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TMI Blog2018 (2) TMI 1340X X X X Extracts X X X X X X X X Extracts X X X X ..... e under Sec. 14A r.w. Rule 8D(2)(iii) was to be worked out after excluding the Compulsorily Convertible Debentures of Tikona Digital Networks Pvt. Ltd. of ₹ 49,97,15,040/-, therefore, uphold his order to the said extent. - ITA Nos. 4331/Mum/2015 - - - Dated:- 14-2-2018 - SHRI R.C. SHARMA, AM AND SHRI RAVISH SOOD, JM For The Revenue : Ms. Amrita Ranjan, D.R For The Assessee : None ORDER PER RAVISH SOOD, JUDICIAL MEMBER: The present appeal filed by the revenue is directed against the order passed by the CIT(A)-22, Mumbai, dated 08.04.2015, which in itself arises from the order passed by the A.O under Sec.143(3)(ii) of the Income tax Act, 1961 (for short Act ), dated 31.01.2014. The revenue assailing the order passed by the CIT(A) had raised before us the following grounds of appeal:- 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not considering interest expenses while calculating disallowance u/s 14A r.w. Rule 8D although the assessee has not maintained separate account for the investment related to exempt income. 2. The appellant craves leave to add, amend, vary, omit or substitute an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of his aforesaid conviction recomputed the disallowance under Sec. 14A r.w. Rule 8D at ₹ 13,08,51,210/- as under :- ( i) The amount of expenditure directly relating to income which does form part of total income Nil ( ii) In a case, where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in Hence, A x B= 380,16,70,329 x 187,49,99,414 C 5867,92,21,705 Where, A = amount of expenditure by way of interest other than the amount of interest included in clause (i) B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee on the first day and the last day of the previous year, i.e. 12,14,76,213 380,16,70,329 187,49,99,414 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest expenditure was called for in the hands of the assessee. The assessee in order to drive home his contention that the A.O had wrongly invoked Rule 8D(2)(ii) for making a disallowance of the interest expenditure of ₹ 12,14,76,213/-, submitted that the disallowance under the said statutory rule could only be invoked where the interest expenditure incurred by the assessee was not directly attributable to any particular income or receipt. It was submitted by the assessee that as the interest expenditure of ₹ 3,80,16,70,329/- was incurred on the borrowed funds which were advanced by the assessee in the course of its business to its customers as infrastructure loans, against which the interest income received by the assessee was reported as business income and offered to tax, therefore, there was a direct nexus of the interest paid on the loan funds and the interest received on the infrastructure loans. The assessee in order to fortify its aforesaid claim, submitted that the borrowed funds of the assessee on which the interest expenditure had been incurred comprised of (i) term loans; and (ii) NCD borrowings, as under : Sr. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts beyond the sweep of the investments which were to be included while computing the disallowance under Sec. 14A r.w. Rule 8D(2)(iii). The assessee further submitted that the A.O while computing the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) had wrongly reduced the current liability and provisions for the purpose of arriving at the total value of the assets. It was the claim of the assessee that as the total assets as per Rule 8D was to be construed as the total assets as appearing in the balance sheet and the methodology contemplated therein did not envisage reduction of the current liabilities from the value of the total assets, therefore, the methodology adopted by the A.O for working out the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) also suffered from the aforesaid fallacy. 7. The CIT(A) after deliberating on the contention raised by the assessee before him in the backdrop of the facts of the case, observed that as the own funds of the assessee by way of share capital and reserve and surplus during the year were to the extent of ₹ 1,012 crores, while for the investments made by the assessee in the exempt income yielding investments were only to the tune of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of ₹ 350 crores, therefore, keeping in view the judgment of the Hon ble High Court of Bombay in the case of CIT Vs. HDFC Bank Ltd. (2014) (366 ITR 505) (Bom) , wherein the Hon ble High Court had held as under : 4. We do not agree. In the case at hand, as recorded by the ITAT, undisputedly the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax free securities. The ITAT therefore held that there was no basis for deeming that the Assessee had used the borrowed funds for investment in tax free securities. On this factual aspect, the ITAT did not find any merit in the contention raised by the Revenue and therefore, accordingly answered the question in favour of the Assessee. On going through the order of the CIT (Appeals) dated 28th March 2005 as well as the impugned order, we do not find that the CIT (Appeals) or the ITAT erred in holding in favour of the Assessee. In this regard, the submission of Mr Mistry, the learned Senior Counsel appearing on behalf of the Assessee, that this issue is squarely covered by a judgment of this Court in the case of Commissioner of Income Tax v/s Reliance Utilities and Power Ltd., re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Calcutta High Court in Woolcombers of India Ltd. (1982) 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (1982) 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance under Sec. 14A r.w. Rule 8D(2)(iii) after including the investments made by the assessee in Compulsorily Convertible Debentures of Tikona Digital Networks Pvt. Ltd. of ₹ 49,97,15,040/-. We find that the CIT(A) taking cognizance of the fact that the interest received on the aforesaid Compulsorily Convertible Debentures of Tikona Digital Networks Pvt. Ltd. were taxable, therefore, observed that while computing the disallowance as per Rule 8D(2)(iii), the average investments were to be worked out after excluding the said CCD s. We have given a thoughtful consideration to the issue and are of the considered view that as per 8D(2)(iii) the average value of investments that have to be considered for working out the disallowance are those, the income from which does not or shall not form part of the total income. We are of the considered view that the CIT(A) rightly observing that as the interest received on the Compulsorily Convertible Debentures of Tikona Digital Networks Pvt. Ltd. was taxable, therefore, the same could not be permitted to form part of the average value of investments contemplated in the formula laid down in Rule 8D(2)(iii). We thus finding no infirmity ..... X X X X Extracts X X X X X X X X Extracts X X X X
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