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TMI Blog2018 (10) TMI 1113X X X X Extracts X X X X X X X X Extracts X X X X ..... particular income, but once he himself has held that mechanical applying of Rule 8D by the AO is not tenable in view of the judicial pronouncement relied upon by the Ld. AR, he cannot proceed to recompute the disallowance. As per the records available before us, the Revenue has not filed any appeal challenging the finding of the Ld. CIT(A) that Assessing Officer has not given any finding as to dissatisfaction on the claim of the assessee of no expenditure incurred towards investment activity. Thus the action of Ld. CIT(A) in proceeding on merit to re-compute the disallowance under section 14A read with Rule 8D, is not justified and we accordingly reject it. - Decided in favour of assessee. Disallowance u/s 36(1)(iii) - assessee raised loan funds at high rate of interest but transferred to a sister concern or group concern at lower rate of interest or no interest without any business purpose - Held that:- In the instant case, the assessee has failed to substantiate that the funds extended to sister concern were for the purpose of the business. In our opinion, the finding of the Ld. CIT(A) on the issue in dispute is well reasoned and we do not find any infirmity in the same, ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived dividend of ₹ 1,42,36,728/-, which was claimed as exempt from tax. No disallowance was made by the assessee out of the expenditure claimed in the profit and loss account against earning the said exempt dividend income. According to the Assessing Officer in view of section 14A of the Act, the expenditure incurred for earning the dividend income was liable to be disallowed. He invoked Rule 8D of the Income Tax Rules, 1962 (for short the Rules ) and made disallowance of ₹ 2,01,90,351/- as under: a) Amount of expenditure by way of interest ₹ 3,26,13,920/- b) Average value of investment ₹ 17,77,02,581/- c) Average of total assets ₹ 2,56,75,709/- (Value of assets as on 1st day of the year And last day of the year) Formula A X B C = ₹ 1,90,62,589/- d) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quity shares of M/s Tulip IT Services (Telecom) Ltd @ ₹ 2 per share on 20/11/2007 and there is no other transaction in dividend ledger during the year. 4.3 It was submitted that all the investment (except the investment in M/s Cedar Hospitility of ₹ 3.25 crores ) was made out of own business funds as the details of utilization of the borrowed funds were duly submitted before the Revenue during assessment proceeding and same details were duly accepted by the Ld. CIT(A) and according to which all the investment were made out of internal accruals of the business earned over the period and, thus, no amount of interest can be attributed whether directly or indirectly towards investment in shares. 4.4 In respect of investment in M/s. Cedar Hospitility made out of loan funds arranged during the year, the learned counsel submitted that assessee has not received any dividend from said investment. 4.5 Without prejudice to the above arguments, the learned counsel submitted that department had applied clause (i) of subrule (2) of rule 8D w.e.f. 01/08/2007 irrespective of the fact that rule 8D came into force from 24/03/2008 and that too came with prospective effect. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 74 ITR 108 (Del); and e) Amway India Enterprises (P) Ltd. Vs. Income Tax Officer, (2014) 91 CCH 4 (Del.); 4.9 The learned DR, on the other hand, relied on the finding of the Ld. CIT(A) with reference to investment in group companies, he submitted that in view of the decision of the Hon ble Supreme Court in the case of Maxopp Investment (supra) disallowance under section 14A has to be made in case of strategic investment made in group companies also. 4.10 We have heard the rival submission and perused the relevant material on record. In view of the various decision cited by the Ld. counsel, it is settled law that the dissatisfaction as to the claim of the assessee of the amount incurred towards exempted income or no expenditure incurred towards exempted income, is prerequisite for invoking provisions of section 14A(2) read with rule 8D of the Rules. We find that the Ld. CIT(A) in para 4.3.1 of the impugned order has recorded that AO has not given the finding that he was not satisfied with assessee s claim of no expenditure incurred on the investment activity. The relevant finding of the Ld. CIT(A) is reproduced as under : 4.3.1 The AO has disallowed ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L A/c. As against this the appellant has made an investment of ₹ 27.04 Crores out of which ₹ 8.97 Crores relates to current Year s addition to the investment. Thus it is clear that the appellant is engaged in investment activity and therefore it cannot be denied that considerable man power and resources must have been employed/utilized for investment activity. The appellant has not come forward to provide the breakup of expenses relating to man power and other resources used for investment activity the income from which is not include in the total income. In view of this, it has to be to held that there is no substance in appellant s submission that no expenditure was incurred towards investment activity. Such submission is therefore liable to be rejected. Further Rule 8D is applicable to the current year. 4.3.3 Therefore the issue to be considered is the computation of disallowance u/s 14A. It is not denied that the appellant has investments, income from which is not taxable. The appellant has on its own not allocated any expenditure relating to such expenditure. There are two components while making disallowance as per Rule 8D. First one is the interest c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of computing disallowance under rule 8D the interest of ₹ 1,26,36,112/- directly relating to the funds which have been diverted and advanced to Tulip Telecom Ltd and Tulip Singapore cannot be treated as interest which is not directly attributable to any particular income or receipt. 4.3.6 It is seen that the appellant has claimed to have earned interest from sums given to Golf Technologies Private Limited and Firepro Wireless and Technologies Private Limited. However the ledger accounts of the said two concerns show that there are several purchase and sale transactions in the said account. In the case of Golf Technologies the appellant has classified certain payments as loan. However it is observed that there are also purchases matching the same loan amounts on different days. Thus I find that the classification given by the appellant to some payments as loan is an artificial one. The reasons are not known. Further there are also receipts in the same account. Similarly in the case of Firepor there are considerable sale and purchase transactions. The total credits are to the tune of ₹ 12.23 crores. There are also purchases. In this given scenario, it cannot be h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income- ₹ 30,29,178/- ( ii) A*B/C = 69,47,970 x 22,55,52,581 / 38,58,94,797 = 40,61,035/- ( iii) Amount equal to one-half percent of average of the value of investment - ₹ 11,27,763/- TOTAL = Rs.82,17,976/- 4.13 In our considered opinion, the recording of dissatisfaction whether expressly or impliedly, is a requirement of law for making disallowance by the Assessing Officer and the Ld. CIT(A) cannot substitute the said dissatisfaction, which the Assessing Officer is required to record. Though on the merit, the Ld. CIT(A) has correctly recomputed the disallowance by way of segregating the interest expenditure directly related to investment for earning exempt income and interest which could not be directly attributable to any particular income, but once he himself has held that mechanical applying of Rule 8D by the AO is not tenable in view of the judicial pronouncement relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20 crores from M/s DBS Chola Mandalam and ₹ 59.89 Crores from Barclay Bank. Before the Ld. CIT(A), the assessee submitted details of utilization of the funds as under: S. No. Particulars Amount Int. Rec@20% 1 Loan Given (Golf) 157516890 3727175 2 Loan Given (Firepro) 50157290 7523250 3 Investment (cedar Hospitality) 32500000 4 Payment of Creditors 5271844 5 Advance to Suppliers (Tulip Telecom Ltd.) 410892703 6 Repayment of loan 91740839 7 ROC Fees Paid 140052 8 Payment to Tulip Singapore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 14A of the Act and thus interest corresponding to advance to suppliers Tulip Telecom (Rs.41,08,92,703/-) and payment to Tulip Sangapore ( ₹ 1,07,32,990/-), totalling to ₹ 42,16,25,693 /- at the rate of 14% per annum was liable to be disallowed under section 36(1)(iii) of the Act. The Ld. CIT(A) provided calculation of the said interest at ₹ 1,26,36,772/-, and thus the Ld. CIT(A) enhanced the addition by ₹ 68,47,671/-. 5.7 Before us, the learned counsel of the assessee submitted that the assessee had advanced funds to M/s Tulip Telecom Ltd. from time to time and also received funds from the said party and a running account was maintained. A chart of such a running account submitted in the written submission is reproduced as under: Amount in Rs. (crores) Particulars Dr. Cr. Opening 1.78 - Sales 4.82 - Mutual Advances 39.17 39.61 Closing Balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal noted that advances are made in the course of the business as borne out from the record, but in the instant case the assessee has failed to substantiate with documentary evidence that the advances are for the purpose of the business, and this ratio of the above decision cannot be applied over facts of the instant case. In the case of Abhisek Industries (supra) the Hon ble High Court of Punjab and Haryana has held that the onus is on the assessee to prove that borrowed funds extended to sister concerns have been utilized for the purpose of the business. The relevant finding of the Hon ble High Court is reproduced as under: 14. As far as the issue of establishment of nexus of the funds borrowed vis-a-vis the funds diverted towards sister-concern on interest-free basis is concerned, in our view, the stand of the assessee that the onus of proving the nexus of funds available with the assessee with the funds advanced to the sister-concerns without interest is on the Revenue is not correct. Sec. 36(1)(iii) of the Act provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of account, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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