field by the assessee as well as the Revenue in ITA 4284/Mum/2014 and 1807/Mum/2011 for assessment year ( AY ) 2006-07 respectively. 2. The grounds of appeal raised by the Revenue in ITA no. 1807/Mum/2011 in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called the tribunal ) read as under:- 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to re-compute the disallowance u/s 14A on a reasonable basis relying on the judgement of Bombay High Court in the case of Godrej Boyce Mfg. Ltd. without appreciating the fact that the judgment of Bombay High Court has not been accepted by the Revenue and SLP has been proposed. 2. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored . 3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 3. The grounds of appeal raised b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income u/s. 14A . The assessee took into account proportionate expenditure on interest on ICD but excluded administrative expenses. The AO rejected the contention of the assessee and work out the disallowance in accordance with the Board notification 45/2008 dated 24.03.2008 . The AO also relied upon the decision of Special Bench of tribunal in ITA no 8057/Mum/2003 in the case of ITO v. Daga Capital Management P. Ltd wherein the Special Bench held that Rule 8D of Income-tax Rules, 1962( hereinafter called the rules‟) shall have retrospective effect as the same is clarificatory in nature. The assessee considered interest on ICD while the AO also included administrative expenses for computing disallowance u/s 14A read with Rule 8D. Thus, the disallowance u/s. 14A of the Act was worked out by the AO at ₹ 4,10,78,401/- instead of ₹ 3,64,34,450/-, vide assessment order dated 28-11-2008 passed by the AO u/s 143(3). 5. Aggrieved by the assessment order dated 28-11-2008 passed by the AO u/s 143(3), the assessee filed an appeal before the learned CIT(A), who held vide appellate order dated 10-12-2010, as under:- 7. I have gone through the above submissions very c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.14A for the purpose of computation of book profit u/s. 115JB. Accordingly ground of appeal is dismissed. 6. Aggrieved by appellate order dated 10-12-2010 passed by learned CIT(A), both the assessee and Revenue have come in appeal before the tribunal. . The Ld. Counsel of the assessee submitted that the tribunal has passed the order in assessee‟s own case in ITA no. 3684/Mum/2012 and 8981/Mum/2010 for AY 2004-05 and 2005-06, vide common orders dated 11th May, 2016. It was submitted that the tribunal vide its aforesaid orders dated 11-05-2016 had given relief to the assessee, by holding as under: 2. The assessee company is engaged in the business of investing and dealing in shares and securities. The company derives its income from short term and long term investments in shares, mutual fund, equities and investment in real estate. The assessee company is a 100% subsidiary of the Tata Power Company Ltd. The assessee company invested in the subsidiary company and earned exempt income but the contention of the assessee is that the expenditure incurred upon the strategic investment is not liable to be added in the income of the assessee. But the Assessing Officer a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g average value of investment. The law settled in [2014] 46 taxmann.com 18, Income Tax Appellate Tribunal, Mumbai bench in case of Garware Wall Ropes Ltd. Vs. Additional Commissioner of Income Tax Range 5(1), [2009] 183 taxman 159 (Bom) in case of Commissioner of Income Tax - 8 Vs. Srishti Securities Pvt. Ltd. and [2013] 35 taxmann.com 210 (Delhi) High court of Bombay in case Commissioner of Income Tax Vs. Oriental Structural Engineers Pvt. Ltd. in accordance with law. 4. In result the both the appeal of the assessee are hereby allowed for statistical purpose. It was submitted by learned counsel for the assessee that the department has already passed order giving effect to the aforestated tribunal orders dated 11-05-2016 and the addition made u/s 14A stood deleted, which order dated 05-06-2017 passed by the AO is placed in file, wherein it is held by the AO as under:- Name of Assessee Af-Taab Investment Co. Ltd, Address 24, Homi Modi Street, Bombay House, Mumbai-400001 PAN AAACA4800H Status Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trative expenses for making disallowance u/s 14A r.w.r. 8D while the assessee only considered interest on ICD for disallowance. The learned CIT(A) directed the A.O to adopt reasonable basis on the method consistent with all the relevant facts and circumstances of the case to compute disallowance u/s. 14A . We have also observed that the tribunal in assessee‟s own case in ITA no. 3684/Mum/2012 and 8981/Mum/2010 for AY 2004-05 and 2005-06, vide common orders dated 11th May, 2016 has given relief to the assesses by holding as under: 2. The assessee company is engaged in the business of investing and dealing in shares and securities. The company derives its income from short term and long term investments in shares, mutual fund, equities and investment in real estate. The assessee company is a 100% subsidiary of the Tata Power Company Ltd. The assessee company invested in the subsidiary company and earned exempt income but the contention of the assessee is that the expenditure incurred upon the strategic investment is not liable to be added in the income of the assessee. But the Assessing Officer assessed the same as income of assessee and the learned CIT(A) confirmed the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome Tax Appellate Tribunal, Mumbai bench in case of Garware Wall Ropes Ltd. Vs. Additional Commissioner of Income Tax Range 5(1), [2009] 183 taxman 159 (Bom) in case of Commissioner of Income Tax - 8 Vs. Srishti Securities Pvt. Ltd. and [2013] 35 taxmann.com 210 (Delhi) High court of Bombay in case Commissioner of Income Tax Vs. Oriental Structural Engineers Pvt. Ltd. in accordance with law. 4. In result the both the appeal of the assessee are hereby allowed for statistical purpose. It is also brought on record that the department has already passed an order giving effect to the afore-stated tribunal orders dated 11-05-2016 and the addition made u/s 14A stood deleted, vide AO order giving effect dated 05-06-2017 to tribunal passed by the AO which is placed in file, wherein it is held by the AO as under:- Name of Assessee Af-Taab Investment Co. Ltd, Address 24, Homi Modi Street, Bombay House, Mumbai-400001 PAN AAACA4800H Status Company Assessment Year 2005-06 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies. The finding of the Commissioner of Income-tax (Appeals) cannot, therefore, be upheld as it is contrary to the decision of the Special Bench. We, accordingly, uphold in principle the applicability of section 14A. However, it is for the Assessing Officer to ascertain from the facts of the case as to how much interest bearing borrowings was utilized to acquire shares in the companies. It is also necessary to see as to whether any interest bearing borrowed funds were used in making the advances and expenditure in the case of Castle Breweries. This factual exercise has to be carried out by the Assessing Officer after giving due opportunity to the assess of being heard. The Assessing Officer may make the disallowance of interest u/s.14A only if it is found that interest bearing borrowed funds were used to acquire shares in the companies or for making advances to Castle Breweries. We, therefore, restore this issue to the file of the Assessing Officer with the above directions. The ground is treated as partly allowed. 9. The aforesaid shows that the Tribunal after holding in principle the applicability of Sec. 14A, has further directed the Assessing Officer to ascertain from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally been incurred in earning the dividend income. Insofar as the appellant-assessee is concerned, the issues stand concluded in its favour in respect of the Assessment Years 1998-1999, 1999-2000 and 2001-2002. Earlier to the introduction of sub-sections (2) and (3) of Section 14A of the Act, such a determination was required to be made by the Assessing Officer in his best judgment. In all the aforesaid assessment years referred to above it was held that the Revenue had failed to establish any nexus between the expenditure disallowed and the earning of the dividend income in question. In the appeals arising out of the assessments made for some of the assessment years the aforesaid question was specifically looked into from the standpoint of the requirements of the provisions of sub-sections (2) and (3) of Section 14A of the Act which had by then been brought into force. It is on such consideration that findings have been recorded that the expenditure in question bore no relation to the earning of the dividend income and hence the assessee was entitled to the benefit of full exemption claimed on account of dividend income. 37. We do not see how in the aforesaid fact situation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. 39. In the above circumstances, we are of the view that the second question formulated must go in favour of the assessee and it must be held that for the Assessment Year in question i.e. 2002-2003, the assessee is entitled to the full benefit of the claim of dividend income without any deductions. We have also observed that Hon‟ble Bombay High Court in the case of Principal CIT v. Reliance Capital Asset Management Ltd. in ITA no. 487 of 2015 has passed an order dated 19-09-2017, wherein it held as under:- 21. We cannot find any fault with this conclusion of the First Appellate Authority based as it is on the language of subsection (2) of Section 14A of the Act, reproduced above. The Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 3,50,000/, we are not in agreement with Mr. Suresh Kumar that the Tribunal has accepted the applicability of this Rule/subrule/clause. This one sentence or one line cannot be read in isolation and out of context. Once the formula prescribed in Rule 8D(2)(iii) of the Rules could not have been applied is the essential conclusion, then, merely because the Tribunal did not accept the working of disallowance by the assessee in its entirety, does not mean that the appeal raises a substantial question of law. We do not think that the Tribunal's exercise can be termed as totally erroneous or illegal. It is neither perverse. The Tribunal's order cannot be said to be vitiated by an error of law apparent on the face of the record. We do not think that the working by the Tribunal or the determination of the disallowance at ₹ 3,50,000/does not meet the ends of justice. It is restricted bearing in mind the facts and peculiar to the assessee's case. Partly the assessee's arguments have been accepted and the appeal allowed by setting aside the order of the Assessing Officer and that of the Commissioner of Income Tax (Appeals). We do not think that the question proposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m/2011 respectively for AY. 2006-07. 8. In the result appeal of the Assessee and Revenue in ITA No. 4284/Mum/2014 and ITA no. 1807/Mum/2011 respectively for AY 2006-07 are allowed for statistical purposes. We order accordingly. Revenue Appeal- ITA No. 1812/Mum/2011 for AY 2007-08 9. Our decision in Revenue‟s appeal in ITA 1807/Mum/2011 for assessment year 2006-07 shall apply mutatis mutandis to the appeal of the Revenue in ITA no. 1812/M/2011 for AY 2007-08. The appeal of the Revenue is allowed for statistical purposes. We order accordingly. 10. In the result appeal of the Revenue in ITA no. 1812/Mum/2011 for AY 2007-08 is allowed for statistical purposes. We order accordingly Assessee s Appeal- ITA no. 7069/Mum/2013 for AY 2009-10 11. From the perusal of Balance Sheet of the assessee during the course of assessment proceedings u/s 143(3) r.w.s. 143(2), it was observed by the AO that the assessee is investor and dealer in shares and securities . The assessee is having investments in shares and mutual fund. The assessee earned dividend income of ₹ 6,69,80,635/- during the previous year relevant to the impugned assessment year which was claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2009-10. It is fairly settled that section 14A r.w.r. 8D is applicable. Section 14A of the I.T. Act is a special provision and provides for disallowances of expense relatable to exempted income. Section 14A(i) stipulates that for the purposes of computing the total income under Chapter. IV, no deduction shall be allowed in respect of an expenditure incurred by the assessee in relation to an income which does not form part of the total income under the Income tax Act. 3.3.1 It is pertinent to note that as per Section 14A(2) of the Act if the AO is not satisfied with the correctness of the claim of the taxpayer of the expenditure related to exempt income, then the AO shall calculate the expenditure ay applying Rule 8D of the Rules. There is no discretion to the Assessing Officer for restricting the disallowance to the extent of exempt income as he has to follow the formula provided in Rule 8D. It may be stated here that, the issues arising out of application of sec.14A and Rule 8D now stand settled by Godrej and Boyce Mfg. Ltd. vs DCIT(2010) 43 DTR 177 (Bom) in which it was decided that the provisions of Rule 8D are not ultra vires the provisions of section 14A and do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tfolio and thereby earning exempt income. Even if the requirement of AO's satisfaction in this regard is considered necessary, the very knowledge of the fact on the part of the AO that the appellant has not disallowed any expenditure suo-moto was sufficient for her to compute the disallowance under rule 8D read with section 14A of the Act. 3.3.3 The argument of the appellant that on strategic investment no dividend is earned cannot be accepted. The appellant has made investment in all big public limited companies when the said company declare dividend the appellant will earn exempt. 3.5.4 The argument of the assessee that the disallowance may be restricted to the amount debited in the P L a/c. of ₹ 38,04,573/- is found to be in order. The A.O. is directed to restrict the disallowance at ₹ 38,04,573. 3.5.5 The second argument of the appellant that on investment on debentures no exempt income is earned. Therefore they should be excluded while calculating 5% (sic.0.5%) of average investment made by appellant merits consideration income from investment in debentures are chargeable to tax. Therefore, while calculating average value of investment they sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.54,738/- 3. Transaction tax on purchase of investment Rs.43,719/- Rs.1,35,367/- The A.O invoked Rule 8D r.w.s. 14A which led to disallowance of expenses to the tune of ₹ 41,76,018/- which was higher than actual expenses of ₹ 38,04,573/- incurred by the assessee as debited to Profit and Loss Account which disallowance was later restricted by learned CIT(A) to actual expenditure. The assessee is a single segment company being an investor and dealer in shares securities and consequently all the business expenses ought to have been incurred towards this segment under normal circumstances unless otherwise shown, which shall also be kept in view by the AO while computing disallowance. The issue of disallowance u/s 14A and manner of computing disallowance is discussed by Hon‟ble Supreme Court in the case of Godrej Boyce Manufacturing Company Ltd.(supra) wherein it has been held by the Hon‟ble Supreme Court in para 37 as under:- 37. We do not see how in the aforesaid fact situation a different view could have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been yielded it would have remain exempt. There is no dispute that if an investment has yielded exempt income in a particular year then it will enter the computation of average value of investments for the purposes of Rule 8D(2)(iii). The assessee's contention that if there is no certainty that an income, which is exempt in current year, will continue to be so in future years and, therefore, that investment should also be excluded, is hypothetical and cannot be accepted. The issues under this appeal are therefore restored to the file of the AO for denovo determination of the issues in accordance with our above directions. We order accordingly. 15. In the result appeal of the assessee in ITA No. 7069/Mum/2013 for AY 2009-10 is allowed for statistical purposes. Cross Appeal-ITA No. 6546/Mum/2014(Assessee s appeal) and 6573/Mum/2014 (Revenue appeal)-AY 2010-11 16. Our decision in ITA no. 7069/Mum/2013 for AY 2009-10 shall apply mutatis mutandis to the assessee‟s appeal in ITA No.6546/Mum/2014 for AY 2010-11. With respect to the stock-in-trade being shares and securities held by the assessee, we are of the considered view that the said stock-in-trade c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld, it is not necessary to consider this aspect of the matter. This disposes of the assessee‟s appeal which stood allowed for statistical purposes. The revenue is aggrieved by the decision of learned CIT(A) directing exclusion of diminution in the value of investments for the purposes of computation of disallowance u/s 14A.We have observed that the AO has also included diminution in the value of investments for the purpose of computing disallowance u/s. 14A, which loss has arisen because of the restructuring/amalgamation owing to loss written off of in the investment in subsidiary namely Vantech Investments Limited, which stood merged with the assessee. In our considered view, said losses being diminution in the value of investment being written off cannot be considered as an expenditure incurred for earning of exempt income for the purposes of disallowance under Section 14A as the mandate is to disallow expenditure incurred in relation to earning of an exempt income and it cannot be stretched to include losses arising due to diminution in the value of the investments due to merger/amalgamation, that certainly is not the mandate of Section 14A. We affirm the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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