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TMI Blog2018 (10) TMI 352X X X X Extracts X X X X X X X X Extracts X X X X ..... t the fund received from the Govt. of Karnataka has been utilized in making the investment in the State Govt. undertaking." 4. The Assessee is a corporation established by the State of Karnataka under the State Financial Corporation Act, 1951. As far as ground no. 2 & 3 raised by the revenue are concerned the facts are that the assessee earned income which does not form part of the total income and therefore expenditure incurred by the assessee to earn such income had to be disallowed while computing income from business as required under the provision of section 14A of the Income Tax Act, 1961 (Act) read with Rule 8D of IT Rules 1962 (Rules). 5. The Assessee had computed the disallowance u/s.14A of the Act read with Rule 8D of the Rules, without considering investments made by it in three Pubic Sector Enterprises viz., (i) Cauvery Neeravari Nigam Ltd., of Rs. 150,00,00,000/- (ii) M/S.Karnataka Neeravari Nigam Ltd. Of Rs. 200,00,00,000/- and (iii) Krishna Bhagya Jala Nigam Ltd., of Rs. 110,00,00,000/- in all totalling Rs. 460 Crores while computing average value of investments for the purpose of Rule 8D of the Rules. The Assessee also did not consider an investments of Rs. 65.33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the relevant previous year. The plea of the Assessee was that only investments which yielded dividend income should be considered while working out the average value of investments for the purpose of applying Rule 8D(2)(ii) & (iii) of the Rules. 8. The AO did not agree with the aforesaid computation of disallowance of expenses u/s.14A of the Act. He computed the disallowance u/s.14A of the Act as follows:- 4.9 Hence rule 8D(2)(ii) and (iii) are applied here and the disallowance is calculated as under: Total direct interest expenditure NIL ....................... (p) D= Ax B , where C A= indirect interest expenditure, B= Average of investments and C= Average of assets A= Rs. 70,44,20,000 B= Rs. 497,45,42,000 C= Rs. 2576,88,62,500 AXB = 13,59,84,539.... (q) C Disallowance u/r 8D(2)(iii) 0.5% of average of investments Rs. 2,48,72,710 (r) Total disallowance u/r 8D (p)+(q)+(r) Rs.16,08,57,249/- However, the assessee company has already disallowed an amount of Rs. 19,01,760/-. Hence, Rs. 15,89,55,489/- is now disallowed and added back to total income u/s. 14A of the I.T. Act r.w.r. 8D of the I.T. Rule." 9. On appeal by the Assessee, the CIT(A) accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perusal of the said provision shows that what is disallowable under rule 8D(2)(iii) is the amount equal to ½ percentage of the average value of investment the income from which does not or shall not form part of the total income. Thus, under sub-clause (iii), what is disallowed is ½ percentage of the numerator B in rule 8D(2)(ii). Again this is to be calculated in the same line as mentioned earlier in respect of Numerator B in rule 8D(2)(ii) of the Act. 8.1 Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under section 14A read with rule 8D(2)(iii), which is issue in the assessee's appeal, is restored to the file of the AO for recomputation in line with the direction given above. No disallowance under section 14A read with rule 8D(2)(i) and ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The AO disallowed the claim for deduction observing as follows:- "5.1 The assessee's contention is not acceptable. It can be seen from the breakup of the stamp 'duty expense claimed towards increase in share capital and issue of bonds totaling to Rs. 36,00,000/- (Rs.11,00,000 + Rs. 25,00,000) is a provision created and not actually incurred. Thus, such expense is contingent in nature which is not allowable u/s.37 of the I.T.Act. 5.2 Further, it is seen from the Schedule-A of the balance sheet that there is increase in share capital by Rs. 110 crores in the F.Y.2010-11. As per the breakup of stamp duty expense mentioned above, the assessee has claimed expense of Rs. 11,00,000/- towards increase in its equity shares. Such expenditure claim for the enhancement of capital by way of equity shares is not allowable as revenue expenditure. 5.3 As regards the stamp duty expense totaling to Rs. 50,00,000/-Rs 25,00,000 + Rs. 25,00,000) towards issue of bonds of Rs. 233 crores (Rs.110 Rs. 123 crore) is concerned, the assessee has submitted that the stamp on bonds is also a part of the expenditure incurred for mobilization of funds through issue of bonds. From this, it is clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the decision of the Hon'ble jurisdictional High Court in CIT v. ITC Hotels 334ITR 109. 08. The Ld. DR relies upon the judgment of the Hon'ble Supreme Court in Brooke Bond India Ltd v. CIT [(1997) 225 ITR 798]. 09. We have heard the rival contentions and perused the material on record. In our view, the issue is squarely covered in favour of the assessee by the Hon'ble Supreme Court in the matter of India Cements (supra) had held that the debenture when issued is a loan and therefore the expenditure incurred for issuance of debenture would be admissible as revenue expenditure. Similarly in the present case, the bonds issued by the assessee were in the nature of a debt instrument and the stamp duty paid to Government of Karnataka by the assessee would be eligible as revenue expenditure as it will not enhance the capital base of the assessee. There is a distinction between the expenditure incurred for raising the loan and the instrument which had an effect of increasing the share capital. In the matter of Brooke Bond India Ltd (supra), the case before the Hon'ble SC was of increasing the share capital, but whereas in India Cements (supra), CIT v. Instrumentation Ltd [(2013) 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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