9911796707
TMI Blog2018 (4) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... o the discussion u/s. 14A read with Rule 8D(2)(iii) the settled position as on date is that only while computing Rule 8D(2)(iii) investments which have yielded dividend should only be taken into account while making the computation under Rule 8D(2)(iii) i.e. investment in dividend bearing scrips only to be taken into for consideration. Therefore, we remand the matter back to the file of AO to decide this issue afresh keeping in mind the aforesaid observation of ours and in accordance to law. The assessee is at liberty to file evidence to substantiate its case as regards the additional ground of strategic investment is concerned. Long Term Capital Gain/loss carry forward against the amount computed by the AO as per the provisions of sections 46, 48 and 49 of the Act - assets incurred or borne by the “previous owner” - Held that:- CIT(A) relying on the Tribunal’s decision in the case of Smt. Mina Deogun Vs. ITO reported in (2007 (8) TMI 375 - ITAT CALCUTTA-E ) as well as DCIT Vs. Manjula J Shah [2009 (10) TMI 646 - ITAT MUMBAI] which was later upheld by the Hon’ble Bombay High Court [2011 (10) TMI 406 - BOMBAY HIGH COURT] has decided in favour of the assessee and directed the AO t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagement Expenses under section 14A: (Rs. 1,22,79,861 - ₹ 33,472)= ₹ 1,22,46,389/- For that the learned CIT(Appeals) erred in applying the formula under rule 80, restricted to the extent of the net expenditure claimed, ignoring the decisions of the Appellate Authorities in respect of the appellant company for the earlier years. For that the learned CIT(Appeals) was not justified in disallowing the entire amount of expenditure (net) claimed, although the appellant company was involved in various financing 1 investment activities and had taxable business income like profit/loss on stock-in-trade, lease rental, interest, brokerage etc .. For that the learned CIT(Appeals) erred in making the said disallowance although no specific / direct expense had been incurred for earning the exempt income and the appellant company had computed a disallowance in line with the principles laid down by the Appellate Authorities. Relief Prayed: The addition of ₹ 1 ,22,46,389/- should be deleted. The assessee has also taken additional ground of appeal (2A), which reads as under: (2A) for that further and in any event and without prejudice to the aforesaid, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % as was prevailing in Australia during the year 2008. The assessee thus computed the arm s length interest of AUD 44,550 which was converted into Indian currency i.e. ₹ 15,75,444/- using the exchange rate as on 31.03.2009. During the assessment proceedings, the assessee filed before the AO copy of the loan agreement and written submission towards justification of arm s length interest computed by the assessee. But the AO did not agree with the interest rate of 8.91% adopted by the assessee and according to him, 10% interest rate would be reasonable and held as under: 4.3. In the light of the above discussion, it is held that the interest rate of 8.91% adopted by the assessee cannot be the arm s length interest rate in an uncontrolled environment and the same is accordingly rejected. Taking into account the totality of facts of the case, it is deemed reasonable to take the arm s length interest rate at 10% and thus the amount of interest payable is worked out at 5,00,000 x 10% x ₹ 35.3635 = ₹ 17,68,175/-. Since the assessee has already offered arm s length adjustment of ₹ 15,75,444/-, the balance of ₹ 1,92,731/- is now added back as further transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngth interest rate to the amount of loan. Thereafter, the assessee added the arm s length value of interest to its income and offered it to tax thereon. The assessee calculated amount of interest as per AUD came to AUD 44,550 which was converted into Indian currency using the exchange rate applicable as on 31.03.2009 i.e. AUD is equal to ₹ 35.3635 which was not acceptable to the AO though the AO agreed to the CUP method. According to AO, the loan agreement vide clauses 3 and 5 reveals that as soon as the AE ceases to be a wholly owned subsidiary of the assessee interest shall be charged @ 1% over the prevailing bank rate and the borrower shall pay the lender interest at 10% per annum or 1% over the prevailing bank rate whichever is higher for the period of delay beyond the due date i.e. 24.08.2010. According to AO, the expression bank rate noted in the agreement does not expressly specifies whether it refers to the bank rate prevailing in India or Australia. Therefore, he has adopted the bank rates in India and was of the opinion that 10% interest need to be computed for the amount given to the AE and thereafter, made an addition of ₹ 1,92,731/-. We note that the clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para 39 and 40 has answered this question as under: 39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money. 40. The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,29,39,053/- by the AO. Aggrieved by the decision of Ld. CIT(A), both the parties are in appeals before us. 7. We have heard rival submissions and gone through facts and circumstances of the case. We note that the assessee company has earned exempt dividend income of ₹ 22,99,44,794/- and exempt long term capital gain of ₹ 2,01,48,797/-. According to the assessee, no specific/direct expenses were incurred in relation to exempt income. However, the assessee company had determined the disallowance u/s. 14A of the Act of ₹ 33,472/-. However, the AO did not accept the said stand of the assessee and disallowed proportionate management expenses under Rule 8D of the Rules of an amount of ₹ 3,29,39,053/- which resulted in a net disallowance of ₹ 3,29,05,581/-. On appeal, the Ld. CIT(A) gave partial relief to the assessee and restricted the disallowance u/s. 14A of the Act to the net amount of expenditure claimed by the assessee to the tune of ₹ 1,22,79,861/-. Aggrieved by the addition of ₹ 1,22,79,861/- the assessee is before us and the revenue has preferred an appeal by ground no. 4 against the partial relief granted to the assessee. The Ld. Sr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to file evidence to substantiate its case as regards the additional ground of strategic investment is concerned. The AO is directed to pass a speaking order after hearing the assessee afresh on facts and law regarding the same. Therefore, the grounds of appeal filed by the assessee as well as by the revenue are allowed for statistical purposes. 8. Now coming to the revenue s appeal. We note that the major grievance of the revenue is against the action of the Ld. CIT(A) in directing the AO to allow Long Term Capital Gain/loss carry forward at ₹ 4,56,14,076/- against the amount of ₹ 3,75,80,707/- computed by the AO as per the provisions of sections 46, 48 and 49 of the Act. 9. Brief facts of the case are that the assessee is a finance and investment company and wholly owned subsidiary of ITC Ltd. The assessee filed return of income electronically on 29.09.2009 showing total income of ₹ 2,09,16,511/- and revised return was filed on 28.03.2011 showing the revised total income of ₹ 2,27,45,583/-. According to AO, in the return of income assessee claimed long term capital loss amounting to ₹ 4,84,27,143/-. When asked to give details of assets for whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into liquidation in the year under consideration. According to the assessee, the shares of M/s. MAL were acquired through the process of amalgamation of two other subsidiaries i.e. M/s. Sage Investments Ltd. (Sage) and M/s. Summit Investments Ltd. (SIL) on 01.0-2.1999 (FY 1998-99). It was brought to our notice that M/s. Sage Investment Ltd. had directly purchased 222,000 shares and 5,92,000 shares of M/s. MAL in the FY 1993-94 and 1997-98 respectively. Further, another 2,96,000 shares of MAL were acquired by M/s. Sage Investments Ltd. by way of merger of another subsidiary of ITC Ltd. i.e. M/s. Pinnacle Investments Ltd. (PIL) with the assessee. It was brought to our notice that M/s. Pinnacle Investment Ltd. have acquired the said shares of M/s. MAL in the FY 1993- 94 and that M/s. Sage Investments Ltd. has directly purchased 3,70,000 shares of MAL in the FY 1993-94. In the light of the aforesaid history, the indexation cost was adopted by the assessee from the original date when the shares were first acquired by the first previous owner and, therefore, in the return of income the assessee claimed LTCG amounting to ₹ 4,84,27,143/-. The AO asked the assessee to give details of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dation proceeds amounting to ₹ 32,26,400/- on 24.03.2009. A liquidation per se will not amount to transfer within the meaning of section 2(47). But section 46(2) provides a deeming fiction stipulating that where a shareholder on the liquidation of a company receives any money or other assets from the company, he shall be chargeable to income-tax under the head capital gains . Also the money so received shall be deemed to the full value of the consideration for the purposes of section 48. Therefore, keeping in view the provisions of sections 46, 48, 49 and in view of the discussion made in para 3.3 above, the long term capital loss arising on account of liquidation of MAL is assessed at ₹ 3,75,80,707/-. 11. On appeal the Ld. CIT(A) relying on the Tribunal s decision in the case of Smt. Mina Deogun Vs. ITO reported in (2008) 117 TTJ 121 (Kol) as well as the decision of the ITAT Special Bench in the case of DCIT Vs. Manjula J Shah 318 ITR 417 which was later upheld by the Hon ble Bombay High Court has decided in favour of the assessee and directed the AO to adopt the figure of long term capital loss to be carried forward to the next year at ₹ 4,56,14,076/- inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to in clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or or clause (vica) or clause (vicb) or clause (xiii) or clause (xiiib) or clause (xiv) of sec. 47 of the Act. Then such assessee being a Hindu undivided family, by the mode referred to in sub-section (2) of section 64 at any time after the 31st day of December, 1969. So, where the capital asset became the property of an assessee by any of the modes i.e. stated above, then the cost of the acquisition of the asset shall be deemed to be the cost for which the first previous owner of the property who acquired it and as per the explanation given the previous owner would not be the last previous owner of the capital asset as held by AO. This decision of ours has been consistently taken by this Tribunal in the case of Smt. Mina Deogun (supra) and Manjula J. Shah, (supra) which has been upheld by the Hon ble Bombay High Court from which decision it is clear that the indexation of cost has to be done from the original date when the shares were first acquired by the first previous owner. Therefore, following the ratio of the Hon ble Bombay High Court and the Special bench decision of this Tribunal and the coor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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