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TMI Blog2018 (1) TMI 586X X X X Extracts X X X X X X X X Extracts X X X X ..... see has made investment in subsidiary company from which the dividend income was earned by it during the year. In this regard, we observed that the assessee has made strategic investment in its subsidiary company to control the interest in the company and not with the object to earn dividend income. The dividend income is merely incidental from the subsidiary company. Therefore no disallowance of whatsoever can be made in respect of dividend income earned from the subsidiary company. In holding so, we find support and guidance from the order of the Hon’ble Tribunal in the case of Electrosteel Casting Limited Vs. DCIT [2017 (2) TMI 685 - ITAT KOLKATA] wherein it was held that no disallowance shall be made against the dividend income if it arises from the strategic investment.Thus, the strategic investments need to be excluded for the purpose of the disallowance under section 14A read with rule 8D The investments made in the non-subsidiary company which have yielded dividend income can only be considered for the purpose of the disallowance under section 14A r.w.r. 8D(2)(iii) of Income Tax Rules 1962. Thus the appeal filed by Revenue is partly allowed. Accordingly, AO is directed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be applied to the present facts of the case as Rule 8D of IT Rules came into force with effect from Assessment Year 2008-09 as held by the Hon'ble Bombay High Court in the case of Godrej Bye Mfg. Co. Ltd. Vs. DCIT Another reported in 328 ITR 81(Bom). Thus The disallowance is required to be made after having regard the books of account but in the instant case, no such reference was made by the assessee. Thus, the disallowance offered @ 10% u/s 14A of the Act does not justify the amount of disallowance. In view of above, the Assessing Officer invoked the provision of Rule 8D r.w.s 14A of the Act and made the disallowance as under:- i) Direct expenses nil ii) Interest expense ₹ 76,78,824 iii) Administrative expense ₹ 2,15,773 Rs.78,94,597 iv) Amount already disallowed ₹ 3,37,336 v) Total disallowance Rs.75,57,261 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the details furnished on record, I note that the appellant had invoked Rule 8D and disallowed a sum of ₹11,86,541/- under Section 14A of the Act. It is however noted that no cogent reasons were recorded by the AO for regarding or rejecting the calculation of the appellant. Although the AO has held that Rule 8D is applicable in the relevant AY 2008-09, but he has not recorded any satisfaction nor has pointed out specific infirmity in the claim of the appellant. Section 14 clearly lays down that the AO has to record objective satisfaction in respect of the disallowance offered by the assessee having regard to its books of accounts. The AO has not considered the specific facts involved in the assessee s case before making the disallowance. The AO seems to have mechanically ignored the explanation stating that the submissions was untenable in law and unacceptable. There is a clear lack of recording of objective satisfaction of the part of the AO before making further disallowance u/s.14A of the Act. 4.3 Nevertheless, I now proceed to consider the specific fats brought before me by the assessee in support of his claim for no-application of Rule 8D. From the audited accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Similarly the AO disallowed 0.5% of the average investments by invoking Rule 8D(2)(iii). From the AO's working I note that the disallowance was made at 0.5% of average investments which inter alia included strategic investments in group subsidiary companies. In the first instance I find that the AO did not identify any specific item of expenditure which he found to be relatable to earning of tax free income. As pointed out by the AR the dividend only on two occasions was received by ECS mode without incurring any collection or bank charges. Whatever little administrative expenses incurred for accounting of the expenses, the appellant had disallowed ₹1,46,866/-. Moreover no disallowance out of administrative expenses was permissible where the investments were made in subsidiaries for strategic but purposes. These investments were made with business motive and not to earn dividend income. The Delhi High Court in the case of Oriental Structure Engineers Pvt. Ltd. ( 216 taxmann 92 ) has held that where the assessee had made investments in shares of subsidiaries on the principle of commercial expediency and with a view to achieve business objective and not for the purposes o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of dividend Amount (Rs) DC Industrial Plant services Pvt. Ltd. 14,39,940 Kontest Chemicals 15,66,900 30,06,840 30,06,840 (ii) Non-subsidiary company Investech Securities Pvt. Ltd. 50,400 50,400 50,400 Total 30,57,240 In this regard, Ld. AR has relied on the order of Chennai Tribunal in the case of EIH Associated Hotels Ltd. vs. DCIT in ITA No.1503 1624/Mds/2012 dated 17.07.2013 for the assessment year 2008-09. Lastly, Ld. AR relied on the order of Ld. CIT(A). 6. We have heard the rival contentions of both the parties and perused and carefully considered the materials on record; including the judicial pronouncements cited and placed reliance upon. In the instant case, the disallowance was made by AO as per Rule 8D of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Less: Total investment at the end of the year 446.35 Investment made during the year (B) 29.60 Net owned fund position as on 31.03.08 (C) [A-B] 1738.50 Submission: 1. Investment of ₹ 29.60 lakh was made during the year under Appeal in mutual fund etc. 2. own fund of the appellant is far more than the total cumulative investment. From the above details we observed that there is no ambiguity with regard to own fund available with the assessee. In such facts and circumstances a presumption can be drawn that investment has been made out of own fund of assessee. Therefore no disallowance on account of interest expense should be made under Rule 8D(2)(ii) of IT Rules. In holding so, we draw our support and guidance from the judgment of Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (supra) wherein it was held as under:- The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. In holding so, we find support and guidance from the order of the Hon ble Tribunal in the case of Electrosteel Casting Limited Vs. DCIT reported in 58 ITR (Trib) 5 wherein it was held that no disallowance shall be made against the dividend income if it arises from the strategic investment. The relevant extract of the order reads as under:- 141. We have considered the aforesaid submissions of the learned counsel for the computing the disallowance under section 14A of the Act read with rule 8D(2)(ii) and (iii) of the Rules, the Assessing Officer while adopting the average value of during the previous year. Similarly, in computing the disallowance under section 14A of the Act read with rule 8D(2)(ii) and (iii) of the Rules, the Assessing Officer while strategic investments. Thus, the strategic investments need to be excluded for the purpose of the disallowance under section 14A read with rule 8D of Income Tax Rules. The ld. DR before us has not brought anything contrary to the argument of ld. AR that the impugned investments are not strategic investments. Thus in the above proposition and respectfully following the order of this Tribunal in the case of Electrosteel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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