AMBATTUR CLOTHING LTD.,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER These appeals by the assessee are directed against different orders of the Commissioner of Income-tax (Appeals)-I, Chennai, for the above assessment years.

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first ground raised by the assessee in this appeal is that order passed

by the lower authorities is opposed to the principles of equity, natural

justice and fair play. This ground was not pressed by the ld.

Authorised Representative at the time of hearing. Accordingly, this

ground is dismissed as not pressed.

assessee is with regard to disallowance u/s.14A of the Act by invoking

Rule 8D of the Income Tax Rules, 1962.

�94,83,093/- by invoking provisions of Sec.14A r.w. Rule 8D(ii) of the

Act. The contention of the ld. Authorised Representative is that the

assessee not incurred any expenditure in earning exempt income

therefore no notional expenditure can be disallowed. The investment

made was from free funds and no borrowed funds were utilized for

making such investments. The borrowed funds are in the nature of

export packing credit, export bill discounting and terms loans which

were meant for specific purpose and were used for that purpose only.

The disallowance at the rate of 5% of average of investment is on

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higher side. The Assessing Officer has not brought out any specific

reason as per the mandate of Sec. 14A(2) before invoking Rule 8D. He

relied on the order of the Tribunal in the case of TVS Investments Ltd

vs. ACIT in ITA No.1609/Mds/2012, dated 29.01.2013 and in that case

the Tribunal held that 2% of the dividend income can be taken as

expenditure for earning such income and the same may be adopted in

this case also. The ld. Authorised Representative further relied on the

following orders of the Various High Courts and Tribunals:-

a. CIT vs Hero Cycles (323 ITR 518) P & H High Court. b. DCIT vs. Jindal Photo Ltd in ITA No.4539/Del/2010, dt. 22.12.2010. c. Auchtel Products vs. ACIT in ITA No.3183/Mum/2011, dt. 30.4.2012. d. Justice Sam P. Bharucha vs. ACIT in ITA No.3859/Mum/2011. e. CIT vs. Hotel Savera 23 ITR 795 Mad.

Without prejudice to the above, he submitted that, if at all, the

expenses can be reasonably estimated as being attributable to

management of investment portfolios, salary and associated

administrative expenses, the expenses may be restricted to 2% of the

dividend income earned by the assessee in the current year.

on the orders of the lower authorities.

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record. Though Rule 8D of Income Tax Rules 1962 is not applicable,

and provisions of Sec.14A of the Act is only applicable for the

assessment year 2008-2009 as the Rule was introduced w.e.f.

24.03.2008. The assessee might have incurred certain administrative

expenditure to earn this income. Being so, as held by the Jurisdictional

High Court in the case of M/s. Simpson and Company Ltd vs. DCIT in

T.C.(A) No.2621 of 2006 decided on 15.10.2012, we are inclined to

direct the Assessing Officer to disallow 2% of exempt income towards

expenditure incurred to earn exempt income. This ground of the

appeal of the assessee is partly allowed.

regard to exclusion of interest on the margin money deposited with the

bank while computing the deduction u/s.10B of the Act.

disallowance and submitted that the assessee has claimed deduction

u/s.10B on interest income from bank deposits, the income is netted

off against the business income. The assessee earned the interest

income on deposit given as collateral security for obtaining export

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credit which has direct nexus with the industrial undertaking and

should be treated as income derived from the assessee’s undertaking

as profits and gains of business. The ld. Authorised Representative

relied on the judgment of Supreme Court in the case of ACG

Associated Capsules P. Ltd 247 CTR 372, the assessee has claimed

that if the interest income is excluded from the computation u/s.10B

and treated as income from other sources, the corresponding

expenditure for earning such interest will have to be excluded as per

section 57(iii) of the Act.

on the orders of the lower authorities.

record. Similar issue was considered by Madras High Court in the case

of Dollar Apparels vs. ITO (294 ITR 484) wherein it was held that

interest on deposits with bank even assuming that the bank had

insisted for making short term deposits for opening letters of credit is

not income derived from export business hence not eligible for

deduction u/s.80HHC. Being so, applying this same ratio, we are

inclined to dismiss this ground of the assessee.

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interest under section 234B and 234C of the Act. Since, the interest

is consequential and mandatory in nature, the same to be considered

by Assessing Officer while passing consequential order. With these

observations, the appeal of the assessee is dismissed.

No.1436/Mds/2014 is partly allowed.

No.910/Mds/2015 for adjudication:- The first common ground raised

in these two appeals are with regard to violation of principles of

natural justice. This ground of the appeal of the assessee is dismissed

has not pressed.

regard to disallowance u/s.14A read with Rule 8D of the Act.

assessee accounted an amount of �29,55,654/- as dividend during the

year and claimed the same as exempt u/s.10(34) of the Act. As per the

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provisions of Sec.14A of the act, no deduction shall be allowed in

respect of expenditure incurred in relation to such income which does

not form part of the total income. The Assessing Officer has not

accepted the contention of the assessee counsel stating that assessee

has incurred an amount of �10,11,58,000/- as interest on its

borrowed capital during the year. Though the assessee claimed that

such borrowed funds were not utilized for making investment, it could

not clearly establish the same. Funds for a company came in a

common kitty and it comprises of borrowed funds, share capital and

retained earnings (Reserves and Surplus). Therefore, the contention of

the ld. Authorised Representative that no portion of interest paid to

investment is not valid. Further, it is logical to conclude that a portion

of the routine expenditure to maintain its establishment and

administration can be attributable towards the activity of making

investments to earn dividend. Further, it is the fact that the

managerial staff and Directors Associated Enterprise involved in

making decision on investments. Hence, a portion of this managerial

remuneration and Directors remuneration definitely be attributable

towards earning such exempt income and to further to determine the

expenses attributable to earning such exempt income, the Finance Act,

2006 had brought in the provisions of Sec.14A(2) which requires the

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Assessing Officer to determine the expenses already relating to an

exempt income in accordance with Rule 8D. The Assessing Officer

placed reliance on the decision of the Bombay High Court in the case

of Godrej & Boyce vs. DCIT, wherein it was held that disallowance

under Rule 8D r.w.s. 14A(2) is fair and reasonable. Accordingly, the

Assessing Officer made disallowance of �9,91,59,315/- u/s.14A of the

Act. Aggrieved, the assessee preferred an appeal before the

Commissioner of Income Tax (Appeals).

AO has made disallowance by invoking limbs (ii) & (iii) of Rule 8D(2).

The AO has given opportunity to the assessee to explain the

expenditure relatable to exempt income. On being not satisfied with

the explanation, the AO had made the disallowance by invoking

provisions of s.14A r.w. Rule 8D. The AO has noticed that the

assessee has received dividend income but not disallowed any

expenditure relatable to earning of such income even though it has

debited several expenses in earning income during the year. The AO is

of the opinion that some expenditure, direct or indirect, must have

been incurred and such expenditure should be disallowed as per

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Sec.14A. The Assessing Officer went by the principle ex nihilo nihil fit

(out of nothing nothing comes). Further, 14A(3) itself states that,

‘’The provisions of sub-section (2) shall also apply in relation to a case 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 this Act’’.

16.1 Which means to say that provisions of Sec.14A are applicable

even if the assessee claims that it has not incurred any expenditure in

earning exempt income. With regard to satisfaction/reasoning of the

AO in rejecting the claim of the assessee, the ITAT Mumbai in the case

of Auchtel Products v. ACIT in ITA No.3183/Mum/2011 dated

30.4.2012 held that satisfaction of AO is the sine qua non for

disallowance u/s 14A. However, this satisfaction should be with due

regard to the "accounts". The provisions of s.14A(2) states that

" .... if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with correctness of the claim of the assessee, .... ".

16.2 In the case of CIT v. Hero Cycles Ltd (323 ITR 518) (P&H)

(2010) this factual requirement has been laid out very clearly. It reads

as under (para 4):

"Disallowance under sec.14A requires finding of incurring of expenditure, where it is found that for earning exempted income no expenditure has been incurred, disallowance u/s 14A. cannot stand."

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The Commissioner of Income Tax (Appeals) submits that reading of

this dictum shows that the first part of the sentence bestows the

responsibility on the AO to give a finding that there is an expenditure

incurred relatable to exempt income. So far as the second part is

concerned, it is incumbent on the part of the assessee to give a

similar finding that there is no such expenditure which has been

incurred for earning exempt income. Of course, both findings should

be "having regard to the accounts". When the details of expenditure -

direct, indirect, interest expenditure, investment, use of own funds,

utility of secured loans, trade profits of the year, etc., - relatable to

exempt income and taxable income, are not forthcoming in the form

of separate accounts, then the AO is at liberty to invoke the provisions

of s.14A r.w. Rule 8D(2) and arrive at an amount for disallowance. In

the case of Godrej & Boyce Mfg. CO.Ltd v. DCIT (328 ITR 81) (2010)

(Bom.), it made it amply clear (para 67) that,

"Even in the absence of sub-section (2) and (3) of section 14A and of Rule 8D, the AO was not precluded from making apportionment. Such an apportionment would have to be made in order to give effect to the substantive provisions of sub-sec (1) of s. 14A which provides that no deduction would be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. Consequently, de hors the provisions of sub-sec (2) and (3) of Sec.14A and Rule 8D, the Assessing Officer was entitled to determine by the application of a reasonable method as to what quantum of the expenditure incurred by the assessee would have to be disallowed on

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the ground that it was incurred in relation to the earning of income which does not form part of the total income under the Act’’.

16.3 From the assessee's side it should come forward with

evidence/finding to show that there was no such expenditure incurred

for earning exempt income. The simple rhetoric that it has not incurred

any expenditure for earning exempt income, therefore invoking of

s.14A is not correct, is not acceptable. Therefore, when the AO was

not satisfied with the correctness of the claim of the assessee in the

absence of detailed accounts, we cannot find fault with the AO when

he makes disallowance by invoking provisions of s.14A. In my opinion

this is a sufficient reason for AO's dissatisfaction and invoking of the

provisions. Before me also, the assessee has not produced any cogent

evidence to show that it has not incurred any expenditure for earning

exempt income except giving verbal arguments. Therefore, I am

satisfied that AO has rightly invoked the provisions. With regard to

onus, the Special Bench of Mumbai Tribunal in the case of Daga

Capital Management P Ltd (117 ITD 169) (2008) has observed the

decision of Punjab & Haryana High Court in the case of Haryana Land

Reclamation and Development Corporation (302 ITR 218) wherein it

has held that,

"From the judgment of the Punjab and Haryana High Court in Haryana Land Reclamation & Development Corpn. v. CIT

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(2008) 302 ITR 218, two things are noticeable, viz., first, the onus to prove that the expenditure was incurred in the taxable business operations and not the exempt income is upon the Assessee and secondly……."

16.4 With regard to another line of argument that the income

disallowed is more than the dividend income earned, it is decided in

the case of Cheminvest Ltd (121 ITO 318) (2009) (Del) (SB) that

disallowance u/s 14A r.w.Rule 8D can be made irrespective of the fact

whether the assessee has earned exempt income or not during that

year. This view is further supported by the latest Board's Circular

NO.5/2014 dated 11.2.2014. Having own funds and no borrowed

funds were used for investment earning exempt income is also not

acceptable in view of the recent decision of the Madras High Court in

the case of Beach Minerals Company P Ltd In T.C. (Appeal) NO.681 of

2013 dated 2.12.2013 wherein it was held that

‘’The mere fact of the availability of 46 crores and odd by itself cannot be taken as furnishing of good explanation as regards the investment. Even with the Reserves & Surplus figure quoted in the balance sheet, we feel that the assessee has the responsibility of explaining the interest expenditure of ₹4.09 crores’’

The decision of Bombay High Court in the case of Reliance Utilities

and Power Ltd (213 ITR 340), which states that if interest-free own

funds are available, it can be presumed that investments were made

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from interest-free funds is also not acceptable for the simple reason

that this is only a presumption which has no relevance in the pariance

of law. They have not laid down any formula or rule and the case is

distinguishable from the facts of the present case. With regard to

secured loans, the appellant has to prove that the loans borrowed

were for a specific purpose and the same were utilized only for that

specific purpose and not invested in the avenues which have earned

exempt income. Even this argument also has to be taken with a pinch

of salt since there is a possibility of parking the idle funds for

temporary period in exempt income earning avenues and recouped

with the other surpluses of the year during the course of time. It is

astonishing to note that the appellant is keen to keep record of the

expenses relatable to taxable income whereas it is not so keen to keep

the track of the expenditure relatable to exempt income. When the

appellant shows expenditure relatable to earning of various heads of

income in its P&L alc but unable to separate the expenditure relatable

to exempt income and taxable income, a scientific formula in the form

of Rule 8D has been devised. The appellant should itself have invoked

the provisions of Rule 8D for the disallowance of expenditure relatable

to exempt income, since it is applicable for the AY. in question in view

of the decision in the case of Godrej & Boyce (supra). Accordingly, the

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Commissioner of Income Tax (Appeals) confirmed the order of the

Assessing Officer. Against this, the assessee is in appeal before us.

filed by the assessee and well as the decisions relied by the assessee.

The main contention of the assessee’s counsel is that the assessee has

not incurred any expenditure for earning exempted income and the

assessee has not used any interest bearing funds for investment. On

the contrary, the ld. DR submitted that the assessee has given

sufficient opportunity to explain that the expenditure was incurred for

earning exempted income and the assessee has not produced

necessary evidence to support its case. In our opinion, the decision of

the Mumbai Bench of the Tribunal in the case of M/s. Daga Global

Chemicals Pvt. Ltd. in ITA No.5592/Mum/2012 dated 1.1.2015 and the

decision of the Delhi High Court in the case of Joint Investments Pvt.

Ltd. vs. CIT in ITA No.117 of 2015 dated 25.2.2015 is having bearing

on this issue, wherein it was observed as under:

“6. Heard both the parties. On a perusal of the order of Mumbai Bench of the Tribunal in the case of M/s. Daga Global Chemicals Pvt. Ltd. (supra), we find that an identical issue has been decided by the Tribunal holding that disallowance under section 14A read with rule 8D cannot exceed the exempt income. While holding so, the Tribunal observed as under:-

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“2. At the time of hearing, Dr. K.Shivaram along with Shri Rahul Hakani, ld. counsels for the assessee advanced their arguments which are identical to the ground raised by submitting that no expenditure directly or indirectly was incurred by the assessee for earning exempt income and further the investment in shares was made in earlier years out of own funds and not out of borrowed funds, therefore, no disallowance u/s 14A r.w. Rule 8D is to be made. 2.1. On the other hand, Shri Akhilendra Yadav strongly defended the conclusion arrived at by the ld. Commissioner of Income tax (Appeals) by contending that a well reasoned order has been passed by the ld. First Appellate Authority as apportionment of expenditure for earning the dividend income was done as per the provisions of the Act. It was pleaded that section 14A r.w. Rule 8D of the Rules is clearly applicable to the facts of the present appeal.

2.2. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is a limited company, engaged in trading of bulk and fine, chemicals, solvent and pharmaceutical raw materials declared its income at Rs.74,40,000/- on 26/09/2009. The assessee credited dividend income of Rs.1,82,262/- in its profit and loss account. The Assessing Officer while framing the assessment invoke section 14A r.w. Rule 8D by contending that assessee claimed various expenses which are related to exempt income in its profit & loss account and disallowed Rs.14,58,412/-. On appeal, before the ld. Commissioner of Income tax (Appeals) broadly the stand taken in the assessment order was affirmed against which the assessee is in further appeal

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before this Tribunal. The totality of facts clearly indicates, as claimed by the assessee that no borrowed funds were utilized for earning the exempt income by the assessee and further the dividend were directly credited in the bank account of the assessee and no expenditure was claimed. What it may be, we find that the assessee only received Rs.1,82,362/- as dividend income, therefore, there is no question of disallowance of Rs.14,58.412/- by invoking section 14A r.w. Rule 8D under the facts available on record. It was also explained by the ld. counsel for the assessee that on identical fact in earlier years, no disallowance was made. In the present assessment year also, no borrowed funds were invested by the assessee for making investment in shares or for earning dividend income . At best, if any disallowance could be made that can be restricted to Rs. 1,485/- which were claimed as demat charges. Disallowance u/s 14A r.w. Rule 8D cannot exceed the exempt income. In view of this fact, we find merit in the claim of the assessee. The appeal of the assessee is therefore, allowed.”

Following the above decision of the Mumbai Bench of the Tribunal, we

are of the opinion that disallowance u/s.14A r.w. Rule 8D should not

exceed the exempt income. The Mumbai Bench in its order sustained

the disallowance on applicability of provisions of sec.14A r.w. Rule 8D.

However, the alternative claim of the assessee was that disallowance if

at all should be made, it should be restricted to exempt income earned

and not beyond that. Accordingly, the AO is directed to look at this

issue on this angle and decide it afresh in the light of the above

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decision of the Mumbai Bench of the Tribunal. Accordingly, this

ground of appeal is partly allowed.

regard to treating the loss on account of cancellation of forward

contracts in forex derivatives as business loss and not as speculation

loss.

of �69,26,01,324/- on account of cancellation of forward contracts in

forex derivatives treating it as a speculation loss. The assessee had

claimed the said loss as against the business income. The AO after

analyzing the assessee's transactions in the light of the

definition given in Sec.43(5), held that they are in the nature of

speculative transaction, since it satisfies the said provision. Reliance

was also placed on Comfund Financial Services (I) Ltd vs. DCIT (ITAT

Bangalore Bench) and ACIT Vs. K.Mohan & Co. (Exports) (P) Ltd

(2010) (39 DTR 97). In view of the detailed discussions, the AO has

concluded that the income/loss from options and forward contracts

entered by the assessee forms part of the Speculation Business as per

Explanation 2 to section 28 and disallowed the entire amount claimed

by the assessee However, the AO has allowed the same to be carried

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forward for set off against any future speculative income. Further, the

AO has observed that as per the information given by the assessee the

contracts were not settled by actual delivery but by cancellation or

premature closure by paying or receiving the difference in amount

between the rate at which the contract has been entered and the

prevailing exchange rate on the date of cancellation of the settlement.

observed that the AO has disallowed the loss on account of

cancellation or postponement of forward contracts holding that the

loss so arrived at is not derived from the business of the assessee and

also as per sec 43(5) the loss is to be treated as "losses from

speculation business". The assessee has contended that foreign

currency losses are on revenue account only and are incidental to the

core business of the assessee of manufacture and export of garments

and hence allowable as business expenditure. This issue has engaged

the attention of various Courts for quite sometime. The Supreme

Court in the case of Woodward Governor India 312 ITR 254

(SC) held that the loss in foreign exchange, if any, as at the end of the

year would be deductible u/s 37 by valuing the outstanding liability at

the rate marked to market as on date of closing of accounts, and the

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method of accounting that has been regularly followed would have to

be continued for the sake of consistency. In coming to these

conclusions, the Supreme Court followed the rationale of its earlier

decision in Sutlej Cotton Mills Ltd. vs. CIT 116 ITR 1 where it was held

that profit or loss in fluctuation of foreign currency would ordinarily

be a trading profit or loss, if held on the revenue account as a trading

asset or as part of circulating capital earmarked in business. The Id.

AR has clarified that the forward contract was on revenue account and

not for capital assets. The decision so rendered in Woodward

Governor India (supra) was applied and the law was reiterated in

ONGC vs CIT, 322 ITR 180 (SC) reversing the decision of the

Uttarakhand High Court in the same case reported in 301 ITR 415

(Uttarakhand), which had treated the exchange loss both relating to

current and capital account as a contingent liability. Supreme Court in

CIT v. Maruti Udyog, 320 ITR 729 (SC) decided that depreciation on

cost enhanced by capitalization of foreign exchange loss was

deductible following the decision in Woodward Governor India (supra).

The Commissioner of Income Tax (Appeals) also noticed the relevance

of the case law relied on by the assessee with regard to closure of

forward contracts. The loss, as a result of closure of forward contract,

has been recognized as business loss by various courts and it

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remained as settled by now. The Commissioner of Income Tax

(Appeals) also agree with the assessee that the forward contract

entered as a tool of hedging has also been recognized by various

decisions, more so, when they are fully covered by the export invoices

and as per the regulations of RBI and FEMA no business man can

ordinarily engage himself in speculation activity. However, the present

issue in question is whether the loss on account of premature closure

of the forward contracts can be allowed as business loss. This specific

question has been answered by the ITAT Mumbai in the case of

London Star Diamond Company (I) P Ltd v DCIT in ITA

No.6169/M/2012, relied on by the assessee, as an alternate plea. As

per this decision the Tribunal has observed the reasons for foreclosure

of the forward contracts as a guide to decide whether the loss

incurred due to such action should be allowed as business loss or not.

It was held that a loss arising from cancellation of matured contracts

is allowed in favour of the assessee. it is a settled issue that the

assessee has to discharge the onus on why he has to resort to

premature cancellation. While setting aside the order of the AO in the

above referred case, the IT AT has directed the AO to disallow the loss

in the absence of specific explanation as to why the forward contracts

were cancelled prematurely. In the above referred case, the ITAT has

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allowed one segment of forward contracts which were closed three

days before the due date and the explanation given by the assessee

as week-end days was accepted. In another segment of forward

contracts which were cancelled prematurely, the explanation given by

the assessee was very general and the delay was more than three

days (more than a month). The Commissioner of Income Tax

(Appeals) directed the Assessing Officer to verify whether any forward

contracts have been cancelled prematurely and verify the reason

submitted for such premature cancellation and allowed the appeal for

statistical purposes. Against this, the assessee is in appeal before us.

record. In this case, the Commissioner of Income Tax (Appeals)

given an direction to the Assessing Officer to verify any forward

contracts have been cancelled prematurely and verify the reasons for

premature cancellation in the light of the order of the Tribunal in the

case of London Star Diamond Company (I) P. Ltd vs. DCIT in ITA

No.6169/M/2012, dated 11.10.2013 wherein it was observed that

loss arising from cancellation of premature is allowed as business

loss. Being so, the assessee cannot have any grievance on this issue

as Commissioner of Income Tax (Appeals) has given direction to

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follow the Tribunal order. Further, we make it clear that loss arising

out of derivative transaction in excess of export turnover has to be

considered as speculative loss because excess derivative transaction

has no proximity with export turnover. With these observations, we

reject the ground of the assessee. The appeals of the assessee in

ITA No.1643/Mds/2014 and ITA No.910/Mds/2015 are partly allowed.

1643/Mds/2014 and ITA No.910/Mds/2015 are partly allowed.

Order pronounced on Monday, the 28th of December, 2015, at

Chennai.

Sd/- Sd/- (वी. दुगा� राव) (चं� पूजार� ) V. DURGA RAO (CHANDRA POOJARI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य/ ACCOUNTANT MEMBER

चे�नई/Chennai. �दनांक/Dated:28.12.2015. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2.��यथ�/ Respondent 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.