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TMI Blog2020 (4) TMI 229X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer u/s.14A of the Act. 2) The Ld.Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in allowing relief to the Assessee after rejecting the recomputation of the Long Term Capital Loss by the Assessing Officer at Rs. 47,74,277/- as against claim of the Assessee at Rs. 8,20,72,056/-. 3) The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition made of the amount disallowed u/s.14A of the Act while computing the Book Profit/Income u/s.115JB of the Act. 3. Brief facts of the case are that assessee engaged in the business of Generation, Transmission and Distribution of Electricity. The return of income for the year under consideration was filed and subsequently assessment u/s.143(3) of the Act was passed on 30/12/2008. Subsequently, the case was reopened by issuing statutory notice and after seeking reply of the assessee, assessment order u/s.143(3) r.w.s.147 of the Act was passed on 17/02/2011 thereby making additions/disallowances under different heads. 4. Aggrieved by the order of the AO, assessee preferred an appeal before Ld.CIT(A), who after considering the case of both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t taxable towards taxable income and thereby reducing the taxable income wrongly. It was to curb this mischief that the Parliament enacted section 14A and also to overcome the decision of Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corpn. v. CIT [2000] 2421TR 450, wherein it was held that if the exempted income and the taxable income are earned from one and indivisible business then the apportionment of expenditure could not be sustained. The intention of the Legislature is clearly evident from the Memorandum explaining the provisions contained in the Finance Bill wherein it was explained that only those expenses could be claimed as deduction which are incurred in relation to earning the taxable income. The use of the expression -only to the extent' in the memorandum is clear indicator that only that part of expenses can he allowed as deduction which is related to the earning of taxable income. Accordingly, when the income is exempt and does not form part of the total income then, no expenditure whether (direct or indirect in relation to that income could be claimed as deduction. Whether to invest or not to invest and whether to retain the investments or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpt income as provided in rule 8D, would become meaningless and the words 'in accordance with such method as may be prescribed' in sub-section (2) for determining the amount disallowable would require obliteration, which is not possible. The expression 'in relation to ' has been used in various sections apart from section 14A, such as sections 36(1)(ix), 35(2AB). The phrase 'relating to' has been used again in several sections including sections 36(l)(vii), 28(ii)(c). The phrase 'wholly and exclusively for the purposes of has been used in sections 37 and 57(iii). On going through the use of the above and other similar expressions in different parts of the Act, it is clearly borne out that these have not been used interchangeably. The Legislature is fully conscious of an employment of an appropriate expression, depending upon its intent of expanding or contracting the scope of the section. Wherever it intends to give a wider meaning, it uses the phrase like 'in relation to ' or. 'attributable to ', etc. However, where the scope is to be restricted, it uses the suitable phrase, such as 'directly relatable to ' or ('wholly and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e apportionment of direct or indirect expenditure towards taxable and exempt income has become academic in view of rule 8D, which prescribes mechanism for working out the disallowance under section 14A. In that scenario, the further question raised by the parties about the onus on the Assessing Officer or the assessee for bringing a particular amount of expenditure in the purview of section 14A and the manner of computation of disallowance had ceased to be of any relevance since the Assessing Officer is bound to adopt rule 8D for making disallowance under section 14A, where he is not satisfied with the correctness of the claim of the assessee in respect of such an expenditure. In view of the above narrated facts and points of law disallowance u/s. 14A r.w.r. 8D is reworked as under. Details Rs. (a) Direct expenses Nil (b) Indirect expenses (Interest charged to P & L A/c.) 434725125 (c) Investment as on 31.3.2005 0 (d) Investment as on 31.3. 2006 1951037000 (e) Average of(c) + (d) 975518500 (/) Assets as on 3 1.3,2005 859000 (g) Assets as on 31.3.2006 33129360699 (h) Average of (f) + (g) 16565109850 (i) : Expense incurred on interest attributable to exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Deputy Commissioner of Income-tax, Range 3(1), Mumbai vs. Beck India Ltd. 26 SOT 141 IV. Impulse (India) (P.) Ltd. :vs_ _ Assistant Commissioner. of Income-tax (OSD), New Delhi 22 SOT 368. V. CIT vs. Hero Cycles Ltd. [2010] 189 Taxman 50 (P& H High Court) . Without prejudice to the above, it may be appreciated that the appellant is having enough share capital and reserves and surplus of the aggregate amount of Rs. 2,60, 718 lakh as against investment in shares / mutual fund of only Rs. 19,510 lakh. Thus the appellant is having enough interest free funds of its own and in such circumstances there is no justification for disallowance of interest on this ground. In this connection the appellant may refer to the following: "(i) Decision of the Bombay High Court in CIT v. Reliance Utilities and Power Ltd. (313 1TR 340) (ii) Decsiion of the ITAT, Ahmedabad, in ACIT v Hipolin Ltd. (ITA No.4259/Ahd/2007) The above decision of the ITAT in the case of Hipolin Ltd. has been approved by the Gujarat High Court. Thus, in any case, having regard to the facts of the appellant's case and the above decisions, there w3as no justification of disallowance of interest. Accordingly, the addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds amounting to Rs. 129.8 crores. Thus, the appellant is having enough interest free funds and, therefore,, also the disallowance out of interest expenditure could not be made having regard to the ratio of decision of Bombay High Court in the case of CIT Vs. Reliance Utilities and Power Ltd. [313 ITR 340]. Said decision is also followed by ITAT, Ahmedabad in the case of AC!T Vs. Hipolin Limited. For this reason also, the disallowance of Rs. 2,56,00,942/- out of interest expenditure made by the A. O. as per section 14A was not justified. The A. O. is therefore directed to delete the disallowance of Rs. 2,56,00,942/- made on this count. The disallowance of Rs. 48,77,592/- made on account of administrative expenses u/s. 14A of the Act, has been confirmed by my predecessor vide his appellate order dated 19/02/2009, The same is, therefore, upheld. The ground of appeal is accordingly partly allowed." 11. After having heard both the parties and after appreciating the facts of the present case, we find that the initial order of assessment u/s.143(3) of the Act was passed on 30/12/2018, wherein the Assessing Officer has considered the investment in shares made by the assessee and its sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the Assessing Officer as per section 14A of the Act was not justified keeping in view the principles laid down by the Hon'ble Bombay High Court as well as the Coordinate Bench of ITAT Ahmedabad and even no new facts or circumstances have been brought before us in order to controvert or rebut the findings so recorded by the Ld.CIT(A). Therefore, we find no reason to interfere with or deviate from the findings so recorded by the Ld.CIT(A). Thus, we uphold the order of the ld.CIT(A) and ground raised by the Revenue is dismissed. Ground No.2 of Revenue's appeal 12. This ground raised by the Revenue relates to challenging the order of Ld.CIT(A) in allowing relief to the Assessee after rejecting the recomputation of the Long Term Capital Loss by the Assessing Officer at Rs. 47,74,277/- as against claim of the assessee at Rs. 8,20,72,056/-. 13. The Ld.DR appearing on behalf of the Revenue relied upon the order of Assessing Officer. Such observations made by the Assessing Officer are contained in paragraph No.4.1 of the order of the Ld.CIT(A) which is reproduced below: "4.1 The Assessing Officer has made the following observation while making addition on this ground, "On perus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o certain modes of acquisition. Therefore 'what' needs to be indexed is supplied by section 49, wherever applicable, but the question 'from when' the cost needs to be indexed is not answered by section 49 it is answered by Explanation (iii) to section 48. Thus when Explanation (iii) to section 48 defines indexed cost of acquisition in a strict and in an unambiguous terms the language cannot be interpreted in a different manner than what is clearly said. On a plain reading of Explanation (iii) to section 48 it is amply clear that benefit of indexation for cost of acquisition is available to the assessee from the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later". Thus there is no ambiguity in the language of the explanation to section 48. Further reliance is placed in the case of Deputy CIT v. Kishore Kanungo, 102 ITD 437 (Mum.).In this case, as regards the cost indexation, the Tribunal held that in view of the express provisions of Explanation (iii) to S. 48, the cost inflation index for the fir si year in which the asset was held by the assesses was to be considered. In the opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the precise words used are plain and unambiguous, we are bound to construe them in their ordinary sense. Words may be modified or varied where their import is doubtful or obscure........ The word ''indexed cost of acquisition" is nowhere mentioned in Section 51 of the Act. As such, it is beyond the competence of the Court to substitute it. The language of the statute is clear and explicit. The words of the statute speak the mens legis. As such recourse cannot be made to the purposive theory of interpretation. " Thus, where precise words used were plain and unambiguous, the provisions were to be construed in their ordinary sense. As far as the provisions of Explanation (Hi) to section 48 were concerned, the language of the statute was clear and explicit. Further, nowhere in section 2(42A), section 47(vi) or section 49(1), the word "indexed cost of acquisition " was mentioned and hence it could not be substituted. Explanation (iii) to section 48 was unambiguous in defining the "indexed cost of acquisition " and lays down "...,,. Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner or the assessee, as the case may be." It meant that in case, of acquisition of asset in the manner mentioned in section 47, "cost of acquisitions" shall be the aggregate of the cost of acquisition, cost of improvement by previous owner and the cost improvement by the beneficiary owner. Thus, there was no question of allowing "indexed cost of improvement" separately in cases of acquisition of asset in the manner covered by section 47 of the Act. Indexation of cost of acquisition was allowable with reference to the year in which the asset was first held by assessee, which in the instant case was F. Y. 2005-06. Thus, assessee could not derive any benefit on indexation of cost of the Long Term Capital Asset transferred because the year in which the asset was first held by assessee and it was transferred by sale was the same. In view of the above it is amply clear that the benefit of indexation cannot be allowed to the assessee and the excess loss to the tune of Rs. 7,72,97,779 cannot be allowed and is therefore not allowed to be carried forward." " 14. On the other hand, AR reiterated the same arguments as were raised before the Ld.CIT(A) while filing the written submissions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quoted below. "13) In the present case, the capital asset in question (Flat No. 1202-A) was originally acquired by the previous owner (daughter) on 29/1/1993 and the same was acquired by the assessee under a gift deed dated 2/J/2003 without incurring any cost. The assessee sold the said capital asset on. 30/6/2003 for Rs. 1,10,00,000/-. Since the assessee held the capital asset for less than thirty six months (2/1/20-03 to 30/6/2003) in the ordinary course, ay per Section 2(42A) of the Act the assessee would have held the asset as a short term capital asset and accordingly liable for short term capital gains tax. However, in view of Explanation: l(i).(b) to Section 2(42A) of the Act which provides that in determining the period for which any asset is held by an assessee under a gift, the period for which the. said asset was held by the previous owner shall be included,' the assessee is deemed to have held the asset as a long term capital asset and accordingly, liable for long term capital gains tax. Thus, by applying the deeming provision contained in the Explanation l(i)(b) to Section 2(42A) of the Act, the assessee is deemed to have held the asset from 29/1/1993 to 30/6/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year in which the capital asset was 'held by the assessee1. Since the expression 'held by ,' the assessee' is not defined under Section 48 of the Act, that / expression has to. be understood as defined under Section 2 of the.. Act. Explanation l(i)(b) to Section 2(42A) of the Act -provides that in determining the period for which an asset is held by an assessee under a gift, the period for which the said asset was held by the previous owner shall be included. As the previous owner held (he capital asset from 29/1/1993, as per s Explanation 1(i) (b) to Section 2(42 A) of the. Act, the assessee is deemed to have held the capital asset from 29/1/1993. By reason of the deemed holding of the asset from 29/1/1993, the assessee is deemed to have held the asset, as a long term capital. asset. If the long term capital gains liability has to be computed under Section 48 of the Act by treating that the assessee held the capital asset from.29/1/1993, then,. naturally in determining the Indexed cost of acquisition under Section 48 of the A ct, the assessee must be treated to have held the asset from 29/1/1993 : * and; accordingly the cost inflation index for 1992-93 would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the said asset was held by the previous owner while determining the indexed cost of acquisition of that asset to the assessee. In other words, in the absence of any indication in clause (Hi) of the Explanation to Section 48 of the Act that the words 'asset was held by the assessee' has to be construed differently, the said words should be construed in accordance with the object of the statute, that is,' in the manner set out in Explanation 1 (i)(b) to section 2(42A) of the Act. 20, To accept the contention of the revenue that the words used in clause (iii) of the Explanation to Section 48 of the Act has to be read by ignoring the provisions contained in Section 2 of the Act runs counter to the entire scheme of the Act. Section 2 of the Act expressly provides that unless the context otherwise requires, the provisions of the Act have to be construed as provided under Section 2 of the Act. In Section 48 of the Act, the expression 'asset held by the assessee is not defined and, therefore, in the absence of any intention to the contrary the expression 'asset held by the assessee' in clause (Hi) of the Explanation to Section 48 of the Act has to be constru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indexation, (he first year in which the said asset was held by the previous owner would be the first year for which the said asset was held by the assessee. 23) Since the assessee in the present case is held liable for long term capital gains tax by treating the period for which the capital asset in question was held by the previous owner as the period for which the said asset was held by the assessee, the indexed cost of acquisition has also to be determined on the i very same basis. ; 24) In the result, we hold that the ITAT was justified in holding that while computing the capital gains arising on transfer of a : capita! asset acquired by the assessee under a gift, the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the asset. " On this issue, as pointed out earlier, the appellant may state that the investments with reference to which capital loss was claimed at Rs. 8,20,72,056 by claiming index cost with reference to the conclusion of such investment by the amalgamating company. The fact is that the said investments were transferred by p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding period in the absence of any other provisions, one has to refer to section 2 (42A) wherein the definition of short term capital asset is given. Explanation I of the said sect ion states that in determining the period for which the capital asset is held by the assessee the transactions referred to therein provide for including the period of holding by the previous owner. Section 2(42A) reads as under: 42A)["short-term capital asset" means a capital asset held by an assessee for not more than [thirty-six] months immediately preceding the date of its transfer:] Provided that in the case of a share held in a company [or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963) or a unit of a Mutual Fund specified under clause (23D) of section 10] [or a zero coupon bond], the provisions of this clause shall have effect as if for the -words "thirty-six months", the words "twelve months" had been substituted.] [Explanation 1].-(i) In determining the period for which any ': * capital asset is held by the assessee- (a) in the case of a share held in a company in l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) in (he case of a capital asset, being equity share or shares in a company allotted pursuant lo demutualisalion or corporatisaiion of a recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such dennitualisation or corporatisation;] (hb) in the case of a capital asset, being any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares;] (ii) in respect of capital assets other than those mentioned in clause (i), the period for which any capital asset is held by the assessee shall be determined subject to any rules which the Board may make in this behal.f] It may be seen from the above that in the case of asset which becomes property of the assessee in the circumstances mentioned in section 49(1) the period holding by the previous owner is to be included in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies with it. The provisions of section 47(vi) defines that any transfer in a scheme of amalgamation shall not be regarded as transfer and nothing contained in Section 45 shall apply. Now, as per the provisions of section 49(1)(e), the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee as the case may be. Therefore, in view of section 49(1), the cost of asset of such investment is to be taken as that of the previous owner. As pointed out by the A.R., section 48 or any other section does nto define the term "first year in which asset was held by the assessee". However, when provisions of section 47, 48 & 49 are to be applied and considered together, the picture becomes clear. For the purpose of holding period, it would be relevant to refer to section 2(42A) wherein the short term capital asset is defined. As per explanation of the said section, the period for which the asset is held by the assessee is to be determined by including the period for which asset was held by the previous owner as referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on do not define the term "first year in which asset was held by the assessee". Thus, in such circumstances, from the conjoint reading of sections 47, 48 & 49 the picture becomes clear. For the purpose of holding period, it would be relevant to refer to the provisions of section 2(42A) of the Act, wherein the short term capital asset is defined and as per the Explanation of the said section, the period for which the asset is held by the assessee is to be determined by "including" the period for which asset was held by the previous owner as referred to in section 49(1) of the Act. 16.1. After considering these provisions as mentioned above, the period of holding by the amalgamating companies is to be 'included' in the period of holding by the assessee. Accordingly, ld.CIT(A) has rightly held that assessee held capital asset from the date on which the amalgamating companies acquired such assets and the Assessing Officer was, therefore, not justified in considering the date of amalgamation for the purpose of indexation. The ld.CIT(A) while reaching to said conclusion had relied upon the decision of Hon'ble Bombay High Court in the case of CIT vs. Manjulla J. Shah (ITA No.3378 of 2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r prepared under subsection (2), as increased by - (a) the amount of income-lax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves, by whatever name called [, other than a reserve specified under section 33AC]: or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities or (d) the amount" by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed ; or (f) the amount or amounts of expenditure relatable to any income to which [section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or] (g) the amount of depreciation,] (h) the amount of deferred tax and the provision therefor, (i) the amount or amounts set aside as provision for diminution in the value of any asset, if any amount referred to in clauses (a) to (i) is debited to the profit and loss account, and as reduced by,-]] (i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the Explanation to section 115JB need to be excluded or included, as the case be, and nothing more can be brought in. All the three items listed above do not feature in the Explanation. Otherwise, the disallowance u/s. 14A would be material In computation of the normal process of income while the second item interest on investment in bonds stands already included in (he book profit. As far as to prior period expenses are concerned, there is no such mention in the explanation. The assessment order on the other hand is silent as to under which category it is being included for the matter to be further analyzed. Therefore, as the matter stands, none of the three items can be added for computation of book profit. " In the above 'decision the CIT(Appeals) had not approved adjustment of book profit on account of disallowance u/s. 14A in the above manner. Thus the appellant's case is squarely covered by the decision of IT AT, Mumbai and ITAT, Ahmedabad referred to above." 20. We have heard the Learned Representatives for both the parties. We have also perused the material placed on record as well as the orders passed by the revenue authorities. From the facts of the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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