M/S MANIPAL MEDIA NETWORK LIMITED,MANIPAL vs. ADDL..C.I.I., UDUPI

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :

“We have not used the borrowed funds to invest in shares. All our borrowed funds were used for the purposes of the business. The equity shores mid mutual fund units were purchased out of the internal accruals of the Company. You may observe tlia! the total net worth of the Companv as on 31st March 2011 is RS.2468 lakhs and trhere as the total investment in mutual funds and shares as on 315t March 2011 15 Rs. 666.96 lakhs. Thus it is quite evident that we have used the own funds for investment in shares. Further all the expenses incurred by tlze Company as deuuled III schedule 11 to 17 of the profit and loss account, were incurred in the ordinary course of busines. No portion of the same is attribuuible to earning of dividend. Normally we received hardly few number of dividend warrants and it takes hardly any time to encash. Therefore we need not incur any expenses to encash the dividends, for the reason that the dividend warrants are encashable at par.

Accordingly we are of the opinion that there are no disallowance u/s 14A and therefore the question of applying the calculations under rule 8D does not arise.” 03. AO did not accept the above reply. According to him, assessee’s claim that no expenditure was incurred for earning exemption income was not acceptable as the investments in shares for earning exempt income always had a notional cost attached to it. Relying on the judgment of Hon’ble Bombay High Court in the case ofGodrej and Boyce Mfg. Co. Ltd. V. DCIT (328 ITR 81) and that of Hon’ble Apex Court in the case of CIT v. Walfort Share & Stock Brokers (P) Ltd. (326 ITR 001), AO held that even if assessee had not utilised any borrowed funds to make investments in tax-free shares, section 14A of the Act, had to be invoked. He made a disallowance of Rs.21,12,761/- under Rule ITA.623/Bang/2014 Page - 3 8D(2)(ii) for interest and Rs.2,78,495/- under Rule 8D(2)(iii) for expenditure incurred. Total disallowance came to Rs.23,91,210/-.

ITA.623/Bang/2014 Page - 4

“5.3.1 We have heard both parties and perused and carefully considered the material on record. It is seen that the Assessing Officer, in the course of assessment proceedings noted that the Balance Sheet of the assessee as on 31.3.2009 reflected investments in shares / mutual funds at Rs.4,36,23,215 (out of whichRs.34,49,660 pertain to this year), on which it had earned dividend income of Rs.1,10,74,523 which was exempt under section 10(34) of the Act. The Assessing Officer observed that the assessee had not shown any expenditure as having been expended towards earning this exempt income. When called upon to explain this position and as to why disallowance under section 14A of the Act should not be made in its case, the assessee argued that it does not have any direct or indirect expenditure attributable to the earning of the exempt dividend income. The Assessing Officer following the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. V DCIT reported in 328 ITR 81, proceeded to invoke the provisions of Rule 8D of IT Rules, 1962 and compute the disallowance under section 14A r.w. Rule 8D as under :

1. 1. Amount of expenses directly related to income which do not form part of total income : NIL.

2. Amount of expenses not directly related to particular income : Rs.21,80,167. 3. 0.5% of average value of investment in shares : Rs.2,07,034. Total disallowance : Rs.23,87,201.

5.3.2 On appeal, the learned CIT (Appeals) upheld the decision of the Assessing Officer at paras 7 to 9 at pages 4 & 5 of his order holding as under :

“I have considered rival contention carefully. As could be seen clearly from the order of the Assessing Officer, the satisfaction of the Assessing Officer and the findings thereof are clearly emanating from the order. Hence I do not find any strength in the argument of the appellant that the Assessing Officer cannot invoke the provisions of section 14A r.w. Rule 8D. The Assessing Officer has given cognizant reasons even to see from the angle of applicability of the case laws cited by the appellant. Further, I have gone through the case laws cited by the appellant. They are all for the Assessment Year’s prior to the amendment to Rule 8D inserted w.e.f. 24.3.2008 applicable from A.Y. 2008-09 onwards.

8. The citation CIT Vs. Hero Cycles Ltd (2010) 323 ITR 518 (P & H) is for the A.Y. 2004-05. The second citation Maxopp Investments Ltd Vs. CIT (2011) (ITA 687/2009) Delhi High Court is for the A.Y. 2002-03. Similarly the third citation DCIT Vs. Maharashtra Seamless Ltd (2011) 52 DTR 5 (Del) (Trib) is for the A.Y. 2003-04.

ITA.623/Bang/2014 Page - 5

5.3.3 We have considered the rival submissions. The Hon’ble Bombay High Court in Income Tax Appeal No. 626 of 2010 in the case of Godrej & Boyce Mfg.Co.Ltd. Mumbai. Vs. Dy. Commissioner of Income Tax, Range 10(2), Mumbai & Anr. 328 ITR 81 (Bom) held as follows: “Insertion of Subsections (2) and (3) to Section 14A : 25. Subsections (2) and (3) of Section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from 1 April 2007. Subsections (2) and (3) provide as follows: “14A(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 subsection (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 ITA.623/Bang/2014 Page - 6 for any assessment year beginning on or before the 1st day of April, 2001.” (The proviso was inserted earlier by the Finance Act of 2002 with retrospective effect from 11.5.2001) Under subsection (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of the expression ‘prescribed’ in Section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub section (3) of Section 14A provides for the application of sub section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an ITA.623/Bang/2014 Page - 7 Assessment Year beginning on or before 1 April 2001 either to reassess under Section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under Section 154.

any particular income or receipt, an amount computed in accordance with the following formula, namely : B x A C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year ; C = the average of total assets as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year ; (iii) an amount equal to one-half per cent. of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year."

5.3.5 In this appeal, the dispute in respect of the disallowance under section 14A r.w. Rule 8D is with regard to expenditure under Rule 8D(2)(ii) i.e. expenditure which is not directly attributable to any particular income or receipt and Rule 8D(2)(iii) i.e. other indirect expenditure than that referred to in Rule 8D(2)(i) and 8D(2)(ii). It is seen from the facts on record that the assessee has not deducted any expenses direct or indirect, while computing its income from dividend income which is exempt under section 10(34) of the Act. In this regard on a similar issue, a co-ordinate bench of this Tribunal in the case of Jindal Aluminium Ltd. in & 864/Bang/2012 dt.30.4.2012 cited by the assessee (supra), has held that it is necessary for the assessee to point out how each item of expense debited to its profit and loss account is wholly incurred for the purpose of earning income which is taxable and therefore remanded the matter for re-examination to the file of the Assessing Officer. In the case on hand too, similarly, we find that the position is that the assessee has merely taken the stand that it has not incurred any direct or indirect expenditure in earning its dividend income which is exempt under section 10(34) of the Act. We are therefore of the view that it would be in the interest of equity and justice if the assessee makes its claim in this regard before the Assessing Officer. The Assessing Officer will examine the claim of the assessee and thereafter decide the issue in accordance with law and as explained in the judicial decisions referred to (supra). It is ordered accordingly.”

ITA.623/Bang/2014 Page - 9

7. We also find that during the relevant previous year, value of the investments made by the assessee had changed. Hence in the interest of justice, we are of the opinion that the matter requires a fresh look by the AO. We set aside the orders of the authorities below and remit the issue regarding disallowance u/s.14A of the Act, back to the file of the AO with similar directions given by us for A. Ys. 2009-10, reproduced above.

Order pronounced in the open court on 30th day of June, 2015.