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TMI Blog2018 (2) TMI 1279X X X X Extracts X X X X X X X X Extracts X X X X ..... R N.K. SAINI, A.M: This is an appeal by the Department against the order dated 29.2.2016 of CIT(A)-2, New Delhi. Following grounds have been raised in this appeal:- i. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) is not justified in deleting the addition of ₹ 1,90,46,924/- on account of section 14A of the I.T. Act read with rule 8D of I.T. Rules. ii. The appellant craves leave for reserving the right to amend, modify, alter and any ground(s) of appeal at any time before or during the hearing of this appeal. 2. Facts of the case, in brief are that, the assessee filed its return digitally on 28.9.2012 declaring a loss of ₹ 15,19,95,132/-. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee had been regularly making investment in mutual funds and that the investment into equity shares were also made in the company who entered into joint venture with the assessee. According to the AO, the assessee will receive a dividend income which will be exempt in his hand. He, therefore, asked the assessee to justify as to why the disallowance u/s 14A of the I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry is to obtain controlling stake instead of receiving dividend. 1.5 We further submit that the assessee company vide his letter dated 15/05/2014 [PB 33- 34] placed on record the copy of financial statements and tax audit report for FY 2011-12. The assessee company has also submitted the details of expenses debited in P L a/c vide its letter dated 13/11/2014 [PB 35-37], The assessee vide its letter dated 13/01/2015 submitted the details of Rent expenses debited to P L A/c in point no. 4. In addition to this, the assessee vide its letter dated 13/01/2015 in point no. 7 submitted the details of training expenses amounting to ₹ 19,45,324/- and in point no. 8 submitted the details of travelling expenses amounting to ₹ 16,45,37,830/-. 1.5.1. Once all the details were made available along with the entire accounts of the assessee, the Assessing Officer was required to record his satisfaction or satisfy himself that having regard to the accounts of the assessee, the claim of the assessee that no expense is disallow able u/s 14A was not correct and there could have been certain other expenditure which can be said to have been incurred in relation to the earning of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rule 8D(1). It is well settled principle in law that disallowance u/s 14A without pointing out any direct expense being incurred for earning exempt income was unjustified. 1.5.6. It is to be noted here that the learned AO completely misunderstood the nature of investment in classifying the long term capital gains as exempt income. We would like to draw your honour s attention to the investment made by the assessee company in its subsidiary and JV partner [Kindly refer page 58. Both the investments if sold will generate capital gains which will be taxable. 1.6. It is also important to note here that no exempt income was earned during the year by the assessee company on such investments. It was explained to the satisfaction of the learned AO by assessee company vide its letter dated 16/01/2015 [PB 44-51], 1.5.6. It is also to be noted here that the investments in subsidiaries were made with an intention to hold controlling stake rather than to earn any dividend income. 5. It was also stated that the purpose of investment was to obtain the controlling interest in subsidiary company rather than to earn dividend and that no exempt income was earned by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of direct expense was called for. Further, the A.O. stated that the investments and the income that would be realized will not usually require direct administrative or management expenses, and since these are usually accounted for in common with all the other businesses of the appellant, logic requires that some mechanism or formula be adopted for attributing part of the administrative/managerial expenses to the tax exempt investment/income. Further, the A.O. stated that it is common knowledge that under the portfolio management scheme, portfolio managers charge about 2 to 2.5 percent of the portfolio value as a fee. Therefore, adopting a certain percentage of the average value of the investment (income from which is tax exempt) is not unreasonable and results in identification of expenditure which has a connection with the tax exempt income. The A.O. further observed that to monitor the investment made by the appellant and the exempt income earned in the form of dividend income and long term capital gain, undoubtedly management/establishment expenses and other office over heads must have been incurred to take care of income received, investments made and other allied activiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of share capital in F.Y. 2010- 11. Since, no management decision relevant to investment in subsidiary was taken during the year, it is apparent that no expenses of such nature can be attributed to exempt income. Also, the company has not earned any exempt income during the year. 3.2.4. Section 14A reads as follows:- 14A. Expenditure incurred in relation to income not includible in total income:- (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expense being incurred for earning exempt income is unjustified. As per schedule-4 to the final accounts, out of total investments of ₹ 535.85 crores as on 31.03.2012 made by the company, investments to the tune of ₹ 532.86 were made in M/s. Bharti Retail Ltd. (subsidiary), ₹ 2.00 crores in M/s. Bharti Wallmart Pvt. Ltd. and ₹ 1.05 crores was share application money. As per decisions of Hon ble Courts, such investments are not to be considered for the purpose of computation of disallowance u/s 14A. Not only this, the expenses claimed as per schedules 12 13 of the annual accounts viz. salaries, wages bonus, gratuity, rates taxes, travelling conveyance, legal professional charges, insurance expenses, repair maintenance, telephone expenses, recruitment and training expense, staff welfare, etc. cannot be stated to have been incurred for the purpose of maintaining the appellant s investments in its subsidiary company or in joint venture. The A.O. has thus erred in making disallowance u/s 14A in the appellant s case for the year and the same is directed to be deleted. These grounds of appeal stand allowance u/s 14A in the appellant s case for the year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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