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TMI Blog2024 (3) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... advances has been contended as was of business exigencies on the assessee, it has not been able to be demonstrated by the assessee that the nature of this income is from business activities particularly when separate head for interest income in the return of income has been shown which is to be included in other income. Neither the miscellaneous income has been able to be shown from routine business activities of the assessee. The assessee failed to demonstrate that the income which is not revenue from operations as required to be treated in the other heads which includes income from other sources and capital gain. The impugned amount of 33.23 lakhs on account of interest income from other loans and advances and miscellaneous income of 9.46 lakhs are rightly been treated as income from other sources. We, therefore, quash the order passed by the Ld. CIT(A) in granting relief to the assessee and confirm the order passed by the AO. Hence, this ground of appeal raised by the Revenue is allowed. Disallowance u/s. 14A for the purpose of computation of book profit u/s. 115JB is hereby deleted. X X X X Extracts X X X X X X X X Extracts X X X X ..... C and 234D of the Income Tax Act, 1961. 4.0 The appellant craves leave to add to, alter, delete or modify any of the grounds of appeal either before or at the time of hearing of this appeal." 4. Ground No.1:- This ground relates to disallowance under Section 14A of the Act. 5. The Ld. A.O. disallowed a sum of Rs. 77,58,44,809/- on account of expenditure attributable to exempt dividend income invoking the provision of Section 14A of the Act. 6. At the time of hearing of the instant appeal the Ld. Counsel appearing for the assessee submitted before us that the issue is duly covered by assessee's own case for A.Y. 2015-16 by the Coordinate Bench in ITA No. 406/Ahd/2019 which has been remanded to the Assessing Officer for fresh adjudication a copy whereof has been filed before us. 7. We find that the Coordinate Bench on the identical issue disposed of the ground by remitting the same to the file of the Ld. AO to adjudicate de novo with the following observation: "4.1. Regarding grounds no. 1.0 to 1.2 namely disallowance u/s. 14A. Both the parties submitted that this issue is squarely covered in assessee's own case by Co- ordinate Bench of this Tribunal in ITA Nos. 11 & 37/Ahd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act on account of interest attributable to investment in shares without appreciating the fact that in view of Section 106 of the Indian Evidence Act, it was up to the assessee company to adduce evidence that all the borrowings were used for the purposes of business and its is assessee' s own surplus fund that were invested in the shares and deposits earning exempted income, and, even in case of mixed funds, the disallowance of interest could be made." 1(b) As an alternate plea, the Id. CIT(A) erred in not upholding the addition u/s. 14A on account of interest attributable to investment in shares to the extent in view of provisions of section 14A read with Rule 8D. " 3. Learned DR has pleaded that an addition of Rs. 187.97 crores which was made u/s 14A was deleted by learned CIT(A), however, it was not adjudicated as per the grounds of appeal. Learned DR has also argued that the assessee was required to adduce evidence that all the borrowings were used for the purpose of the business and the assessee's own surplus funds were invested in the shares. Learned DR has also informed that in A.Y. 2007-08, the addition of similar nature was upheld by learned CIT(A). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "In view of the above discussion and provision of law, the interest attributable to the investment is not allowable expenditure. The assessee was required to give the rates of interest paid to various sources. The assessee vide its reply did not furnish the rates of interest paid. It simply submitted that loans from various banks with varying interest rates were obtained. During the year under consideration, the market rate of interest was 12%. Therefore, interest at the rate of 12% works out to Rs. 65725.17 lacs on investments of Rs. 547709.74 lacs. However, the assessee has claimed interest expenditure of Rs. 19360.59 lacs and has shown interest income of Rs. 55.59 lacs and dividend income of Rs. 508.18 lacs. Hence, against the interest expenditure of Rs. 19360.59 lacs assessee has grown interest and dividend income of Rs. 563.77 lacs. Thus, net disallowance is made of Rs. 18796.82 lacs." 5. Being aggrieved the matter was carried before the First Appellate Authority who has decided the issue in assessee's favour in the following manner: "Thus, the only test to be applied is that of "commercial expediency". In the instant case, it is seen tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted relief only on the ground that the assessee company had become the holding company and the investments were in the form of shares of subsidiary companies which was an integral part of the demerger arrangement. Therefore, it was nothing but commercial decision. 6.2 According to us, the issue has been mixed up by the Revenue Department. The first step should be to examine the scheme of demerger and thereafter the issue could have been streamlined. As per the definition of "demerger" prescribed u/s. 2(19AA) means; the transfer pursuant to a scheme of arrangement by a demerged company of its one or more undertakings to any resulting company in such a manner that all the property of the undertaking/unit being transferred by the demerged company immediately before the demerger, which becomes the property of the resulting company by virtue of the demerger. Therefore, it was necessary for the AO to examine the balance sheet of the demerged company and the position of the accounts of the undertaking which is demerged with the resulting company. The AO has to examine the liabilities related to the said undertaking whether being transferred under the scheme of arrangement wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of an ITAT order viz., Aditya Midcals as follows: "5. With this brief background, we have examined the facts of the case as also the law pronounced in this regard. 6. As far as the Assessing Officer's action is concerned, the disallowance has been made on the basis of a calculation of the proportionate interest alleged to be attributable to the investment earning exempted dividend income. It is also to be noted that while doing so for the years under consideration the A.O. has not followed the past method of calculation of the disallowance. As per AO it was seen that the working of disallowance was wrong because while calculating the proportionate interest attributable to dividend income the ratio of dividend income and total sales have been taken though there was no direct relation between the two. The Assessing Officer had thus made the calculation after taking into account the proportion of the interest on the ratio between the investment in shares and total assets including investment in shares. Apart from this, there is nothing in the assessment order which can establish the nexus of utilization of borrowed interest-bearing funds diverted towards investment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04/1962, however, sub- sections (2) & (3) were made applicable with effect from 01/04/2007. The proviso was inserted with retrospective effect from 11/05/2001 , however Rule 8D was inserted by the Income Tax (Fifth Amendment), Rules, 2008 by publication in the Gazette dated 24/03/2008; reproduced below:- "a) The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallow ability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the present case, no such exercise has been carried out and, therefore, the Tribunal was justified in remanding the matter. b) Section 14A was introduced by the Finance Act 2001 with retrospective effect from 1 April 1962. However, in view of the proviso t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient 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 24th March, 2008 shall apply with effect from Assessment Year 2008-09; (vi) Even prior to 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 Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.' 2. New Rule 8D : 2.1 In exercise of the powers given in S. 14A(2) C.B.D.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting year. 12. We also observe that ld. Assessing Officer applied the facts and figures of the assessee company into the method provided under Rule 8D of the IT Rules because assessee was having an average investment of Rs. 5529.57 crores , interest paid during the year at Rs. 131.22 crores and exempt income of Rs. 249 crores. Going through these figures ld. Assessing Officer felt appropriate to applying the method of Rule 8D but did not look into the following facts :- (i) As on 1.7.205 when the company was given a balance sheet duly notified by the State Govt., the company had total investment of Rs. 5580.20 crores considering all investment in subsidiary companies at Rs. 5336.43 crores, investment in other companies at Rs. 243.69 crores and balance in petty investment. (ii) Opening balance of investment as on 1.4.2007 stood at Rs. 5477.16 crores. (iii) Few investments were made during Financial Year 2005-06 to 2007-08 and in subsidiary companies and funds for the same were partly received from State Government as equity and remaining from net profit earned. (iv) Interest expenditure of Rs. 131.32 crores represents mostly the interest paid on bill discounting of IP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ITAT as discussed above. Respectfully following the order of this Coordinate Bench in the own case of the assessee, we set aside the issue on hand to the file of the AO for fresh adjudication in terms of the finding of the ITAT in its own case for the Assessment Year 2008-09 (Supra) as well as in accordance to the provisions of law. Hence, the ground of appeal of the assessee and the Revenue are allowed for the statistical purposes. 4.2. Respectfully following the above decision of our Co-ordinate Bench, for this assessment year 2015-16, we set aside the matter back to the file of Assessing Officer for fresh adjudication by examining the facts and figures and calculate the disallowance u/s. 14A of the Act." 8. Respectfully relying upon the order perused by the Coordinate Bench we are disposing of the ground by setting aside the issue to the file of the Ld. AO for de novo adjudication in the light of the observation made by the Co- ordinate Bench as reproduced hereinabove upon giving an opportunity of being heard to the assessee and upon considering the evidence which the assessee may choose to file at the time of hearing of the matter. This ground is allowed for statistic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not. The CIT(A) also failed to appreciate that the usage of term 'includible1 in the Heading to section 14A of the Act and also the Heading to Rule 8D of IT Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section 14A of the Act does not use the words "income of the year" but "income under the Act", which also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. (b) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in directing the Assessing Officer to treat the interest income on loan/advances and miscellaneous receipts of Rs. 76.05 lacs as business income instead of income from other sources without appreciating that the nature of the income is of purely interest and not from any activities of business or profession of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retained to run the business of the Company and accordingly the loans given to them are out of such business expediency(in line with approved HR policies)and hence the interest earned thereon is business income. Details of such interest is as under: Particulars Amount (in Rs.) Interest on HBA to Staff 25,57,592 Interest on Other Loans & Advances to Staff 7,78,338 TOTAL 33,36,130 Interest on Other Loan & Advances The details of Interest on other Loan & Advances amounting to Rs. 33.24 lakhs are as under: Particulars Amount (in Rs.) Receivable (after TDS) from Chhatisgarh Surguja Power Ltd. on deposits with them 33,23,630 TOTAL 33,23,630 From the above, it can be seen that the Company was mandatorily required to place a Deposit with M/s. Chhattisgarh Surguja Power Ltd. towards Gujarat's share of power in Chhattisgarh Ultra Mega Power Project. Hence, interest on the same has been earned in the normal course of business and is exclusively incidental to the business activities. Miscellaneous Income The details of Miscellaneous Income aggregating to Rs. 9.46 lakhs are as under: Particulars Amount (in Rs.) Income from Staff Welfare Activities 47,250 Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as provision of electricity and water charges collected from water through its employees and contractors for facilities in the township, receipt from transit hostel, sale of scrap, insurance claim etc. The facilities were given to its employees for better conditions of employment. This was to improve the overall efficiency of the undertaking which is devoted to the single purpose of generation of power. The Court, therefore, has no difficulty in accepting the submission of the Assessee that the interest received on advances and loans given to its employees are receipts in normal course of carrying its business and should be considered as income derived from its essential business activities. Likewise, the late payment by GRIDCO for the electricity supplied, is sought to be made up by GRIDCO by issuing bonds on which the Assessee earns interest. This also therefore, has a direct nexus with the essential business activity of the Assessee." 16. The case made out by the assessee therein is not akin to the case made out by the assessee before us. Though interest on other loans and advances has been contended as was of business exigencies on the assessee, it has not been able to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the aforesaid judgment of Hon'ble Gujarat High Court in assessee's own case for A.Y. 2015-16 in ITA No. 569/Ahd/2019 vide order dated 31.08.2023. 23. While dismissing the appeal filed by the Revenue, on identical issue of addition under Section 115JB for disallowance under Section 14A of the Act, the Coordinate Bench has made the following observation:- "21. Ground No.5 relates to adjustment in book profit under Section 115JB of the Act for the disallowance under Section 14A of the Act. 22. Ld. Counsel appearing for the assessee submitted that the impugned issue is covered in favour of assessee by the judgment of Hon'ble Gujarat High Court in Assessee's own case for A.Y. 2010-11 in Tax Appeal No.63 of 2020, judgment dated 17.02.2020.Recently, the ITAT by following the aforesaid judgment of Hon'ble Gujarat High Court, in assessee's own case for Asst. Years 2013-14& 2014-15 in ITA Nos.281 & 282/Ahd/2018 & 323 & 324/Ahd/2018 has deleted the addition made on the aforesaid issue of adjustment in book profit under Section 115JB for disallowance made under Section 14A of the Act. 23. Such contention made by the Ld. AR has not been controverted by the Ld. DR with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit. In this context, the findings recorded by the ITAT are as follows: 17. Next common issue involved in both years is, whether the amount disallowed under section 14A read with rule 8D deserves to be added back in the book profit for the purpose of section 115JB. In other words, whether the additions which have been confirmed by the Tribunal at Rs. 1.55 crores in the assessment year 201213 and Rs. 75 lakhs in the assessment year 201314, deserves to be added back in the book profit computed for the purpose of section 115JB. 17.1 The ld. Counsel for the assessee at the very outset contended that this issue is covered in favour of the assessee by the judgment of Hon'ble Gujarat High Court in the case of CIT Vs. Alembic Ltd. in Tax Appeal No.1249 of 2014 as well as decision of Hon'ble Bombay High Court in the case of CIT Vs. Bengal Finance & Investment P. Ltd. in Tax Appeal No.337 of 2013. He placed on record copies both these decisions. Apart from the above, he placed upon reliance Special Bench decision of the ITAT in the case of CIT Vs. Vireet Investment P. Ltd. 165 ITD 27. On the other hand, ld. CITDR relied upon the order of DRP. 18. We have duly considered rival con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondents-assessee, during the course of hearing, has fairly conceded that the first question has to be answered in favour of the Revenue and against the assessee in view of specific provisions in the Explanation 1 below Section 115JB(2) clause (f). The Assessing Officer it is stated had made an addition of Rs. 88,292/- to the book profits towards expenditure incurred having nexus with dividend income, which were exempt under Section 10(33). Recording the said statement, the first question is answered in favour of the appellant-Revenue and against the respondent-assessee." The assessee has relied upon the judgment of ITAT special bench in the case of Vireet Investment Pvt. Ltd. In this regard, it is pertinent to mention that Hon'ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. Vs. Additional Commissioner of Income Tax & Ors. (2014) 264 CTR 0030 (Bom) : (2013) 96 DTR 0193 (Bom) : (2014) 361 ITR 0531 (Bom) : (2014) 221 Taxman 0166 (Bom); has held that the proceedings before DRP are extension of assessment proceedings. Therefore, they are not bound by the decision of Tribunals unlike CIT(A) as long as the issue is not acceptable on merit and/or the issue is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance, and with Explanation 115JB not specifically mentioning Section 14A of the Act, the addition of Rs. 89,00,000 was not justified. The view taken by the ITAT cannot be faulted with. It is consistent with the decision in Apollo Tyres Ltd. V. Commissioner of Income Tax 255 ITR 273 (SC) which held that "the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115J." The Court declines to frame a question on the above issue." 21. Apart from the above, we have a binding precedent before us - one from Hon'ble jurisdictional High Court and other from the Hon'ble Bombay High Court. The question considered by the Hon'ble Gujarat High Court in the case of Alembic Ltd. (supra) is as under: " Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that adjustment made on account of disallowance u/s.14A of the Act in computation of book profit u/s. 115JB of the Act is not as per law without appreciating that the amount disallwable under section 14A is covered under clause (f) of Explanation to section 115JB(2) and, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The addition under section 115JB of the Act of a sum of Rs. 1,14,43,040/-when was made as an expenditure estimated on earning of dividend income under Section 14A of the Act, without reiterating the rationale of confirming deletion of such amount as has been elaborately done at the time of deciding question No.1, this deletion requires to be confirmed." 8. Taking into consideration the evidence on record and considering the decision of this court in the case of Commissioner of Income tax-I vs. Gujarat State Fertilizers & Chemicals Ltd. (supra), we are of the opinion that issue Nos.(iii) and (iv) required to be answered in favour of the assessee and against the revenue. In that view of the matter, we answer questions (iii) and (iv) referred to us in favour of the assessee and against the revenue. The appeal ofrevenue is dismissed. 23. Similarly, Hon'ble Bombay High Court has formulated following question in the case of Bengal Finance & Investments P. Ltd. (supra) and replied as under: (b) Whether on the facts and in the circumstances of the case, and in law, the ITAT is justified in deleting the addition of Rs. 78,84,387/- under clause (f) of Explanation 1 to Section 115J ..... X X X X Extracts X X X X X X X X Extracts X X X X
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