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Income Tax Appellate Tribunal, DELHI BENCH: ‘C’ NEW DELHI
Before: SHRI KULDIP SINGH & DR. B. R. R. KUMAR
This is an appeal filed by the assessee against the order dated 10.12.2015 passed by the Commissioner of Income Tax (Appeals)-5, Delhi for A.Y. 2011-12.
“1. That the learned Commissioner of Income Tax (Appeals) has erred in law and on facts in sustaining a disallowance of Rs.1,96,610/- on account of memorandum fees paid to M/s. AZB Partners.
1.1 That the adverse findings recorded by the learned Commissioner of Income Tax (Appeals) while sustaining the impugned disallowance has been recorded with preconceived notions and by arbitrarily brushing aside the detailed submissions/evidences/material place on record, which were furnished in order to support the fact that the transaction in question cannot be regarded as non genuine, so as to warrant a disallowance.
1.2 That in doing so, the learned Commissioner of Income Tax (Appeals) has failed to appreciate the basic fact that claim of expense whether in the previous year or in the current year is tax neutral as the tax rates are similar in both the assessment years.
2. That the learned Commissioner of Income Tax (Appeals) has further erred in law and on facts in sustaining a disallowance of a sum of Rs.2,72,441/- on account of professional fees paid to M/s. KPMG.
2.1 That the adverse findings recorded by the learned Commissioner of Income Tax (Appeals) while sustaining the impugned disallowances have been recorded with preconceived notions and by arbitrarily brushing aside the detailed submissions/ evidences/ material placed on record, which were furnished in order to support the fact that the transaction in question cannot be regarded as non genuine, so as to warrant a disallowance.
3. That the learned Commissioner of Income Tax (Appeals) has grossly erred in law and on facts in disallowing a sum of Rs.9,74,683/- on account of repair and maintenance expenses, by treating the same as prior period expense;
3.1 That in doing so, the learned Commissioner of Income (Appeals) has failed to appreciate the fact that the said expense was crystallized during the year under consideration and as such, should have been allowed.
3.2 That in doing so, the learned Commissioner of Income Tax (Appeals) has failed to appreciate the basic fact that claim of expense whether in the previous year or in the current year is tax neutral as the tax rates are similar in both the assessment years.
4. That the learned Commissioner of Income Tax (Appeals) has grossly erred in law and on facts in sustaining a disallowance of a sum of Rs.53,87,200/- on account of extension fees paid to Noida Authority.
4.1 That the learned Commissioner of Income Tax (Appeals) has further gone wrong in treating the extension fees paid to Noida Authority as Capital Nature, which is based on assumptions, presumptions and contrary to submissions/evidences / material placed on record and the same should have been allowed, as such.”
3. Ground No.1 deals with sustaining of disallowance of Rs.1,96,610/- paid to AZB partners. The companies paid memorandum of appeal to AZB partners which Assessing Officer disallowed non production of vouchers.
Before us the Ld. AR argued that this amount has not been finalized during the year in which the discussions were held. Hence, it should be consider in the year in which the contract amount would be finalized. He argued that there is no loss of revenue compared the tax position in the two years. On the other hand Ld. DR argued that no documents have been produced by the Assessing Officer notwithstanding fact that the amounts pertain to October – November of 2009 which should have been rightly claimed in the assessment year 2010-11 but not in the assessment 2011-12. He apprises that the last meeting happened in November-2009 hence the arguments that the amount could not be finalized cannot be accepted. He further argued that the assessee cannot give on medaling with the accounting system as per his vissiciate. He also relied on the case law of Delhi tourism and travel development corporation which did not allow prior period expenses. He further argued that the allowability of the prior paid expenses should be an exception to the rule and only under rare circumstances with a reasonable degree of clarity.
5. We have gone through the arguments of both the parties in detail. The assessee well following mercantile system of accounting the deductions can be permitted in connection of the expenditure involved in the relevant assessment year. In case of absolute non concretization of expenditure the assessee ought to have claimed the approximate expenditure and vary the absolute expenditure at a later date. The expenditure on legal expenses cannot be absolutely undeterminable. Claiming of the expenditure at a later year can only lead to distortion in the disclosure of profits of that particular year. Hon’ble Supreme Court in the case of Keshav Mills Ltd. Vs. CIT 23 ITR 230 held that the mercantile system brings into credit what is do immediately before it is actually received and similarly debit entries for the expenditure. The assesse could foresee the expenditure and determine the liability and make necessary provisions which the assessee failed to do. The legal expenditure is not such expenditure which cannot be quantifiable or ascertainable while soliciting the services. Hence keeping in view the judgment of Hon’ble Supreme Court and the decision of the Jurisdictional High Court in the case of DTTDC 155 Taxmann 10 we hereby decline to interfere with the reasoned decision of the Ld.CIT(A).
The ground No. 2 relates to payment to M/s. KPMG on account of professional fees. The main arguments of Ld. AR on this issue is that since the business has already started, any expenditure on account of exploration of new business or the new aspect of business should be considered as revenue expenditure. On the other hand the Ld. DR argued that the expenditure is capital in nature and incurred pertaining to a totally a new project “BILTZ”.
We have gone through the facts of the case. We find that this expenditure on account of legal advice relates to operational management of the new business venture but not for the ongoing business activities. We find that this expenditure clearly pertains to a new project have purportedly under taken by the assessee hence primarily be treated as capital expenditure. Since this expenditure is capital in nature the claim made by the assessee in the P&L Account which has been disallowed by the Assessing Officer is hereby confirmed.
The ground No.3 relates to disallowance on account of repair and maintenance expenses. The Ld. CIT(A) has treated this expenditure as prior period expenses. The ld. AR argued that the amounts have been in dispute and hence could not be paid or provision in the current year. The Ld. DR on the other hand argued that since 4 years have lapsed by incurring the expenditure the amount cannot be allowed in this year. The dispute relates to the expenditure incurred on account of repair works undertaken by one M/s Jyotirath Associates Pvt. Ltd. which is an additional bill raised by the party as filed in the Annexure-5 which has been a matter of dispute between the assessee and the repair contractor. We find that the amount pertains to the work done in the earlier years and the bills have been raised subsequently since the matter has been dispute and the amount has been settled later on the assessee could claim the amount only in the year in question. Hon’ble Bombay High Court in the case of Commissioner Of Income-Tax vs Phalton Sugar Works Ltd. 162 ITR 622 held that “The question before us is not whether an assessee, maintaining books of account on the mercantile system, is entitled to claim deduction in the year in which the liability arose notwithstanding the fact that hejwas disputing his liability, but whether it is open to such an assessee to claim the deduction not in the year in which the liability arose but in the year in which the dispute about it was finally adjudicated upon or settled. The judgment of the Supreme Court in Swadeshi Cotton and Flour Mills Private Ltd's case and the two judgments of the Allahabad High Court referred to above provide a pointer. In our view, where a liability arising out of a contractual obligation is disputed, the assessee is entitled, in the assessment year relevant to the previous year in which the dispute is finally adjudicated upon or settled, to claim a deduction in that behalf.”
Respectfully following the above ratio of the Hon’ble High Court as mentioned above, we allow this expenditure as the amount has been concretized in the current year.
Ground No.4 pertains to payment made to Noida Authority. The Ld. AR argued that this payment is in connection of the ownership and interest in the least hold property and failure to pay this amount would lead to loosing of the leased property and hence would make a part of the revenue expenditure. This amount has been paid to continue to hold the capital asset on which the construction could not be completed and by paying amount the assessee would be entitled to hold the lease hold property by paying 4% of the allotted value and hence it cannot be said to be penalty. Since the payment is not in the nature of penalty, it should not be disallowed under section 37(1) be treated as revenue expenditure. On the records we find that extension fee paid by the assessee was disallowed in the assessment year 2011-12 only whereas in the subsequent assessment year 2012-13 and 2013-14 the same allowance has been allowed by the revenue in the orders passed u/s 143 (3). Since the amounts have been treated as revenue expenditure in the subsequent two years of assessment and Ld. DR could not bring any to our notice any other remedial action taken in the assessment year 2012-13 and 2013-14 it can be safely presumed that the same amount of Rs.30,78,400/- has been accepted by the revenue as revenue expenditure. Hence, we find no reason to treat as capital expenditure for the assessment year 2011-12. As a result the appeal of the assessee on this ground is allowed. / Del/.2016 ACIT Vs. Living Media 10. The Revenue has taken the following grounds:
1. That onthe facts and circumstances of the case & Law, the Ld. CIT(A) erred in deleting the addition of Rs. 32,45,041/- made on account of commission paid to foreign parties u/s 40(a)(ia) of the I. T. Act, 1961.
2. That on the facts and circumstances of the case & law, the Ld. CIT(A) erred in deleting the addition of Rs. 2,86,70,036/- made u/s 14A r.w. Rule 8D by ignoring fact that as per the CBDT’s instruction No. 5/2014 dated 11.02.2014 Rule 8D read with section 14A of the Act provided for disallowance of the expenditure even where taxpayer in a particular years has not earned any exempt income.
11. Regarding the commission payments the facts taken from the order of the Ld. CIT(A) are that during the course of assessment proceedings it was noticed that the assessee has claimed commission paid to different parties amounting to Rs. 32,45,041/- . The assessee was asked to furnish the details of the expenses as also to file details of TDS deducted on the same, A show cause notice as to why the same should not be disallowed as per provisions of Section 40(a) (i) in case of non deduction of tax at source was also issued. The assessee failed to furnish any reply to the said show cause notice. In absence of any explanation/evidence of deduction of tax at source, the amount so paid was held to be not allowable as per provision of Section 40(a)(i) of the I.T. Act.
Keeping in view the facts of the case, a disallowance of Rs. 32,45,041/- was made as per provision of Section 40 (a)(1).
12. On this issue the Ld. AR submitted that in response to the query of the AO whether the TDS has been deducted on the commission, the assessee had replied vide letter dated 12.3.2014 that no TDS has been deducted on the commission paid to foreign parties amounting to Rs.32,45,041/- as the foreign entities in question neither had any permanent establishment nor any business connection in India. The income of the foreign agents therefore cannot be deemed to accrue and arise in India, Even considering Article 7 of the DTAA, now these receipts are taxable as business profits in their hands and no TDS is deductible. The relevant extract of the order of the Ld.CIT(A) is as under: In order to decide the issue under appeal, the relevant section 5 r.w.s 9(l)(i) need to be perused in order to decide the taxability or otherwise of the sums paid by way of commission to such non-resident agents. Section 5 which deals with the scope of total income of a non-resident and reads as under:-
“5(2) subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him in India during (b) such year”.
5.2.1 Section 9(1), which amplifies and supports the scope of total income of a non-resident reads as under:
9.(1) The following incomes shall be deemed to accrue or arise in India :— (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, [* * *] or through the transfer of a capital asset situate in India. [Explanation 1],—For the purposes of this clause— (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;
5.3 Section 5(2)(b) deals with the scope of total income whereby the income of a non-resident includes all income from whatever source derived, which accrues or arises or is deemed to accrue or arise in India during such previous year. Under section 9( 1)(i), income accruing or arising directly or indirectly, through or from any business connection in India or source of income in India shall be deemed to accrue or arise in India. We are concerned in this particular case with the source of income of the non-resident agents who had earned commission from the business activity of the applicant. Sections 5 and 9 of the Act thus proceed on the assumption that income has a situs and the situs has to be determined according to the general principles of law. The words 'accrue' or 'arise' occurring in section 5 have more or less a synonymous sense and income is said to accrue or arise when the right to receive it comes into existence. 5.4 The facts of the present case have to be analyzed in order to see whether the income of the non-resident agents accrued or arose in India. The foreign entities in question had been appointed by the appellant company in order to collect the subscription of magazines in the countries in which they were positioned namely, UK, France, Italy and Sri Lanka. They were also in charge of procurement of advertisements for the appellant company. The services were provided outside India and the commission was paid outside India also. The situs of the income of the appellant earned as a result of these services provided, was in these countries. The AO has not brought anything on record to show that the entities concerned had any permanent establishment in India or any business connection which in defined in Explanation 2 to section 9(1) (i). Therefore, I do not see any logic in the conclusion drawn by the AO that the amounts were chargeable to tax in India. It may also be kept in mind that the AO has not mentioned the specific default for deduction of tax at source and it can only be assumed that the provisions of section 40(a)(i) have been applied for the defaults in failure to deduct tax u/s 194H. Accordingly, it is held that there is no liability of the appellant to deduct tax u/s 194H and consequently any default u/s 40(a)(i).
Before us, the Ld. DR relied on the order of the Assessing Officer and the Ld. AR reiterated the arguments taken before the Ld. CIT(A).
We find that the section 194J, 194H are not applicable to the payments made by the assessee as the entities for which the commission payments have been made are situated outside India and no taxability arises out of these transactions as the payments were made for the work executed outside India by a foreign entity. The provisions of Article 7 of DTAA are applicable to the assessee and no TDS is deductible, hence the disallowance made by the Assessing Officer under section 40a(i)is liable to be deleted.
As a result the appeal of the Revenue on this ground is dismissed.
Grounds relating to Section 14A.
For the sake of convenience the relevant order of the Ld. CIT(A) is reproduced as under: The assessee was asked to explain why disallowance u/s 14A read with Rule 8D should not be made in respect of investment made. The assessee submitted before the AO that a disallowance of Rs. 48,23,318/- has already been made and added to the computation of income. However the disallowances were found not worked out as per provisions of Section 14A r.w. Rule 8D as per formula prescribed in the Rules. The amount to be disallowed u/s 14A was therefore, worked out to be Rs. 3,34,93,354/- (as per Rule 8D), and since the assessee on its own had already made disallowance of Rs. 48,23,318/-, the balance Rs. 2,86,70,036/- was disallowed and-u/s 14A and added back to the total income of the assessee. 8.1 The AR has submitted that there is no doubt that section 14A was applicable in the present case as the appellant had itself offered the disallowance. However, whereas the AO has taken the full value of investments, it is to be seen that investment in subsidiary companies which are not listed companies and hence capital gains are not exempt or from whom no dividend has been received would be excluded for purposes of rule 8D. The detailed submissions filed in this regard are as under: "8(a) That the Ld. Assessing Officer has gone wrong in disallowing expenses amounting to Rs.2,86,70,036/- incurred for earning dividend income;
8(b) That the Ld. Assessing Officer has gone wrong in disallowing expenses amounting to Rs. 2,86/70)056/- for earning dividend Income by considering those Investments on which no dividend has been received by the assessee company during the year; 8(c) That the Ld. Assessing Officer has gone wrong in disallowing expenses amounting to Rs. 2,86,70,036/- for earning dividend Income by considering those Investment on which no exempt Income is receivable either in the form of dividend or in the form of capita! gain; 8(d) That the Ld. Assessing Officer has gone wrong in disallowing expenses for earning dividend income to the extent of Rs. 2,86,70,036/- by ignoring the investments chart for last 1 8 - 2 0 years filed by the assessee company in which dearly shows that no investments has been made out of borrowed funds;
8(e) That the Ld. Assessing Officer has gone wrong in disallowing expenses for earning dividend income to the extent of Rs. 2,86,70,036/- by considering the interest on working capital demand loans/ Interest on cash credits/ Interest on Fixed deposits/ Interest others for working of disallowance u/s 14A r w r 8D;
8(f) That the Ld. Assessing Officer has gone wrong in disallowing expenses amounting to Rs. 2,86,70,036/- for earning dividend income of Rs. 2,57,40,528/- Findings of the Assessing Officer
Assessing Officer has made a disallowance u/s 14(a) read with Rule 8D amounting to Rs. 2,86,70,036/- in respect of the expenditure incurred in relation to the exempt income. Facts and arguments of the Case • In the return of income for the year under consideration, the assessee company has made a disallowance of expenses amounting to Rs. 48,23,318 in the computation of taxable income being the expenses incurred in respect of the exempt income as reguired per the provision of Section 14A read with Rule 8D. The calculation of the disallowance u/s 14A read with Rule 8D is enclosed herewith as Annexure 5 for your kind reference.
S. No. Particulars Amount (Rs.) Amount (Rs.) 1 The amount of Nil expenditure directly relating to the income which does not form part of total income 2 A*B/C 7,17,77,097/- A= amount of expenditure by way of interest other than the amount mentioned in clause 84,86,15,503/- (1) B= the average of value of investment 2,08,24,11,773/- C= The average value of total assets The amount of 2,92,50,779/- disallowance ( A* B/C) 3 0.5% of average value of investment (0.5% * Rs.84,86,15,053/-) Total amount of 33,493,354/- disallowance
• The assessee company has no doubt in respect of the applicability of Section 14A read with Rule 8D in the present case as the company has itself offered the disallowance in the return of income. However, the assessee company has been aggrieved by the amount of disallowance as computed by the assessing officer on the following points:
The assessing officer has taken the full value of investment as appearing in the balance sheet, this includes various investments on which the company has not received any dividend during the year under consideration.
It is being highlighted before your Ld. Self that all the subsidiaries cqmpany in which investment has been made are not listed companies in the recognized stock exchange. Hence the capital gain arising on the sale of investment made in such companies is not eligible for exemption under the provision of the Act.
The purpose of making investments in the subsidiary company is commercial expediency and not for the purpose of earning dividend.
4. Further it is submitted before your Learned self that the assessee company has already received a favorable CIT(A) order for the AY 2010-11 on the same issue wherein all of the contentions of the assessee company has been accepted by the CIT(A). In the said order the CIT(A) has accepted the contention of the assessee company that all of the investments made till that year is not out of the borrowed funds. The copy of the said order is attached herewith as Annexure 6 for your kind reference.
The comparison of fresh investment made after AY 2010-11 and the source thereon has been explained below for your kind reference. • During the year under consideration, the assessee company has sold its business division 'Bag it today' as a going concern on slump sale basis to Today Merchandise Private Limited ("TMPL") for a consideration of Rs. 280,310,000 out of which Rs. 135,310,000 was received in cash bank and balance was received in the form of 14,500,000 fully paid up shares of Rs. 10 each in TMPL. Hence the fresh investment in TMPL is the shares received pursuant to Sale of "Bag it today" division.
• Further, the assessee company also transferred the assets of distribution business of 'Bag it today' at cost to its group concern. The source of other fresh investments is the cash received on the above transactions and the internal revenue generated in the form of Interest, dividend. • The fresh investment made in TV today network limited is due to the Sale of Radio Business by Radio today Broadcasting Limited to TV Today Network Limited pursuant to Composite scheme of arrangement
• Hence it is clear from the above that the fresh investments have been made out of the own funds and internal revenue generation of the company and the borrowed funds have not been utilized for the purpose of investment.
6. In the calculation, the Ld. Assessing officer has considered the finance cost amounting to Rs. 7,17,77,097/- as debited in the Profit & Loss Account. Such an amount includes the following components:
Particulars Amount (Rs.) Interest on working capital 5,40,52,105 demand loan and cash credit Interest on Fixed Deposit 16,94,163 Others 1,60,30,829 Total Amount (Rs.) 7,17,77,097
• Interest on short term borrowings amounting to Rs. 5,40,52,105/- pertains to cash credit/ working capital demand loan which have been utilised for the purpose of working capital requirement of company.
• Interest on fixed deposit amounting to Rs. 16,94,163/- and other borrowing cost amounting to Rs. 1,60,30,829 is in the nature of interest of security deposits and includes various bank charges like DD charges [charges for making demand drafts for making payments to the company's clients], cheque book charges, bank guarantee charges, TT Charges [charges for making telegraphic transfer of money to its clients], expenses incurred for the processing of loans etc. • The various terms loan from the bank has been taken for the specified purpose and has been wholly utilized for the said purpose only. Hence, the interest cost on such term loan cannot be considered for the purpose of calculation of disallowance. An amount of Rs. 622,868/- is due on loans not taken for any specific purpose and the same had already been considered in the amount of disallowance u/s 14A by the assessee company. • The above said component can not by any stretch of imagination be called as used for the purpose of making investment by the assessee company. Hence this amount is not to be considered while calculating the disallowance under section 14A read with Rule 8D.
7. In order to strengthen the viewpoint mentioned above, the assessee company has put reliance on following judgments of High Courts: a) CIT vs Holcim India Pvt Ltd ITA 486 of 2014 [Delhi HC] b) CIT v's Delite Enterprises ITA 110 of 2009 [Bombay HC] c) CIT vs Winsome Textiles ltd [319 ITR 204 [Punjab & Haryana HC] d) CIT vs Corrtech Energy Pvt Ltd 233 Taxmann 130 [Gujarat HC] e) CIT vs Shivam Motors Pvt Ltd ITA 88 of 2014 [ Allahabad HC] f) Alliance Infrastructure Projects Pvt Ltd vs DCIT [ITAT Bangalore]
8. Further, the brief summary of the various judgments put reliance by the assessee company is mentioned below:: In the case of DCIT vs. REI Aaro Ltd Kolkata lTA No 1331/Koi/2011 dated > 19.06.2013 for the ASSESSMENT YEAR 2008 - 09 Bench "At Kolkata tribunal has held that in the absence of any such finding, facts of the present case shows that the investment in shares was made out of own capital employed and not from borrowed funds, no disallowance on account of interest expenditure can be made b v invoking rule 8D of the Rules. > In the case of JM Financials Limited vs ACIT Mumbai Bench "J" flTA No 4521/Mum/2012 dated 26.03.2014 for AY 2009 - 101 wherein Mumbai Tribunal has held that no disallowance u/s 14A/ rule 8D can be made on investment made in shares of subsidiaries companies & Joint Ventures > Similarly, in the case of Oriental Structural Engineers (P) Ltd wherein Hon'ble Delhi High Court has been held that section 14A disallowance cannot be made for investment in subsidiaries and SPVs out of commercial expediency. > Also, in the case of Garware Wall Ropes Ltd v/s Addl CIT Mumbai Bench "G" lTA No 5408/Mum/2012 AY 2009 - 101 where in it was held that a disallowance u/s 14A cannot be made if the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. > Based on the judgment given by Chandigarh Tribunal in the case of ACIT vs Punjab State Coop & Marketing Fed Ltd lTA No 548/Chd/2011 for AY 2007 - 081 wherein Chandigarh tribunal has held that disallowance u/s 14A cannot exceed the exempt income.
9. Further, it is really incongruous that expenses amounting to Rs. 2,86,70,036/- has been disallowed for earning dividend income amounting to Rs. 2,57,40,528/- In view of the above, it is being requested that the disallowance made by the Ld. Assessing Officer may kindly be deleted." 8.2 Subsequently, during the course of appellate proceeding the AR has filed written submission dated 09.12.2015, stating that, at the time of filing the return of income, the appellant considered, for the purpose of calculation of disallowance u/s 14A, the entire investments except investments made in foreign companies. In view of the subsequent decisions, wherein it has been held that only those investments on which exempt income has been received during the year should be considered for the purposes of calculating the disallowance u/s 14A, it has been submitted that this has been accepted by the CIT(A) for A.Y. 2010-11 and the amount of disallowance for that year has been reduced to Rs. 9,00,621/-. The revised working of disallowance u/s 14A, considering only those investments in which dividend has been received has been submitted wherein the amount offered for disallowance u/s 14A is mentioned at Rs. 11,05,860/-. 8.2.1 I have given careful consideration to the issue in question. The appellant was in the receipt of dividend income of Rs. 2,57,40,528/-. It offered a disallowance of Rs. 48,23,318/- suo-motu in the return of income. Perusal of the working of the disallowance show that an amount of Rs. 6,22,868/- was offered under rule 8D(2)(i). This shows that the appellant admits that there is certain direct expenditure incurred in relation to the exempt income. In the revised working this amount has been taken as nil. No explanation has been offered as to why the direct expenditure that has been incurred in respect of exempt income has been revised. I see no reason to give relief on the expenditure suo-motu offered. In so far as the question of interest is concerned, there is an increase in investment from Rs.67.30 crores to Rs. 102.42 crores. It is seen that net fresh investment during the year totals Rs. 37.12 crores (new investments of Rs. 47.03 crores - sale of investments of Rs. 9.91 crores). As per the note to Schedule VI of the balance sheet the appellant acquired the share of TV Today to the tune of Rs. 11.91 crores, pursuant to the sale of radio business by Radio Today Broadcasting Ltd. to TV Today Network Ltd. as per the composite scheme of agreement between the two parties duly approved by the shareholders and the Delhi High Court dated 21.11.2009 & 24.12.2010 respectively. In addition shares to the tune of Rs. 14.51 crores in Today Merchandise Pvt. Ltd. (TMPL) were received in pursuance to sale of its business concern "Bag it Today" as a going concern on slump sale basis to TMPL. As result, no cash outflow was involved in these two transactions. The balance fresh investment during the year is Rs. 82.11 lakh in ITAS Media Pvt. Ltd., Rs. 18.18 crores in Automotive Exchange Pvt. Ltd. and Rs. 1.59 crores in World Media Trading Pvt. Ltd. The case of the appellant is that investments made during the year (other than those acquired through non cash sources) of Rs. 20.60 crores are entirely funded through internal funds. It is pointed out that the profits for the year before tax, inclusive of the non cash adjustment, on account of depreciation, is Rs. 22.22 crores and the appellant had opening reserves of Rs. 39.89 crores. This clearly shows that no borrowed funds have been utilized for purposes of making the fresh investment during the year. 8.2.1 I have perused the facts stated above and find myself in agreement with the legal contention of the appellant that-in a situation where the own funds are more than the investment in exempt assets, no disallowance can be made out of the interest expenditure. This has been the view of the Bombay High Court in Reliance Utilities and Power Ltd. (313 ITR 340) and HDFC Bank Ltd. (366 ITR 505). It has most recently been followed by the Delhi Bench of ITAT in the case of T&T Motors LTD. (154 ITD 306). Accordingly in my view no disallowance of interest expenditure u/s 14A read with rule 8D(2)(ii) is warranted. 8.2.2 Coming to the issue of disallowance of administrative expenses, the AR has pointed out that, despite offering a sum of Rs. 42,00,450/- in the return of income on this account, in view of the fresh case laws, the amount may be revised to Rs. 11,05,860/- by considering only those investments from which dividend income has been received. It is noted in this regard that the appellant has not maintained separate accounts with regard to the investment portfolio nor has it been pointed out which decisions support its claim that only those investments are to be considered for purposes of section 14A which have yielded exempt income during the year. The Rule 8D(2)(iii) cannot be applied as per the assessee's convenience. So far as the Delhi High Court decision in the case of ACB India Ltd. is concerned, which presumably the appellant is relying upon, the ratio would apply in a situation where the disallowance is to be computed by applying the provisions of Rule 8D and not to self admitted disallowance of direct expenditure incurred in this regard. In any case, if for arguments sake, the appellant's contention is accepted then also the said amount becomes disallowable as non business expenditure. Therefore this contention of appellant is dismissed. The disallowance offered by the appellant of Rs. 48,23,318/- under Rule 8D(2)(iii) is sustained since the same has been offered in the return of income itself. “
Against the background of this disallowance the Ld. DR argued that the instruction of CBDT no. 5 / 2014 dt. 11/02/2014 regarding the disallowance under Rule 8D r.w.s 14 wherein it was provided for disallowance of expenditure even where the tax payer in a particular year has not earned any exempt income has been ignored by the Ld. CIT(A). On the other hand Ld. AR argued that at the time of filing the return of income, the appellant considered, for the purpose of calculation of disallowance u/s 14A, the entire investments except investments made in foreign companies. In view of the subsequent decisions, wherein it has been held that only those investments on which exempt income has been received during the year should be considered for the purposes of calculating the disallowance u/s 14A, it has been submitted that similar disallowance has been accepted by the CIT(A) for A.Y. 2010-11.
We have heard the arguments of both the parties. Following the established judgments as of now, we hereby hold that there cannot be any disallowance under section 14A where the assessee has not earned any exempt income, in any other case the disallowance cannot exceed the exempt income earned, while calculating disallowance the dividend yielding investments are only to be considered. With these observations we remand the matter back to the file of the Assessing Officer to re-compute the disallowance with the above guidelines and in accordance with the provisions of the Act.
In the result appeal of the Assessee is partly allowed whereas the appeal of the Revenue is allowed for statistical purposes.