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TMI Blog2021 (7) TMI 1201X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to establish conditions necessary for considering the liability in question as ascertained liability on the basis of the principles laid down by the Hon ble Supreme Court in the case of Bharat Earth Movers [ 2000 (8) TMI 4 - SUPREME COURT] The AO will afford opportunity of being heard to the assessee before deciding the issue. Thus the relevant grounds of appeal of the assessee are treated as allowed for statistical purposes. Disallowance u/s 14A - HELD THAT:- The explanation given by the assessee before us is not sufficient to avoid the disallowance in terms of Rule 8D(2)(ii) of the Rules. The assessee has to establish by necessary fund flow statements that burrowed funds on which interest paid was not utilized for the purpose of making investments with yielded tax free income. In these circumstances, we are of the view that the disallowance made by the Revenue authorities by invoking the provisions of section 14A of the Act read with Rule 8D(2)(ii) and 8D(2)(iii) of the Rules deserves to be upheld and the same is upheld. The grounds of appeal are accordingly dismissed. Computation of tax liability under section 115JB - HELD THAT:- We are of the view that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.12872/2013 in which the assessee challenged the order dated 19.03.2015 passed in Assessment Year 2009-10 and the order dated 27.02.2013 in Assessment Year 2010-11. The Hon ble Karnataka High Court in its judgment dated 18.02.2016 gave directions with regard to taxability of privilege fees paid by the assessee and set aside the orders of assessment for Assessment Years 2009-10 and 2010-11 referred to above. The Hon ble Karnataka High Court also directed that in so far as other disallowances are concerned, the matter is remanded to the AO to re-examine the same after affording assessee opportunity of being heard. 4. It is pursuant to the aforesaid judgment of the Hon ble Karnataka High Court that the AO passed orders for Assessment Years 2009-10 and 2010-11. Both the orders are dated 31.01.2017. We shall first take up the issue with regard to disallowance of provision for payment of ex-gratia of a sum of ₹ 18,90,000/- in Assessment Year 2009-10. In the original Order of Assessment passed under section 143(3) of the Act for Assessment Year 2009-10 dated 30.10.2011, no disallowance of provision for ex-gratia payment was made by the AO in the Order of Assessment. However, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What is important is the incurring of the liability and ascertainment of the quantum of liability with reasonable certainty. If the above requirements are satisfied, the Court held that the liability is not a contingent one. The learned Counsel drew our attention to page 233 to 251 of the Paper Book wherein the assessee has given the basis of the quantification of the liability of ₹ 18,58,958/-. A specific query was raised by the Bench as to what is the basis on which ex-gratia payment was sanctioned by the Government. The learned Counsel for the assessee submitted that the quantification as given in pages 233 to 251 is based on the Rules / Policy of the Government regarding payment of ex-gratia. It was submitted by him that the actual payment was made by the assessee on 06.04.2010 and therefore the quantification as done by the assessee cannot be faulted. From pages 233 to 251 of the Paper Book what we have notice is that the payment is in reference to the Financial Year 2008- 09 relevant to Assessment Year 2009-10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of total income. Therefore, it cannot be assumed with any degree of certainty that the investments were made exclusively out of surplus funds. Considering the commonality of the expenses, having regard to the accounts, not being satisfied that the correctness of the claim of the assessee is respect of such expenditure in relation to income which does not form part of total income. I am satisfied the assessee's claim that no expenditure is incurred, is not correct and therefore, the provisions of section 14A are hereby invoked and applied. Considering the fact that such indirect expenses cannot be allocated to any specific head of income and also that the assessee does not maintain the accounts in such manner as to enable to identify the expenditure relating to exempted income, the provisions of section 14A are attracted and accordingly are applied. 7. The AO also was of the view that in the absence of any explanation regarding disallowance of other expenses in terms of Rule 8D(2)(iii) of the Act, he had to apply the provisions of the Rules and make a disallowance. Accordingly, the AO made a disallowance under section 14A of the Act read with Rule 8D(2)(ii) and (iii) as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment relating to the exempt income is concerned, the assessee has not provided any clarity or distinction in the source of use of funds, whether from borrowed or from temporary surplus funds, as the investment has flown from a common pool of funds viz. the current account. In such a scenario such expenditure is to be disallowed. In all other cases where a direct nexus cannot be established between the expenditure and the exempt income the provisions of section 14a read with rule 8D are applied. This is the essence of this section. The business receipts and payments as well as investments are made from these accounts. The company has not maintained separate records in report of its income not forming part. of total income. Therefore, it cannot be. assumed with any decree of certainly that the investments were made exclusively out of surplus funds. Considering the commonality of the expenses, having regard to the accounts of the assessee, regarding the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of total income, the undersigned is satisfied that the assessee's claim that no expenditure is incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance to the extent of ₹ 18,87,663/-made on account of proportionate interest, is to be upheld. 6.6. The AO made a disallowance of ₹ 19,25,000/- (under rule 8D(iii)) on account of the sum being 0.5% of average amount of taxexempt investments. There is no dispute in the fact that, whenever exempt income is earned, certain Indirect / common expenditures would always be attributable to such receipts. In this view of the matter, the applicati9n of Rule 8D(iii) r.w.s 14A, has to be upheld in principle. It is also apparent in the present case that, statedly there is exempt income earned during the year to the extent of ₹ 7,70,76,407/-. The jurisdictional courts have held there can be application of section 14A r.w.s. 8D(iii) in a particular case, only to the of exempt income which has been earned during the year. In the present case, the AO has recorded that the appellant earned dividend income of ₹ 770,76,407/- , during the current year, which was claimed as exempt. In respect of clause (iii) of 8D of 1.T. Rules, one-half percent of average value of taxfree investments is suggested for any other indirect expenditure. The indirect expenditure is norma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 31.01.2016 passed pursuant to the directions of the Hon ble Karnataka High Court. In fact, no grounds of appeal has been raised by the assessee in this regard before the CIT(A). Consequently, these grounds are dismissed as not arising out of the order of the CIT(A). We however observe that this issue arises out of an order passed under section 143(3) r.w.s. 147 of the Act, dated 20.03.2015 for Assessment Year 2010-11 and the appeal in ITA No.1925/Bang/2017 deals with the aforesaid ground. The issue will be adjudicated while deciding the said appeal. 14. The second issue raised by the assessee in this appeal is the disallowance under section 14A of the Act. The grievance in this regard is projected by the assessee in grounds 5 to 11 of the grounds of appeal. The facts are identical to the facts as it prevailed in Assessment Year 2009-10. As far as Assessment Year 2010- 11 is concerned, the AO recorded identical reasons for making disallowance under section 14A of the Act and this emanates from the Order of Assessment dated 27.02.2013 in which the AO has given the following findings: 4.5 The assessee has submitted that the daily collection amount has been invested in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 125,95,05,000 62,33,27,000 94,14,16,000 E] Proportionate indirect interest to be disallowed = BXC = ₹ 19,77,797 F] 0.5% of average amount of tax exempt investment = ₹ 16,75,000 G] Total disallowance u/s14A read with Rule 8D = A-4-E+F = ₹ 36,52,797 15. The AO in the Order of Assessment dated 31.01.2015 has followed the findings of the AO in the order dated 27.02.2013. On appeal by the assessee, the CIT(A) confirmed the order of the AO. In the findings of the CIT(A) in this regard are identical to findings of Assessment Year 2009-10. Submissions made by the learned Counsel for the assessee are identical to the submissions made in Assessment Year 2009-10. We have already rejected similar contention raised on behalf of the assessee. The conclusions arrived at in this regard in Assessment Year 2009-10 will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limited extent. 20. The assessee has also raised an issue with regard to validity of proceedings under section 148 of the Act. It is the case of the assessee that notice under section 154 of the Act was issued on the issue of making addition on account of provision for ex-gratia payment and after receipt of reply from the assessee, proceedings order under section 154 of the Act were not continued but a notice under section 148 of the Act was issued. It is the plea of the assessee that having initiated proceedings under section 154 of the Act, the AO cannot issue notice under section 148 of the Act on the ground of belief regarding escapement of income. We are of the view that the provisions under section 154 and 148 of the Act are for different purposes and so long as conditions for initiating proceedings under section 148 of the Act are satisfied, the initiation of proceedings cannot be held to be invalid. We therefore concur with the view of the CIT(A) on this issue. 21. In the result, appeal by the assessee is treated as partly allowed for statistical purposes. 22. In the result, ITA Nos.971/Bang/2018 and 1925/Bang/2017 are partly allowed for statistical purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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