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TMI Blog2015 (7) TMI 1344X X X X Extracts X X X X X X X X Extracts X X X X ..... had been earned were not to be taken into account for working out the disallowance if any." 3. After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that assessee has shown investment of Rs. 23.31 crores as on 31.3.2009 in comparison to 21.71 crores on 31.3.2008. Since income from such shares etc. was exempt and, therefore, Assessing Officer issued a show cause notice that why the provisions of section 14A read with Rule 8D should not be applied. In response it was mainly stated that most of the investment were brought forward from the earlier years and the investments have been made on the long term basis to manage the surplus funds and does not require any expenditure. It was also contended that investments were in the mutual funds, no dividend would accrue and the assessee would get only capital appreciation. The Assessing Officer discussed the issue in detail and no disallowance was made under Rule 8D(i) &(ii) because there was no direct expenditure and there was no interest cost. However, he computed the disallowance under rule 8D(ii)(iii) at Rs. 11,25,505/- since assessee had already made a disallowance of a sum of Rs. 50,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year 2009-10 because after assessment year 2008-09, Rule 8D is applicable. He referred to the impugned order and pointed out that Ld. CIT(A) has already accepted the contention of the assessee that there were some investments on which no income was there and Ld. CIT(A) has remanded this aspect to the file of the Assessing Officer for verification and therefore, the assessee cannot be aggrieved by the impugned order. 8. We have considered the rival submissions carefully. It is important to note here that present assessment year is 2009-10 where Rule 8D would be applicable. In this regard, we would like to reproduce the detail analysis given by Tribunal regarding interpretation of section 14A as well as implication of Rule 8D in the case of M/s. Chandha Super Cars P. Ltd. Ludhiana v ACIT in ITA No. 1241/Chd/2011. This issue was discussed in paras 17 to 28 which are as under:- "17. We have considered the rival submissions carefully and find that during the year the assessee has made investment in partnership and mutual fund. The profit from mutual fund in the form of dividend is exempt. As far as share profit from partnership firm is concerned, the same is also covered u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm as such is independent from its partners as far as provisions of IT Act, 1961 are concerned. Specific provisions mentioned hereinabove read with Circular No. 636 :, dt. 31st Aug., 1992 go to show that a firm is to be taxed as separate entity and the gross total income of the firm is to be determined in the normal way under different heads as in the case of any taxable entity, hence, any expenditure which has been incurred by firm for the purposes of its business is to be allowed as a deduction in computing the total income of the firm subject to any specific limitation/prohibition provided for the allowance of such expenditure. Having regard to judicial opinion and also the legislative changes in the Act, a partnership firm is a separate entity than that of its partners under the IT Act and if there exists any specific provision in the income-tax law modifying the partnership law then, such specific provision shall be applied and if the tax law is silent on a specific issue, then a reference will have to be made to the provisions of partnership law for the adjudication of the same and in the present case, provisions of law sufficiently take care of the issue involved herein, hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the Hon'ble High Court the contention was raised that even if the assessee made investment out of its own funds the assessee had taken loans on which interest was paid and therefore, the money available with the assessee was in common kitty in view of the decision of the Court in case of CIT V. Abhishek Industries (supra). Hon'ble High Court held vide para 7 as under:- "We do not find any merit in this submission. The judgment of this court in Abhishek Industries Ltd. (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present cased, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application." 19. Second decision relied on is that of CIT V. Hero Cycles (supra). In that case following question was raised before the Court: "Whether on the facts and in law, the Hon'ble Income-tax Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this court in CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1 and, therefore, disallowance under section 14A was justified. We do not find any merit in this submission. The judgment of this court in Abhishek Industries Ltd. [2006] 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application." In view of the above, we are of the opinion that no substantial question of law arise." 22. It is clear that both the above decisions pertain to Assessment year 2004-05 when Rule 8D was not even in statute book. Rule 8D has been introduced by I.T. Rules (5th Amendment) w.e.f. 24.3.2008. Therefore, in both the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of section 10(33). Income from mutual funds stands on the same basis; (iii) The provisions of sub-sections (2) and "(3) of section 14A of the Income-tax Act 1961 are constitutionally valid; (iv) The provisions of rule 8D of the Income-tax Rules as inserted by the Income-tax (Fifth Amendment) Rules, 2008, are not ultra vires the provisions of section 14A, more particularly sub-section (2) and do not offend article 14 of the Constitution; (v) The provisions of rule 8D of the Income-tax Rules which have been notified with effect from March 24, 2008, shall apply with effect from the assessment year 2008-09; (vi) Even prior to the assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub-section (1) of section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he net income, i.e., gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. The proposed amendment will take effect retrospectively from April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent Assessment Year." 24. Hon'ble Bombay High Court noted this decision and then confirmed the theory of apportionment of expenses and held that same is very much applicable in Section 14A. At placitum 28 it has been observed as under: "During the course of this judgment, it would be necessary to revisit the decision of Hon'ble Supreme Court in Walfort. At this stage, however, it needs to be emphasized that the provisions of section 14A were construed in Wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pex Court in Commissioner of income Tax v. Walfort Share & Stock Brokers (P) Ltd. (2010) 41 DTR Judgments 233. 12. Controverting the aforesaid submission, learned counsel for the assessee relied upon the decision of the Calcutta High Court in Commissioner of Income Tax v. United Collieries Ltd. (1993) 203 ITR 857 (Calcutta). Learned counsel also relied upon Commissioner of Income Tax v. Central Bank of India (2003) 264 ITR 522 (Bombay) and State Bank of Indore v. Commissioner of Income Tax (2005) 275 ITR 23 (MP). It was contended that it was only the actual expense incurred for earning dividend which was to be deducted from the dividend income for calculating the admissible deductions under Section 80M of the Act. It was urged that the plea of the Revenue that proportional expenses should also be reduced, was against the statute. 13. We have given our thoughtful consideration to the respective submissions of the learned counsel for the parties and find *force in the submissions of the learned counsel for the revenue. Finance Act 2001 had inserted Section 14A with effect from 1.4.1962. According to the said Section, any expenditure incurred by the assessee for earning income whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that various heads of income as prescribed under Chapter IV would fall within Section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of Section 14A. Further, Section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in Sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in part of total income could not be allowed against ore income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:- A X B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total asset as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half percent of the average of the value of investment, income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax free investment. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as "A" in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example - any aspect of the assessee's business such as plant/machinery etc.). As regards rule 8D(2)(iii) it has been submitted that some mechanism or formula had to be adopted for attributing part of the administrative/managerial expenses to tax exempt investment income. The administrative expenses attributable to tax free investment income have a fixed component and a variable component. A view was taken that the disallowance should also be linked to the value of the investment rather than the amount of exempt income. Under Portfolio Management Scheme (PMS) the fee charged ranges between 2 and 2.5 percent of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed administrative expense were excluded, on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 8D is applicable from assessment year 2008-9 and, therefore, issue arising in this appeal have to be discussed on the premise that Rule 8D was applicable. 10. The Ld. Counsel for the assessee has emphasized that assessee has itself disallowed a sum of Rs. 50,000/- which was confirmed by Tribunal in the earlier years. The decision of earlier year pertains to assessment year 2007-08 and therefore, as emphasized earlier Rule 8D was not applicable and that decision cannot be relied in the present year. In any case the Hon'ble Punjab & Haryana High Court itself has held in CIT v A.B. Sugar Mills Ltd. in Income Tax Appeal No. 199 of 2014(O&M) vide order dated 16.2.2015 that Tribunal has no power to estimate the disallowance u/s. 14A read with Rule 8D. In that case also the Assessing Officer has disallowed a sum of Rs. 7,19,513/- and Rs. 60,97,429/- which was estimated at Rs. 1 lakh and Rs. 5 lakh because Rule 8D was not applicable in those years. The Hon'ble High Court observed as under:- "We have heard counsel for the parties. The question of law that arises for adjudication is whether the Tribunal could have reduced the quantum of disallowance without recording satisfacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following questions of law arose before the High Court. "(i) Whether in facts and circumstances of the present case, the learned authorities have erred in invoking the provisions of Section 14A read with Rule 8D without any finding that any expenditure has been incurred for earning exempt income is legally unsustainable the eyes of law? (ii) Whether in facts and circumstances of the case, the learned authorities below erred in law in making the provisions of Section 14A read with Rule 8D applicable to the assessee in a mechanical manner without controverting the fact finding in favour of the assessee? (iii) Whether the learned authorities below erred in ignoring the disallowance made by the assessee himself in respect of earning the exempt income and invoking Section 14A and Rule 8D? (iv) Whether in fact and circumstances of the case, the action of the authorities below, the impugned orders are legally sustainable in the eyes of law?" 12. In this case the issue mainly pertains to disallowance of interest under Section 14A. In this case also Rule 8D was held to be applicable and disallowance of interest was confirmed by the Tribunal. Before the Hon'ble High Court, reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat Hon'ble Court has confirmed that once there are mixed funds, Rule 8D has to be resorted. The same principle would apply in the case of expenditure incurred in earning exempt income. 14. The last important contention made by the Ld. Counsel for the assessee is that section 14A read with Rule 8D can be applied only if the Assessing Officer has recorded a satisfaction that disallowance made by the assessee is not correct. We find that section 14A reads as under:- "EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situation the funds are temporarily deployed to earn reasonable returns. In the second situation, there are certain companies where cash credits and other limits are taken from the bank and such funds may not be required for some intervals of time because of slackness in the business cycle or because of the business being of seasonal character. Such companies can also not return the funds to the banks because it may not be easy to obtain the same limits later on. Such companies also invest the funds to earn short term returns. In these two situations, generally the companies deploy the funds for considering the implication of taxation also. 16. In these treasury operations, specialized people either bring Chartered Accountants or MBA Finance or some other persons with higher qualifications like CFA are employ to conduct these operations. The treasury operations are very sophisticated and complicated. It requires decisions for selection of investment, whether investments should be made in bank deposits, government securities, share of various companies, mutual funds, debentures, derivatives etc. Further, the tax implications on such investments are required to be analyzed. For taki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf in the case of Avon Cycles Ltd. v. CIT in ITA No. 277 of 2013 and the relevant paras have already been reproduced above. In this decision it is to be noted that no expenditure was allocated by the assessee whereas in the case before us the assessee has itself allocated a sum of Rs. 50,000/- towards expenditure incurred for earning the exempt income. There is another aspect in this case for which matter has been set aside by Ld. CIT(A) to the file of Assessing Officer, therefore, this aspect can also be examined by pointing out how Assessing Officer is not satisfied with the correctness of the claim made by the assessee. The other decision of Hon'ble Delhi High Court in the case of CIT v Taikisha Engineering India Ltd. (supra) are also to the same effect. 18. The Ld. Counsel had also referred to the decision of the Tribunal in the case o REI Agro Limited v DCIT in 144 ITD 141 (Kolkata). In that case also the assessee has claimed that no expenditure was incurred for earning exempt income. Therefore, Tribunal finally set aside the issue to the file of Assessing Officer. The relevant para 8.1 reads as under:- "8.1 Thus, not all investments become the subject-matter of conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B+C) 184,600,955 164,600,955 - FUNDS FROM WHICH INCOME FULLY TAXABLE: MUTUAL FUNDS-GROWTH (WITHOUT STT) JM Fixed Maturity Fund -Series Iv - Growth Plan - 2.500,000 TOTAL (D) - 2,500,000 DEBENTURES CITI Bank Debentures - Series 170 - 50,000,000 CITI Bank Debentures - CFIL Series 409 48,500,000 - TOTAL (E) 48,500,000 50,000,000 FUNDS FM WHICH INCOME IS TAXBALE TOTAL (D+E) 48,500,000 52,500,000 TOTAL AS PER BALANCE SHEET(A+B+C+D+E): 233,100,955 217,100,955 20. From the above it becomes clear that new investments have definitively been made in various mutual funds and some of the funds are designated as dividend plans which itself means that assessee is going to earn dividend which is exempt from tax. Further, wherever no dividend is received from the market fund the sale of funds also may be exempted in the case of long term funds. In some cases there may not be any exempted income. This aspect was examined by Ld. CIT(A) and he has remitted the matter back to the file of Assessing Officer for examination of the issue whether disallowance under Rule 8D(2)(iii) is properly computed with respect to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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