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TMI Blog2017 (12) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... essee is outsourcing job work relating to reeling and doubling from sister concern namely Sri Venkataraya Threads Pvt. Ltd - Held that:- We find that the A.O. has not made any enquiry whether the payment made by the assessee is excess according to the norms prevailing in the similar industry. It is submitted that the assessee has to increase the price for the purpose of business expediency. We find neither A.O. nor CIT(A) gave any reasons for the disallowance. Accordingly, we find that the A.O. is not justified in invoking section 40A(2)(b) of the Act and accordingly we set aside the order passed by CIT(A) and we direct the A.O. to allow the claim of the assessee.- Decided in favour of assessee. - I.T.A.Nos.419 to 423/Vizag/2016 And I.T.A.Nos.401 And 402/Vizag/2016 - - - Dated:- 23-11-2017 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER For The Appellant : Shri C. Subrahmanyam, AR For The Respondent : Shri M.K. Sethi, DR ORDER PER V. DURGA RAO, Judicial Member: These appeals filed by the department are directed against common order of the Ld. CIT(A) for the assessment years 2008-09 to 2012-13. The assessee also fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited companies. (ii) This dividend income is earned from the investment in shares, which was not made in this year of account but all those investments were made several years ago. (iii) For earning of this dividend income, neither any interest nor any expenditure is incurred during the year, since the investment was made long ago out of the funds generated by the company. Thus, it is submitted that no expenditure is incurred for earning the said dividend income by the company. Therefore, section 14A of the Act has no application to assessee s case since that section comes into play only when the expenditure was actually incurred for earning the exempt income. However, the A.O. was not convinced with the above explanation and he came to a conclusion that it is mandatory for A.O. to determine the amount of expenditure incurred in relation to the earning of tax free income and that the provisions of section 14A(2) of the Act will apply to the cases where an assessee claims that no expenditure has been incurred in relation to the income, which does not form part of the total income. Accordingly, the A.O. has made disallowance of section 14A of the Act read with Rule 8D for all the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to the investments, therefore, the A.O. is not justified in making impugned disallowance u/s 14A of the Act. We have gone through the order passed by the A.O. The A.O. has invoked section 14A read with Rule 8D on the ground that the assessee has received an exempt income. In the assessment order, the A.O. has not given any finding that the investments made by the assessee are out of borrowed funds and the assessee has incurred certain expenditure towards payment of interest. The Ld. CIT(A) gave a finding that the assessee made investments in earlier years out of surplus funds and reserves. The A.O. is not justified in invoking rule 14A read with 8D to disallow the expenditure. Under similar circumstances, the coordinate bench of the Tribunal in the case of M/s. Andhra Sugars Limited (supra) has considered the issue and observed as under: 9. We have heard both the parties and perused the materials available on record. The A.O. disallowed interest on borrowed capital and indirect expenditure of head office u/s 14A of the Act on pro-rata basis. The A.O. disallowed the amount for the reason that the assessee has earned exempt income, however, failed to allocate relatable int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e. disallowance of interest expenditure and disallowance of administrative expenditure. The A.O. invoked Rule 8D and worked out the proportionate interest and indirect expenses of head office as provided under Rule 8D. As for as interest expenditure is concerned, the assessee proved that it has not utilized borrowed funds and its own surplus fund is invested in its subsidiary companies, that too more than 15 to 20 years back. Though, there is further investment in the financial year 2007-08, the assessee proved that it has surplus funds which was invested in the shares and no interest bearing funds are diverted for investments. Therefore, we are of the opinion that the A.O. was not correct in disallowing the interest expenditure. As regards the disallowance of administrative expenditure of head office, the assessee cannot claim that there is no expenditure incurred to earn the dividend income. Although investments are made in earlier years, the assessee cannot get away with the plea that it did not incurred any administrative expenditure for day to day management and monitoring of such investment portfolios. Therefore, we are of the opinion that once there is exempt income, the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re with the order passed by the Ld. CIT(A). 9. In the result, the appeals filed by the revenue are dismissed. 10. So far as cross appeals filed by the assessee for the assessment years 2010-11 2011-12 in ITA Nos.401 402/Vizag/2016 in respect of disallowance of reeling and doubling charges. For the assessment year 2010-11, the A.O. noted that the assessee has claimed expenditure to the tune of ₹ 12,59,049/- towards reeling and doubling charges paid to M/s. Sri Venkataraya Threads Pvt. Ltd. The A.O. noted that Sri M.S.R.V.K. Ranga Rao, Director of the assessee company was having a substantial interest in M/s. Sri Venkataraya Threads Pvt. Ltd. holding substantial shares in the said company. M/s. Sri Venkataraya Threads Pvt. Ltd. was exclusively attending the job works of the assessee for which payments are made. The assessee called upon to justify the reasonableness of the payments made to said company. In response to that, the assessee has filed a letter dated 12.12.2012 filed a detailed reply before the A.O. as follows: In respect of Reeling and Doubling charges paid to N/s. Sree Venkataraya Threads Pvt. Ltd., we write to submit that the services of the above pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the payment was made as per agreement entered with the sister concern and in support of which the assessee filed agreement dated 14.03.2009, which was effective from 01.04.2009. The authorized representative was asked to clarify whether any agreement existed for the prior period that were the rates in the earlier years. The authorized representative also asked to clarify whether any revision of rates was made in the earlier years or subsequent years The authorised representative submitted that a 20% revision was made w.e.f. 01.04.2010 based on a letter of agreement dated 19.04.2010 between the parties. The authorised representative also clarified that agreement was originally entered on 24th April, 2000 with effect from 01.04.2000 and for every succeeding there was revision of rates at lO% over the rates of preceding year as per letter of agreements. A copy of the agreement dated 24th April 2000, letter dated 09.04.2001, 19.04.2002, 22.04.2004, 31.03.2006, 24.04.2008 were filed. The perusal of the details show that there was upward revision of rates at 10% over the preceding year at every succeeding year from the year 2000 and it was 20% increase in the year 2010. No valid justi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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