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TMI Blog2018 (4) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Ld.CIT(A) erred in restricting the disallowance to ₹ 73,69,364/- as against ₹ 32,59,61,000/- made by the Assessing Officer, without appreciating the fact that section 14A r.s. Rule 8D is squarely applicable in this case and disallowance has to be made as per the formula given in Rule 8D. 2. Whether on facts and in the circumstances of the case and in Law, the Ld.CIT(A) erred in allowing software expenses related to website/portal to assessee amounting to ₹ 62,36,529/- as revenue expenditure. Apropos ground no. 1: 3. The brief facts of the case are that the assessee company earned dividend income of ₹ 12,74,97,916/- from mutual funds and other investments and ₹ 22,87,91,487/- being long term capital gains on sale / redemption of investments, both aggregating to ₹ 35,62,89,403/-, that was exempt from tax. The total income (revenue) as appearing in the Profit and Loss Account of the assessee company was ₹ 36,69,34,00,324/-. While filing the return of income, the assessee disallowed a sum of ₹ 73,39,364/- under Sec.14A(1) of the Income Tax Act, 1961 (the Act). The assessee company, in its computation of income, in Not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e meaning of the expression prescribed in Section 2(33), must be prescribed by Rules made under the Act. What merits emphasis is that the jurisdiction of the assessing officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the assessing officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not form part of the total income. Moreover, the satisfaction of the assessing officer has to be arrived at having regard to the accounts of the assessee. Hence, sub- section (2) does not ipso facto enable the assessing officer to apply the method prescribed by the rules straight away without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The assessing officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Rule 8D is his opinion that after the insertion of Rule 8D there is no occasion for estimating the disallowance under Sec.l4A by any other method. This, by no stretch of imagination, can be an objective satisfaction arrived at by the A.O. with regard to the correctness of the claim of the Appellant company to disallow ₹ 73,69,364/- under Sec. 14A(1) of the Act while filing its return of income. The ratio of the jurisdictional High Court judgment clearly requires that the A.O. cannot, ipso facto, invoke Rule 8D straight away without coming to such an objective satisfaction on the correctness of the claim of the Appellant company. Not having done so, the action of the A.O. in invoking Section 14A(2) and Rule 8D is beyond jurisdiction. 4.9 In the circumstances, respectfully following the decision of the jurisdictional High Court in the case of Godrej 86 Boyce Mfg. Co. Ltd. vs. DCIT (328 ITR 81) (Bom.) I am of the opinion that invoking Rule 8D by the AO is not justified and accordingly the appeal is allowed. 5.2 I have carefully considered the facts, gone through the Assessment Order and other material available on record as well as the written submissions filed befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the Judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the Income-tax Appellate Tribunal in the present case is that the assessee's own funds and other on-interest bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the assessee's capital, profit reserves, surplus and current account deposits were high than the investment in the tax-free securities. In view of this factual position, as per the judgment of this court in the case of Reliance Utilities and Power Ltd. (supra) it would have to be presumed that the investment made by the assessee would be out of the interest-free funds available with the assessee. We, therefore, are unable to agree with the submission of Mr. Suresh Kumar that the Tribunal had erred in dismissing the appeal of the Revenue on this ground. 5.6 Respectfully following the ratio of the jurisdictional High Court in the above decisions, the Appellant company having sufficient interest free funds available wherefrom it has made investments on which it has earned tax-free income, the borrowings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free income. It is therefore, appropriate to consider the common expenses of the Registered Office of the appellant (excluding staff cost and the expenses directly related to the printing and publishing operations) and apportion them in the ratio of exempt income to total income. On this basis, the appellant has arrived at a disallowance of ₹ 23,80,000 u/s 14A of the Act. Considering the facts and circumstances of the appellant's case and the apportionment being on a reasonable basis, the AO. is therefore directed to disallow ₹ 23,80,000 u/s 14A (1) of the LT. Act, 1961 based on this method. Thus Ground Nos.5, 6, 7, 8 and 9 (a), (b), (c) and (d) are allowed and ground No.4 is dismissed, 5.8. Respectfully following the same , I am inclined to agree that the disallowance of ₹ 73,39,364/- made by the Appellant company under Sec.l4A(l) of the Act can be attributable to the earning of exempt income by the Appellant company and therefore further disallowance made by the A.O. of ₹ 32,59,61,000/- is not warranted. 6. Against this order, the assessee is in appeal before us. 7. We have heard both the counsel and perused the records. The ld. Counsel o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income received 882 982 1996 2187 Investments in unlisted shares of subsidiary 313 374 514 807 Other Investments 173 324 613 812 B 1368 1680 3123 3806 SURPLUS (A B) 1812 2139 1725 1575 It is clear from the records that the assessee has replied to show cause notice issued by the AO and furnished details before the lower authorities by means of above chart that the own funds over the years were sufficient to cover the investments in the shares and securities yielding exempt income. We also note that the borrowings of the assessee company have been utilised for other business requirements and not for making the investments as such. The entire interest expenditure on borrowing fund was incurred in connection with the operating revenue which has been offered to tax. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of ₹ 62,36,529/- is of capital nature. The said amount is accordingly disallowed. 11. Upon the assessee's appeal, the ld. Commissioner of Income Tax (Appeals) deleted the addition by holding as under: 7.3 I have considered the submissions carefully. A website enables dissemination of information relating to the Appellant Company and thus providing wider access to a large section of society. This, by no stretch of imagination, gives rise to acquisition of any capital asset or any enduring advantage so as to constitute capital expenditure. Respectfully following the judicial decisions relied upon by the Appellant company, the facts in the current year being the same as that in the earlier years, I consider it proper and appropriate to delete the addition of ₹ 62,36,529/- in respect of website expenses made by the A.O. in the Assessment order. 12. Against the above order, the assessee is in appeal before us. 13. We have heard both the counsel and perused the records. We find ourselves in agreement with the ld. Commissioner of Income Tax (Appeals) s finding that the website creation expenditure is a revenue expenditure and not a capital expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X
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