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TMI Blog2016 (6) TMI 1391X X X X Extracts X X X X X X X X Extracts X X X X ..... needless to mention that AO shall allow reasonable and sufficient opportunity of hearing to the assessee before adjudicating the same. These grounds of assessee and the Revenue are allowed for statistical purposes. Enhancement of Book Profit computed u/s 115JB - disallowance made under section 14A - HELD THAT:- We set aside the matter referred in this ground to the file of Assessing Officer to recomputed book profit u/s 115JB of the Act on the basis of disallowance, if any, to be made by ld. Assessing Officer as referred in ground no.1 above for calculating the disallowance, if any, u/s 14A of the Act. Accordingly, this ground is also allowed for statistical purposes. Disallowance of depreciation on the basis that certain items included under the head computers @ 60% - HELD THAT:- We find that during the assessment proceedings assessee has himself submitted the revised computation of depreciation on the computers and has agreed that depreciation has been claimed excess by ₹ 9174986/-. Thereafter the matter which was almost closed due to the submission made by assessee, was revived back by the assessee by raising ground against this addition before CIT(A) and gave va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... records are that the assessee is a company engaged in buying and selling of power. Original e-return for Asst. Year 2008-09 was filed on 29.09.2008 declaring total loss at ₹ 31.15 crores. Subsequently the return of income was revised on 18.9.2009 declaring total loss of ₹ 33.01 crores. Book profit u/s 115JB of the Act was worked out at ₹ 2,38,76,190/- in the revised return as against ₹ 4,25,35,566/- shown in the original return of income. The case was selected for scrutiny assessment and notice u/s 143(2) of the Act was issued on 17.08.2009. Further a notice u/s 143(2) r.w.s. 129 of the Act was issued on 16.8.2010 followed by notice 142(1) of the Act along with questionnaire. Necessary details were submitted. Case was discussed and income was assessed at Rs.NIL and deemed income u/s 115JB was revised at ₹ 155.29 crores. Various additions were made to the returned income as well as to the book profit against which assessee went in appeal before ld. CIT(A) and got part relief. 3. Now both the assessee and the Revenue are in appeal before us against the order of ld. CIT(A). 4. First we take up Ground no.1 of assessee s appeal and that of Revenue s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly considered facts of the case and appellant's submissions. There is no dispute that appellant had made investments in shares of subsidiaries and other companies, income from which i.e. dividend would be exempt from taxation. As per section 14A of the Income tax Act, no deduction is to be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Income tax Act. As held by Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. (2011) 15 taxmann.com 390 (Delhi), if the expenditure in question has a relation or connection with -or pertains to exempt income, it cannot be allowed as a deduction, even if it otherwise qualifies under other provisions of the Income tax Act. Thus, even if investment in shares etc. was for reasons of commercial expediency and/or expenditure in relation to such investments by way of interest or other expenses was allowable u/s.36(l)(iii)/37, the same would not be allowable as deduction as per provisions of section 14A. As held by ITAT's Special Bench in the case of Cheminvest Ltd.(2009) 124 TTJ (Del) (SB) 577 and also ITAT Ahmedabad in the case of Shanker Chemical Works (2011) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause the loans were taken prior to Financial Restructuring Plan does not mean that interest on loans inherited from GEB by the appellant company is not at all in relation to investments yielding tax free-income. Appellant's contention that dividend income had already suffered dividend distribution tax, due to which there was no logic in disallowing expenditure u/s.!4A is not tenable since dividend income is exempt in the hands of appellant whereas dividend distribution tax is to be paid by the company distributing dividend. Appellant's contention that investments were made out of funds received from State Government and out of net profit of the appellant company, due to which interest on loans raised after 1.4.2005 can also not be disallowed is now taken up. Appellant has not maintained separate books of accounts in respect of dividend income. Neither any separate bank account is maintained for tax free income and related expenditure. As held by Hon'ble High Court of Kerala in the case of CIT, Thissur vs. Dhanalaxmi Bank Ltd. (2011) 10 taxmann.com 213 (Kerala), if the assessee had a case that separate funds available or funds sourced other than through borrowing only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 131.22 crore Add: Provision of interest on Govt. loans returned back. ₹ 67.80 crore Interest capitalized. ₹ 7.16 crore ₹ 206.18 crore Less: Interest claimed to be on working capital borrowings exclusively for power trading business. ₹ 167.48 crore ₹ 38.7 crore Disallowance under Rule 8D(2)(ii) (38.7 X 552957.24 / 581358.105) = ₹ 36.8094 crore Add: Disallowance under Rule 8D(2)(iii) (as per assessment order). ₹ 27.6478 crore i.e. ₹ 61.4572 crore Thus, instead of disallowance of ₹ 152.4627 crore U/S.14A made by the Assessing Officer, disallowance of ₹ 61.4572 crore is directed to be made subject to verification by the Assessing Officer that interest of ₹ 167.48 crore was in relation to working capital loans or other loans utilized exclusively for power trading business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Chennai) ITA No.1503/Md/2012 8. Gujarat Alkalies vs.DCIT (Ahd) ITA No.2398/Ahd/2012 9. Kunal Corporation vs. ACIT 28 (Mum) ITR (T) 277 10.CIT vs. Hlmatsingka Sied Ltd. (Kar) 69 Taxmann.com 259 8. On the other hand, ld. DR supported the orders of lower authorities. 9. We have heard the rival contentions and perused the material on record. In these grounds raised by the assessee and the Revenue challenge the action of ld. CIT(A). We observe that an addition of ₹ 152.46 crores was sustained, made by ld. Assessing Officer which was sustained to ₹ 61.46 crores by ld. CIT(A) and, therefore, assessee has raised the ground against the sustained addition of ₹ 61.46 crores whereas Revenue has challenged the deletion of ₹ 91 crores out of the disallowance u/s 14A of the Act. 10. In ITA No.1874/Ahd/2010 vide its order dated 20.6.2014 the Tribunal adjudicated the issue relating to disallowance u/s 14A and held as under :- 7. We have heard the rival submissions and perused the orders of lower authorities and materials available on record. The undisputed facts of the case are that the Assessing Officer found that the assessee has earned tax fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is worth to mention that the impugned addition of ₹ 18796.82 lacs was made by the AO without having any discussion in respect of the applicability of Section 14A of the IT Act. Likewise, learned CIT(A) has also not discussed the applicability of the provisions of Section 14A of IT Act, however, after considering the merits of the case, deleted the addition. With this clarification, we have examined the facts and the issue as emerged from the corresponding assessment order passed u/s. 143(3), dated 26.12.2008. It was noted by the AO that the assessee had claimed a huge amount of interest expenditure of ₹ 19360.59 lacs, as per the following bifurcation. Amount (Rs. in lacs) Particulars Interest on Term Loans 8981.35 Working Capital 8184.50 Others 677.63 Bank Charges Guarantee Fees 591.65 19435.13 Less: Interest Capitalized 74.54 19360.59 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the instant case, it is seen that no investment was made by the assessee company by using borrowed funds.The entire investment, except minor investment of ₹ 11.25 lacs was inherited in the demerger exercise. The investment in shares was due to the restructuring carried out at the behest of GOG. The investments were in the form of shares of subsidiary companies as pan of the financial restructuring plan approved by the Government of Gujarat which was integral to the demerger. This was clearly commercially expedient for the appellant company. The business itself was viable only under the plan of restructuring, which required the company to have cross-holdings in the unbundled companies of GEB. In fact, the appellant became the holding company of the generating and transmission companies. Looking to the facts and circumstances of the case, I am of the opinion that there was no diversion of borrowed funds for non-business purposes. Accordingly, the addition of ₹ 18796.82 lacs is directed to be deleted. 6. With this factual background, we have heard both the sides. Learned DR has primarily placed reliance on a decision of respected Special Bench of ITAT Mumbai in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the scheme of arrangement which were in existence immediately before the demerger. The AO has to examine the value of the property in the books of accounts immediately before the demerger which was transferred. The AO has also to examine the financial position of the resulting company , as defined u/s.2(41A) of IT Act. In general, an undertaking of the demerged company is transferred in a demerger scheme and as a result a resulting company comes into existence. The resulting company in consideration of such transfer of an undertaking of the demergerd company issues shares to the share holders of the demerged company. Therefore, the responsibility of the resulting company was also required to be ascertained by the AO. This is the first aspect, which was not examined by the AO and the order of the Revenue Authorities are silent on this subject. 6.3 Next question is about the huge amount of interest expenditure claimed by the assessee. The AO is required to examine first the correctness of the claim. Whether the interest on term loans, bank charges and guarantee fees were in respect of the business of the assessee. Thereafter, the AO is also required to give a clear finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in debentures. But there are other discussions in this very assessment order wherein the provisions of section 36(l)(iii) of the Act have also been touched upon. The Assessing Officer was expected to correlate the said discussion with the exempted dividend income u/s. 10(33) of the Act. As far as the law pronounced in this regard is concerned, first of all, we have to follow a latest decision of Hon'ble Bombay High Court pronounced in the case of Godrej Boyce Mfg. Co.Ltd. Mumbai vs. Dy.CIT in Income tax Appeal No.626 of 2010 and Writ Petition No.758 of 2010 order dated 12/08/2010, { now reported as 328 ITR 81(Bom) } wherein the Hon'ble High Court has upheld the constitutional validity of section 14A of the I.T. Act, 1961 and held that the Assessing Officer should determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income and/or income from mutual fund which do not form part of the total income as contemplated U/S.14A of the I.T. Act, 1961. It has also been directed that the Assessing Officer can adopt a reasonable basis for effecting the apportionment. It has also been observed by the Hon'ble Court that w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o to that Section, the disallowance thereunder could be effectively made from assessment year 20012002 onwards. The fact that the Tribunal failed to consider the applicability of Section 14A in its proper perspective, for assessment year 2001 -2002 would not bar the Tribunal from considering disallowance under Section 14A in assessment year 2002-2003. c) The decisions reported in Sridev Enterprises (supra), Munjal Sales Corporation (supra) and Radhasoami Satsang (supra) holding that there must be consistency and definiteness in the approach of the revenue would not apply to the facts of the present case, because of the material change introduced by Section 14A by way of statutory disallowance in certain cases. There, the decisions of the Tribunal in the earlier years would have no relevance in considering disallowance in assessment year 2002-2003 in the light of Section 14A of the Act. 73. For the reasons which we have indicated, we have come to the conclusion that under Section 14A(1) it is for the Assessing Officer to determine as to whether the assessee had incurred any expenditure in relation to the earning of income which does not form pan of the total income under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record; vii) The proceedings for Assessment year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income / income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case. 6.4 Due to the decision of the Hon'ble Bombay High Court, it is legally correct to refer this issue back to the stage of the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C.B.D.T. has issued a Notification No. S.O. 547(E) on 24-3-2008 (299 ITR (ST) 88). This notification amends the Income-tax Rules by insertion of a new Rule 8D providing for a Method for determining amount of expenditure in relation to income not includible in total income . Reading this Rule it is evident that the Rule provides for disallowance of not only direct expenditure incurred for earning the exempt income but also for disallowance of proportionate indirect expenditure. This is clearly contrary to the main objective with which S. 14A was enacted. 2.2 Broadly stated, the new Rule 8D provides as under : (i) The method prescribed in the Rule is to be applied only if the AO is not satisfied with : (a) The correctness of the claim of expenditure incurred for earning the exempt income made by the assessee or (b) The claim made by the assessee that no expenditure has been incurred for earning exempt income. (ii) The method prescribed in the Rule states that the expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts : (a) The amount of expenditure directly relating to income which does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest paid on bill discounting of IPPs and working capital loan from banks which are specifically meant for the business purpose; and (v) Total exempt income earned by assessee during the year stood at ₹ 249 crores. 13. We observe that ld. Assessing Officer has made disallowance u/s 14A of the Act without examining the facts referred above which were very crucial to reach at the final disallowance u/s 14A of the Act. There are series of judgments of the co-ordinate benches that the disallowance u/s 14A of the Act should not exceed the exempt income earned during the year and also decisions wherein the disallowance u/s 14A of the Act on account of interest expenditure are held to be incorrect if the assessee has sufficient equity and general reserve to cover the investments. 14. We are, therefore, of the view that applying the decision of the co-ordinate bench in assessee s own case in ITA No.1874 1821/Ahd/2010 for Asst. Year 2007-08 is dated 20.6.2014 the matter is set aside to the file of Assessing Officer to examine the facts and figures of the case in the light of our observations made above in order to arrive at a final conclusion as to whether disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR of the assessee. Vide submissions dated 24.12.2010 assessee agreed before ld. Assessing Officer on the mistakes and submitted revised depreciation table reducing total depreciation claim by ₹ 9174986/-. On the basis of this submission ld. Assessing Officer made disallowance of depreciation at ₹ 9174986/-. 20. Pursuant thereto assessee preferred appeal before ld. CIT(A) against this disallowance claiming that the addition in plant and machinery also includes the cost towards annual maintenance charges, cost of recorder machines, LCD projector etc. Out of which some of the expenses are fully allowable during the year and on some of the machines depreciation @ 60% is allowable but at the time of framing assessment order depreciation has been allowed at reduced rates. However, ld. CIT(A) confirmed the addition towards disallowance of depreciation at ₹ 9174986/- by observing as under:- 7.2. I have considered the matter. Assessing Officer has not held that entire expenditure incurred of ₹ 164,75,39,828/-, i.e. addition towards computer assets was not of capital nature. Appellant's submissions in this regard are therefore not relevant. The dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s open the way for examining the relates facts towards calculation of correct depreciation in the block of assets relating to computers by way of observing the related facts in his decision. 25. We are, therefore, of the view that in the given circumstances this issue needs to go back to the file of ld. Assessing Officer for reexamination and calculation of depreciation on computers in the light of submissions made by assessee before ld. CIT(A) after giving sufficient and reasonable opportunity to the assessee for providing necessary details so as to arrive at the correct amount of depreciation on computers for which the assessee is eligible. Accordingly this ground is allowed for statistical purposes. 26. Ground Nos.4 5 of assessee s appeal read as under :- 4.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has dismissed the ground relating to the initiation of penalty proceedings under section 271(l)(c) of the I T Act. 5.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on fact has dismissed the ground relating to the initiation of penalty proceeding under section 271B of the Income Tax Act, 1961. 27. These t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing such loans. Only if the assets acquired out of such loans were not put to use till the end of previous year, i.e. 31.3.2008, guarantee fees to such extent, i.e. in respect of such loans only needs to be capitalized as cost of such assets. Appellant has certified that guarantee fee was paid in respect of loans for acquisition of capital assets which were put to use prior to 1.4.2007. Guarantee fees of ₹ 4,76,00,000- is directed to be allowed as revenue expenditure, subject to verification by the Assessing Officer of the certificate filed during appellate proceedings, i.e. loans on which guarantee fees was paid were fully utilized and there was no capital work-in-progress in respect of such loans during F.Y.2007-08. 35. Aggrieved, Revenue is now in appeal before the Tribunal. 36. Ld. DR supported the order of Assessing Officer. 37. On the other hand, ld. AR at the outset submitted that the issue is squarely covered in favour of the assessee by the decision of the co-ordinate bench in the case of Gujarat Energy Transmission Corpn. Ltd. vs. ACIT, Circle-1(1), Baroda in ITA No.704 761/Ahd/2012 for Asst. Year 2008-09 pronounced on 12.06.2015. 38. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowability of guarantee commission paid to a Director of the company in respect of loans taken from the bank. In the case of Himalaya Machinery Pvt.Ltd. (ITA No.738/Ahd/2009) for AY 2006-07, the Tribunal held, vide order dt.5.6.2009, following the decision of the Rajasthan High Court in CIT v. Metalising Equipment Co.Pvt.Ltd., 8 DTR 12, that the payment of commission for guaranteeing repayment of loan was allowable as revenue expense. In the instant case, the loan has been guaranteed by the Government of Gujarat. Hence, quite apart from the other sound reasons for treating the expenditure as revenue, it would be unrealistic to say that the appellant company could derive any undue advantage or collateral benefit by making such payment to the GOG. In view of the totality of the circumstances, I am of the opinion that the AO was not justified in treating the payment of guarantee commission (₹ 8,39,04,550/-) as capital in nature. The addition is directed to be deleted. 6.2. I have considered the submissions of the ld.AR and the facts of the case. The jurisdictional Bench of ITAT has held in the case of Shri Rama Multi Tech vs. ACIT, 92 TTJ 568, that in determining the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ascertained liability for the computation of book profit u/s115JB of the Act. 42. The assessee did not add the provisions for gratuity of ₹ 44.36 lacs on the basis that the same was made on acturial valuation, but ld. Assessing Officer did not find the contention of assessee acceptable because of his view that provisions made as acturial valuation does not make ascertained liabilities and the facts remained that it is mainly a provision which need to be added back to profit for computing the tax liability on the book profit as per the provisions of section 115JB of the Act and the was taken up before the ld. CIT(A) and decision was given in favour of assessee by ld. CIT(A), who followed the decision of his predecessor for Asst. Year 2006-07 and 2007-08. 43. Aggrieved, Revenue is in now in appeal before the Tribunal.. 44. Ld. DR supported the order of Assessing Officer. 45. Whereas the ld. AR at the outset submitted that the issue in this ground is squarely covered in favour of assessee by the decision of the co-ordinate bench in the case of DCIT vs. Gujarat Urja Vikas Ltd. in ITA No.1820/Ahd/2010 for asst. year 2006-07. 46. We have heard the rival contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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