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TMI Blog2019 (9) TMI 1312X X X X Extracts X X X X X X X X Extracts X X X X ..... ar the disallowance of any part of the administrative expenses for earning of the exempt dividend income - A.O had failed to record any dissatisfaction as regards the correctness of the claim of the assessee insofar disallowance on account of administrative expenses offered by him under Sec. 14A is concerned. In fact, there is not even any whisper on the part of the A.O as to why the disallowance of the amount of salary and other overheads as had been offered by the assessee in its return of income was not be accepted. In our considered view, the very process of determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the A.O returns a finding that he is not satisfied with the correctness of the assessee‟s claim in respect of such expenditure. We are of the considered view, that the A.O before discarding the claim of the assessee as regards the amount of expenditure incurred in relation to the exempt income, remains under a statutory obligation to record cogent reasons as regards his dissatisfaction in respect of such claim of the assessee, before adverting to and quantifying the amount of disallowance in accordance with met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal. Accordingly, finding no force in the claim of the revenue that the CIT(A) was in error in deleting the disallowance of the consultancy charges of ₹ 43 lacs that was paid by the assessee company to Mr. Arata Nambu, we uphold his order to the said extent. Disallowance of commission to Galaxy Automobile Pvt. Ltd. and IKON Solutions to the file of the A.O, failing to appreciate that the power to set aside‟ a matter as was vested with him u/s 251were no more available w.e.f 01.06.2001 - CIT(A) had after perusing the documentary evidence which were placed on his record by the assessee in the course of the appellate proceedings viz. copy of agreement, form 16A, copy of ledger account of the aforesaid parties, copy of letter received from M/s Galaxy Toyota, New Delhi dated 26.10.2011 in response to notice that was issued by the A.O under Sec.133(6) of the Act, along with the copy of the certificate incorporation of the said company viz. Galaxy Toyota, and also the copy of passport, driving licence, PAN Card, etc. of its directors, had after considering the contention of the assessee that sufficient opportunity was not provided by the A.O to furnish the aforesaid docu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ures etc. and also the term loan agreements have restrictive clauses prohibiting the company from investing in capital markets. As per the RBI guidelines on Asset Liability mismatch, short term loans cannot be used for making long term investments including shares and securities. (c) Without prejudice to the above, the CIT (A) erred in ignoring Appellant's submissions that atleast opening investments of ₹ 734.06 crores and incremental tax free investments of ₹ 100 crores during the year should not be considered while computing disallowance under section 14A read with Rule 8D. (d) Without prejudice to the above, CIT(A) erred in not following the ratio laid down by Kolkata Tribunal in the case of ACIT vs. Champion Commercial Co. Ltd. 139 lTD 108 [2012] and thereby ignoring Appellant's submissions that the interest cost on entire borrowings cannot be considered for the purpose of disallowance under section 14A read with Rule 8D. (e) Without prejudice to the above, the CIT(A) erred in not considering the appellants submission that the investments which have not yielded any exempt income during the relevant assessment year should not be considered. 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a direct correlation between the investments and the loan funds. It was observed by him that out of the total increase in the investments, the increase in the investments made in mutual funds amounted to ₹ 1544.63 crores, while for the balance increase was in respect of quoted and unquoted shares. On the basis of his aforesaid deliberations, the A.O called upon the assessee to correlate the investments with the bank statements so that it could be ascertained as to whether the interest bearing loans were used wholly and exclusively for the purpose for which they were raised or they had been diverted for making investments yielding tax free income. In reply, the assessee filed a fund flow statement. However, the A.O observing that while there was only an increase of ₹ 103.56 crores of the share capital funds, the increase in the interest bearing loans taken and the investments made was manifold. Apart there from, it was noticed by him, that as the assessee had mixed funds, therefore, the possibility of utilisation of interest bearing funds for making of exempt income yielding investments could not be ruled out. Accordingly, the A.O was of the view that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by him to an amount of ₹ 71,37,00,000/-, vide his order passed under Sec. 154 of the Act. It was submitted by the ld. A.R, that as the assessee had sufficient own funds to justify the investments made in the exempt income yielding assets, therefore, no disallowance of any part of the interest expenditure was called for in its hands. In support of his aforesaid contention the ld. A.R had relied on the judgment of the Hon‟ble High Court of Bombay in the case of the CIT-2, Mumbai, Vs. HDFC Bank Ltd. (2014) 360 ITR 505 (Bom). Insofar, the disallowance of the administrative expenses made by A.O by attributing the same for earning of exempt dividend income by the assessee was concerned, it was submitted by the ld. A.R that the A.O had dislodged the disallowance that was voluntarily offered by the assessee u/s 14A in its return of income, without recording any dissatisfaction as regards the correctness of the claim of the assessee. It was averred by the ld. A.R, that the disallowance made by the A.O under Sec. 14A without arriving at a dissatisfaction as regards the correctness of the claim of the assessee on the basis of its accounts, as were placed before him, was not sust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed by the assessee, had rightly worked out the same as per the mandate of law. 7. We have heard the ld. authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. Admittedly, the assessee during the year under consideration had earned exempt dividend income of ₹ 14,49,99,258/-. Also, it is a fact borne from the records that the assessee had offered a disallowance under Sec.14A of ₹ 54,86,307/-. A perusal of the assessment order reveals, that the A.O had worked out the disallowance under Sec. 14A r.w. Rule 8D, as under : Opening Balance Closing Balance (in lacs) (i) The amount of expenditure directly relating to income which does not form part of total income 0 (ii) In case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chart‟ in support of his claim that it had sufficient own funds for making of investments in exempt income yielding assets, and no part of the interest bearing funds were utilised for the said purpose. A perusal of the chart‟ reveals as under: Particulars Amt. (Rs. In lacs) Amt. (Rs. in lacs) Total investments as at 31.03.2009(Refer page 22 of the paper- book-Financials) 295,866 Less: Investments yielding taxable income: 1. Investment in shares of foreign subsidiaryTata Capital Pte ltd. (5,644) 2. Investment in Bonds and Debentures 12.5% Steel Strips Wheels Ltd. Indian Hotels Company Ltd. (1,000) ( 1) 3. Investment in Pass Through Certificates Auto Securities (7,293) 4. Investment in quoted Govt. securities (962) 5. Investment in units of Mutual Funds (Growth Scheme) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and therefore, proportionate disallowance of interest by the Assessing Officer was fully justified. He therefore submitted that the CIT (Appeals) the ITAT had gone wrong on this count that required interference by this Court. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est expenditure under Sec.14A r.w. Rule 8D(2)(ii) shall stand vacated. 8. We shall now advert to the contention advanced by the ld. A.R, that as the A.O had failed to record any dissatisfaction as regards the correctness of the claim of the assessee insofar the disallowance of any part of the administrative expenses for earning of the exempt dividend income is concerned, therefore, the disallowance made by him under Sec. 14A r.w.Rule 8D(2)(iii) cannot be sustained and is liable to be vacated. We find that the ld. A.R in order to drive home his aforesaid claim had placed heavy reliance on the judgment of the Hon ble Supreme Court in case of Godrej Boyce Manufacturing Ltd. Vs. DCIT Anr. (2017) 394 ITR 449 (SC). We have given a thoughtful consideration to the contentions advanced by the authorized representatives for both the parties in context of the issue under consideration. As is discernible from the assessment order, the A.O had failed to record any dissatisfaction as regards the correctness of the claim of the assessee insofar disallowance on account of administrative expenses offered by him under Sec. 14A is concerned. In fact, there is not even any whisper on the part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to why the claim of the assessee was not to be accepted. We are of the considered view that the A.O remained under an obligation to have recorded the reason as to why he was not satisfied with the claim of the assessee, and he ought to have made a mention of the reasons leading to his dissatisfaction. In fact, we are of a strong conviction, that in case the A.O was not satisfied with the claim of disallowance of the assessee under Sec. 14A, then it was obligatory for him to have recorded cogent reasons which had led to such dissatisfaction on his part. We are of the view that as the A.O had failed to record the requisite satisfaction, therefore, the very assumption of jurisdiction by him for dislodging the claim of disallowance made by the assessee and substituting the same by the amount worked out as per the method prescribed in Sec. 14A r.w Rule 8D cannot be sustained and is liable to be vacated. We thus set aside the disallowance of ₹ 923 lacs made under Sec. 14A r.w. Rule 8D(2)(iii) by the A.O and sustained by the CIT(A). Accordingly, in terms of our aforesaid observations, the disallowance made by the A.O under Sec. 14A r.w. Rule 8D(2)(ii) in respect of the interest exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The ld. D.R drawing our attention to the assessment order in context of the aforesaid issue, submitted, that the assessee had claimed that the aforesaid amount was paid to Mr. Arata Nambu for the consultancy services which were rendered by him to the assessee company in Japan. It was submitted by the ld. D.R, that as the assessee had failed to place on record any evidence of services rendered by Mr. Arata Nambu, therefore, the aforesaid expenditure of ₹ 43 lacs which was debited in the profit and loss account was disallowed. It was averred by the ld. D.R, that the CIT(A) had grossly erred in summarily vacating the aforesaid disallowance without appreciating the facts in the right perspective. Apart there from, it was submitted by the ld. D.R, that the CIT(A) was also in error in setting aside the issue as regards the disallowance of commission that was claimed by the assessee to have been paid to M/s Galaxy Automobiles Pvt. Ltd. and IKON Solutions, to the file of the A.O. It was the claim of the ld. D.R, that as the CIT(A) subsequent to 01.06.2001 was not vested with any power to set aside‟ an issue to the file of the A.O, therefore, he had clearly erred in traversin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he documentary evidence to which our attention was drawn by the ld. A.R, it can safely be gathered, that the aforesaid person had rendered his services as an overseas advisor in Japan, and had explored opportunities in the overseas market for the assessee. We find substantial force in the claim of the ld. A.R that the payments made to the said person were for the services which were rendered by him viz. creating awareness about the assessee company and its products amongst the foreign parties, supporting it in its marketing efforts, arranging meetings with Japanese business contacts, and also assisting in translation and supplying of information. We find that the aforesaid documentary evidence which had been relied upon by the ld. A.R to support the aforesaid claim of expenses debited by the assessee in its profit and loss account for the year under consideration, had neither been dislodged by the lower authorities, nor anything proving to the contrary had been placed on our record by the ld. D.R in the course of the hearing of the appeal. Accordingly, finding no force in the claim of the revenue that the CIT(A) was in error in deleting the disallowance of the consultancy charges o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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