SHRIRAM CAPITAL LIMITED,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER

These two appeals by assessee are directed against different orders of Commissioner of Income Tax (Appeals)-15, Chennai for the assessment years 2010-2011 and 2011-2012. Since certain issues in these

2 ITA Nos.512 & 513/Mds/2015

two appeals are common in nature, these appeals are combined, heard

together, and disposed of by this common order for the sake of convenience.

the Commissioner of Income Tax (Appeals) which was made by the Assessing

Officer u/s.14A r.w. Rule 8D. The facts narrated in ITA No.512/Mds/2015 for

the assessment year 2010-11 are considered for adjudication as the facts are

similar in both years.

r.w. Rule 8D for the assessment year 2010-2011. The assessee earned

exempt income of �23,82,25,782. The assessee incurred total expenditure in

the year of �46,37,20,957/-. The exempt income formed part of 27.75% of

total receipts of the assessee. According to the Assessing Officer, the

expenditure relating to exempt income has to be considered for disallowance

in view of provision 14A r.w. Rule 8D of the Act. Accordingly, the Assessing

Officer computed disallowance u/s14A as per method prescribed in Rule 8D

which is as under:-

According to clause (i) No direct expenditure of Rule 8D According to clause (ii) 8,63,34,000 X 670,98,30,500 �6,18,09561/- of Rule 8D 937,21,17,974 According to clause (i) 0.5% of 670,98,30,500 �3,35,49,152/- of Rule 8D Total �9,53,58,713/-

Average assets = (827,38,22,646 + 1047,04,13,303)/2 = 937,21,17,974/-

3 ITA Nos.512 & 513/Mds/2015

Average investments = (789,89,19,000 + 552,07,42,000)/2 = 670,98,30,500/-.

3.1 According to AO the disallowance of the expenditure to be

made according to the provisions of the Rule 8D read with section

14A works out at Rs.9,53,58,713. This amount constitutes 20.56%

of the total expenditure claim of Rs. 46,37,20,957 (as per return of

income). On the other hand, the income claimed as exempt of �

23,82,25,782 constituted 27.75% (23,82,25,000x100

/85,81,74,000) of the total receipts of the assessee. Hence,

disallowance according to the provisions of section 14A, is at

20.56% of the total expenditure as against proportionate

expenditure of 27.75% in relation to total receipts to be considered

in the normal course.

3.2 According to Assessing Officer, there is an excess claim for

deduction of expenditure of Rs. 9,53,58,713 and the same needs

to be disallowed. It was noted by the AO that the determination of

the expenditure in relation to the exempted income is to be worked

out according to Rule 8D read with section 14A, in accordance with

decision of the Tribunal the case of Income Tax Officer vs Daga

Capital Management (P) Limited (117 ITD 169) (Mumbai), where

in it was held that the provisions of section 14A of the Act are

applicable with respect of the dividend income earned by the

4 ITA Nos.512 & 513/Mds/2015

assessee engaged in the business of dealing with shares and

securities, and the disallowance under sec. 14A is required to be

computed with reference to the mandate of section 14A read with

rule 8D. Further, he relied on the order of the Tribunal, Delhi, 'F'

Bench, in the case of Renaissance Asset Management Co. Pvt.Ltd

Vs. Assistant Commissioner of Income Tax, in ITA

No.181/Del/2012, was held that any expenditure relatable to

investment activity has to be construed as expenses incurred for

earning dividend income and the same cannot be allowed as per

section 14A, supports this view.

3.3 Therefore, the expenditure claim of the assessee to an extent

of �.9,53,58,713 was disallowed by Assessing Officer and added

back to the income returned holding the same as the expenditure

incurred in relation to the exempted income as per the provisions

of Rule 8D red with section 14A. Aggrieved, the assessee preferred

an appeal before the Commissioner of Income Tax (Appeals).

that the assessee was not able to controvert the findings of the

Assessing Officer with sufficient evidence giving the reasons for

not making disallowance. The ld. Authorised Representative for

assessee could not dispute the fact of incurring expenditure

5 ITA Nos.512 & 513/Mds/2015

towards establishment and administration, which was also

consciously involved in making investments. The assessee was

earning income from both exempted category of income and non

exempted category of income. The exempted category of income

consists of 27.75% of the total receipts of the assessee. The gross

receipts accounted by the assessee during the period under

consideration was �85,81,74,000/- which consists of dividend on

shares of �23,93,40,000/- other income �42,96,02,000/-, artistic

copy and fees received �1,89,232/- . Out of the gross income,

dividend received was �23,93,40,000/- On the other hand the

expenses claimed in the accounts was �46,37,22,000/- which

consists of interest and finance charges of �.8,63,34,000/-,

personal expenses �1,80,60,000/- other expenses �35,30,95,000/-

and depreciation was �62,33,000/-. No books of accounts were

separately maintained for earning dividend income and other

incomes which are chargeable to tax. Large part of the expenses

incurred were common. The entire top management of the

company was fully involved in making strategic decisions and

improving the profitability of the company. According to

Commissioner of Income Tax (Appeals), therefore, it cannot be

said that only few employees were involved in earning the

exempt income. Had it been so, the assessee could have

6 ITA Nos.512 & 513/Mds/2015

separately formed a new entity and earned exempt income to

claim benefit from the taxation. Therefore, he agreed with the

view of the AO that large portion of the expenditure incurred

could be attributable towards earning of dividend income. It is

also not disputed that the assessee incurred huge expenditure of

�8,63,34,000/- as finance charges on its borrowed capital which

was also claimed as deduction in the P&L Account. The P&L

Account consists of dividend income as well as other incomes

which are chargeable to tax. The quantum of the expenditure on

the basis of the proportionate exempted income at the rate of

27% also works out to more than �12.52 crores which is more

than the amount disallowed by the Assessing Officer. According

to CIT(A), the assessee could not furnish with an evidence like

cash flow to prove its claim that no part- of the interest borrowed

fund was utilized for investing in subsidiaries which are source of

earning exempt income. According to CIT(A), mere claim made in

the submissions without furnishing sufficient evidence would not

entitle the assessee for the claim of exemption for computation of

the expense for disallowance for the purpose of sec.14A of the IT

Act. Regarding the legal position for computation of disallowable

expenditure u/s 14A r.w.Rule 8D under sub clause (ii) with

respect to claim of interest expenditure, the CIT(A) relied on

7 ITA Nos.512 & 513/Mds/2015

judgment of jurisdictional High Court in Tax case(appeal) No.681

of 2013 dated 02.12.2013 in the case of Bench Minerals Co. Pvt.

Ltd. held at para 11 as under:-

"11 - We do not agree with the said submission. The mere fact of availability of ₹46 crores and odd by itself cannot be taken as furnishing of good explanation as regards the investments. Even with the reserve in surplus figure quoted in balance sheet, we feel that the assessee has the responsibility of explaining the interest expenditure of ₹4,09,99,104/-

4.1 The Commissioner of Income Tax (Appeals) observed that in the

instant case, the assessee could not furnish satisfactory explanation

with respect to claim of expenditure of �8,63,34,000/- in the P&L

Account particularly when the quantum of the exempted income i.e.

dividend income declared was �23,82,25,000/-. The ratio of the

exempt income i.e. dividend income. to the gross receipts of the

assessee was 27.75%. Non earning of exempt income for the

particular investment giving rise to exempt income in future years is

also not relevant for making computation of expense under the

provisions of sec. 14A of the IT Act. In the instant case, the Assessing

Officer was not satisfied with the claim of the assessee that no

expenditure was incurred for earning exempt income. Regarding legal

position, the CIT(A) relied on the order of the Tribunal, Chennai Bench

in the case of Siva Industries & Holding, Ltd. vs. ACIT reported in 54

SOT 49 Chennai(2012), held that even in a year, where no exempt

8 ITA Nos.512 & 513/Mds/2015

income was earned or received by the assessee, the disallowance u/s

14A can be made. The Tribunal while delivering the order has followed

the order, of the Delhi Special Bench reported in 121 ITD 318 in the

case of Chem Invest Ltd. vs. ITO wherein it was held that disallowance

u/s.14A can be made even in the year where no exempt income has

been earned or received by the assessee. The High Court of Bombay

in the case of M/s. Godrej & Boyce. Mfg. Co. Ltd. vs CIT reported in 328

ITR 81 held that the AO is duty bound to determine the expenditure

which had been incurred in relation to income which did not form part

of the total income. It is further held by the High Court of

Bombay that the AO had to enforce the provisions of sub section(1) of

Sec.14A even prior to A.Y. 2008-09. This same issue also came up

before the Tribunal, Chennai Bench in the case of M/s. Lakshmi Ring

Travellers Vs. ACIT, Company Circle I (1), Coimbatore [ITA

No.2083(Mds)/ dt. 02.11.2012] for the A.Y. 2008-09 and Hon'ble ITAT

at page 4 of the said order has held that - "Rule 8D has already been prescribed. Sub-section 3 further provides that even in a case where the assessee claims that no expenditure was incurred, the assessing authority has to presume the incurring of such expenditure as provided in sub-section 2 read with the rule prescribed. Therefore, it becomes clear that even in a case where the assessee claims that no such expenditure was so incurred, the statute has provided for presumptive expenditure which has to be disallowed by force of the statute. In a distant manner, literally speaking, it may even be considered for the purpose of convenience as a deeming provision. When such deeming provision is made on the basis of statutory presumption, the requirement of factual evidence is

9 ITA Nos.512 & 513/Mds/2015

replaced by statutory presumption and the Assessing Officer has to follow the consequence stated in the statute. It means that even in a case where no expenditure 'is stated to have been incurred, the Assessing Officer has to apply Rule 8D.’’

4.2 Regarding the recording of the satisfaction note for invoking Rule

8D, the Commissioner of Income Tax (Appeals) placed reliance on the

order of Tribunal, Calcutta Bench in the case of ACIT, Circle-10 Vs.

Champion Commercial Co. Ltd. reported in [2012] 26 Taxmann.com

342(Kol) held as under:

"Therefore, a plain reading of the statutory provisions of Section 14A(2) and (3) shows that when assessee offers a disallowance under section 14A, the provisions of Section 14A(2), read with rule BD cannot be invoked unless the Assessing Officer is satisfied about incorrectness of the disallowance so offered, but when assessee does not offer any disallowance under section 14 A on his own, the provisions of section 14A(2) read with rule 8D can be invoked without there being any need to express satisfaction about incorrectness of such a claim. The facts of the present case are stronger and loaded in favour of revenue. The Hon'ble ITAT,: Mumbai Bench (Special Bench) in the case of ITO v. Daga Management (P) Ltd. [117 ITD 169] held that what is relevant is to work out expenditure in relation to exempt income and not to examine the expenditure incurred by the assessee which has resulted in exempt income or taxable income.

4.3 Regarding the legislative intent with respect of disallowance of

expenditure u/s 14A, the Commissioner of Income Tax (Appeals) placed

reliance on the judgement of Supreme Court in C.I.T. vs. Walfort Share

and Stock Private Limited, reported in 41 DTR 233, wherein Supreme

Court explained the reason for the insertion of Section 14A as follows:

10 ITA Nos.512 & 513/Mds/2015

“The insertion of Section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No.14 of 2001 dated 22.11.2001). In other words, Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of Section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of Section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of Section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is .to tax the net income, i.e. gross income minus the expenditure. On the same analogy, the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of Section 14A '',.

Further, the Commissioner of Income Tax (Appeals) observed that it

was evident from the decision of the Supreme Court of India cited

(supra) that only net income is taxable and consequently, the

disallowance of expenses incurred u/s 14A with respect to Rule 8D is

required to be done with respect to dividend income received or

receivable in all the cases irrespective of the nature of business carried

on by the assessee.

4.4. The Commissioner of Income Tax (Appeals) observed that no

evidence was also furnished before him to prove its claim that assessee

was engaged in the business of investments and the entire investments

11 ITA Nos.512 & 513/Mds/2015

were held as stock in trade in the books of accounts. The income on

sale of equity, if any, in future years would be taxable under the head

capital gains and not under the head business income. No consolidated

accounts of the group companyies were maintained to prove that

business of the assessee is only business of promotion of investment.

Even otherwise, the claim of the assessee that provisions of sec.14A

would not be applicable in the case of the assessee carrying the

business of, investments is not legally tenable. The ratio of the decision

rendered by Tribunal (Special Bench) in the case of ITO v. Daga

Management (P) Ltd. [117 ITO 169] (Mumbai) further held that the

provisions of section 14A would be applicable with respect to dividend

income earned by the assessee engaged in business of dealing in

shares and securities, on shares held as stock-in-trade when earning of

the such dividend income was incidental to trading in shares. The ratio

of the decision rendered by Tribunal Mumbai Special Bench in the case

of ITO v. Daga Management (P) Ltd. [117 ITD 169] squarely applies to

the facts of the case. Therefore, contention of the assessee that

provisions of sec.14A are not attracted in the case of the assessees

carrying on the business of investment promotion was not accepted by

Commissioner of Income Tax (Appeals). It was the stand of the

assessee that the Tribunal in the assessee's own case has held that

provisions of the section 14A are not attracted. According to

12 ITA Nos.512 & 513/Mds/2015

Commissioner of Income Tax (Appeals) the stand taken by the

assessee on this issue is not factually correct. In fact, the Assessing

Officer during the assessment year 2005-06 has computed 2% as the

expenditure incurred for earning exempt income and disallowed the

same u/s.14A of the I.T. Act. On appeal, the Tribunal in Appeal in ITA

No.638/Mds/2012 dated 04.02.2013 in the assessee's own case has

confirmed the stand of the revenue and modified the quantum of the

disallowance to �10,00,000/-. The relevant paras are mentioned below:

"2.8 We considered this issue. We, are not on the question whether the income was earned without incurring any, mechanical expenditure like clearance charges, collection charges etc. or not. We are concerned about the expenditure by way of remuneration paid to top management and executives. The top management and executives of the assessee company would be required to decide about the investments, whether to continue or liquidate etc. Investment is a very important part of the assets of the assessee company. Therefore, even though there is no direct mechanical expenditure in realizing the dividend income, definitely some management expenditure has to be attributed towards earning of tax-free dividend income. . 2.9 But in the present case, the investments were so 'old and those investments have been held by the assessee company in a consistent manner and as such, the scope of indirect expenditure also would be little lessor. Taking into consideration all the aspects of the case, we modify the disallowance to lumpsum amount of ₹10 lakhs. This ground is partly allowed.’’

4.5 The similar disallowance made by the Assessing Officer for A.Y.

2008-09 was also confirmed in Tribunal No.640/Mds/2012 is as under:- ‘’6.2The next issue raised by the assessee is regarding disallowance of Rs.50,000/- which relates to general and administrative expenses, pertaining to dividend income and investments in the past year. For the reasons stated in our order for A. Y. 2005-06 in ITA No. 638/Mds/2012, we uphold the disallowance and it is confirmed

13 ITA Nos.512 & 513/Mds/2015

4.6 According to Commissioner of Income Tax (Appeals) from the above

legal proposition laid by the Tribunal in the assessee’s own case in the earlier

years, it is clear that Tribunal had in principle upheld the disallowance of

expenditure u/s.14A of the I.T. Act. Regarding the applicability of the

provision of sec.14A with respect to claim of management expenses for

the assessment year 2001-02, the jurisdictional High Court in Tax

case(appeal) No.2621 of 2006 dated 15.10.2012 in the case of M/s

Simpson and Co. Ltd. upheld that disallowance of expenditure on

estimation basis at 2% of the gross total income. Prior to A.Y. 2008-09,

the disallowance u/s.14A was not required to be computed under Rule

8D of the I.T. Rules but reasonable estimation of expense for the

purpose of disallowance was required to be done. However, from the

A.Y. 2008-09 and onwards, the computation of disallowance under Rule

8D is mandatory as the said Rule 8D was notified in the month of March

2008. This view was taken by Bombay High Court in the case of of M/s

Godrej & Boyce. Mfg. Co. Ltd. vs CIT reported in 328 ITR 81. The

purpose of investment is not relevant for determination of the quantum

of disallowance u/s.14A of the I.T. Act. According to the CIT(A), the

provisions of Section 14A are applicable to all the classes of the

assessees who hold investments, giving rise to exempt income. The

provisions of Section 14A are very clear and unambiguous to that effect.

14 ITA Nos.512 & 513/Mds/2015

Therefore, the stand of the AR of the assessee that provisions of section

14A are not applicable to-the assessee for the year under consideration

is rejected by CIT(A).

4.7 Regarding exclusion of interest paid on TDS, FBT,ST and IT of

�1,40,95,404/- for the purpose of disallowance under Rule 8D (ii) of the

I.T. Rules, the assessee stated before CIT(A) that if this is taken into

account the amount of disallowance works out to �.517,80,237/- as

against the amount computed by the AO at �.618,09,561/-. The claim of

the assessee is not accepted by Commissioner of Income Tax (Appeals)

as the Rule 8D(ii) does not prescribe for exclusion of such expenditure.

The Rule 8D(ii) prescribes the quantum of the interest expenditure to be

disallowed i.e. amount of expenditure by way of interest other than the

amount of interest included in Clause (i) of Rule 8D(ii) during the

previous year in proportion of the average value of investment to the

average value of total assets but does not exclude interest expenditure

of the type referred in. Therefore, the plea of the assessee to exclude

an interest of �1,40,90,404 for the purpose of computation of

disallowance under Rule 8D(ii) is rejected by CIT(A). The claim of the

assessee that the investments made with Shriram Holdings (Madras) (P)

Ltd alone is required to be considered for the purpose of computation of

quantum of disallowance under Rule 8D, is also rejected by CIT(A) on

15 ITA Nos.512 & 513/Mds/2015

the reason that the provisions of section 14A are applicable even in case

no dividend income was earned in respect of the particular investment

which give rise to dividend income.

4.8 According to Commissioner of Income Tax (Appeals) the quantum

of the disallowance u/s. 14A worked out by the Assessing Officer is

correct. Therefore, placing reliance on the order of Special Bench of

Tribunal, Delhi, in the case of M/s. Chem Invest Ltd.(supra) and Chennai

Bench in the case of M/s. Siva Industries & Holding Ltd (supra), M/s.

Lakshmi Ring Travellers, Coimbatore cited (supra), Calcutta Bench in the

case of Champion Commercial Co. Ltd, High Court of Bombay in the

case of M/s. Godrej & Boyce. Mfg. Co. Ltd. vs CIT reported in 328 ITR

81, Tribunal Mumbai (Special Bench) in the case of in the case of ITO v.

Daga Management (P) Ltd. [117 ITD 169], Supreme Court in the case

of C.I.T. vs. Walfort Share and Stock Private Limited, reported in 41

DTR 233, Madras High Court in the cases of M/s. Simpson & Co. Ltd.,

(supra) M/s. Beach Minerals Company Ltd. cited (supra), he confirmed

the order of the Assessing Officer in making the disallowance of

�9,53,58,713/- u/s. 14A of the IT Act. Against this, the assessee is in

appeal before us.

assessee submitted that a similar issue was considered by this Tribunal in the

16 ITA Nos.512 & 513/Mds/2015

case of Shriram Capital Limited in ITA Nos. 638 to 640/Mds/2012 for the assessment years 2005-06 to 2008-09 vide order dated 4th February, 2013

held as under:-

…‘’2.4. We find that this issue of disallowance of interest to the extent of ₹1,72,02,624/- is covered by the above said order of the Tribunal passed in assessee’s own case. It is to be seen that the business of the assessee is investment in shares. It is in the course of carrying on of the said business that the assessee has invested in shares of Shriram Investments Limited and Shriram Transport Finance Company Limited. Whether the dividends arising out of those shares will be exempted from taxation or not, is entirely a different question. The first thing to be examined is the purpose of investments made by the assessee in shares on the testing ground of “commercial expediency”. In the present case, the assessee engaged in the business of investing in shares, has made investments in shares of group companies viz., Shriram Investments Limited and Shriram Transport Finance Company Limited. In that way, the assessee company is strengthening the capital and liquidity base of those two companies viz., Shriram Investments Limited and Shriram Transport Finance Company Limited. The strengthening of the capital base and liquidity of those associate concerns will definitely enhance the turnover and the profit of the group concerns. It is a fact that in group concerns some companies are carrying on operational activities and other companies are acting as catalysts to boost the performance of those operating companies. 2.5. Viewed in the above perspective, we cannot say that the assessee company has made investments in shares of Shriram Investments Limited and Shriram Transport Finance Company Limited just for the simple purpose of earning tax-free dividend income. As rightly pointed by the assessee, when those investments in shares are liquidated by the assessee company, it is accountable for capital gains taxation. Therefore, there is no case of unconditional exemption from taxation as far as the investments made by the assessee are concerned. 2.6. In the facts and circumstances of the case, the investments being made as a business proposition and in the light of the decision of the Tribunal rendered in assessee’s own case for the earlier assessment year 2002-03, we hold that the lower authorities have erred in disallowing ₹1,72,02,624/- against the claim of expenditure made by the assessee under the head interest. This disallowance is accordingly deleted.

17 ITA Nos.512 & 513/Mds/2015

2.7. The second issue raised in the appeal is regarding disallowance of ₹22,98,746/- being 2% of the dividend income earned by the assessee. The assessing authority has disallowed an amount of ₹22,98,746/- as expenditure attributable to dividend income earned by the assessee. It is the case of the assessee that the disallowance made by the assessing authority works out to ₹2 lakhs per dividend warrant received by the assessee company. It is also the case of the assessee that the disallowance works out to 2% of the total dividend of ₹11,49,37,339/- earned by the assessee. It is the case of the assessee that it has not incurred any expenditure on this income, as it was received by cheques and no other work was necessary for obtaining the said income.

2.8. We considered this issue. We are not on the question whether the income was earned without incurring any mechanical expenditure like clearance charges, collection charges etc. or not. We are concerned about the expenditure by way of remuneration paid to top management and executives. The top management and executives of the assessee company would be required to decide about the investments, whether to continue or liquidate etc. Investment is a very important part of the assets of the assessee company. Therefore, even though there is no direct mechanical expenditure in realizing the dividend income, definitely some management expenditure has to be attributed towards earning of tax-free dividend income.

2.9. But in the present case, the investments were so old and those investments have been held by the assessee company in a consistent manner and as such, the scope of indirect expenditure also would be little lessor. Taking into consideration all the aspects of the case, we modify the disallowance to a lumpsum amount of ₹10 lakhs. This ground is partly allowed.’’

made by assessee is strategic investment and there is no question of

disallowance u/s. 14A of the Act. In the present case, the assessee made

investment in Shriram Retail Holdings Pvt. Ltd alongwith another group

company Shriram Enterprise Holdings Pvt. Ltd having controlling interest in

18 ITA Nos.512 & 513/Mds/2015

Shriram City Union Finance Ltd., a public limited company, whose equity

shares are listed in stock exchanges. Similarly Shriram Credit Company Ltd.,

has controlling interest in M/s. Shriram Insight Share Brokers Ltd. The

investments are made to acquire controlling interest. The facts of the

investment made by the assessee in acquiring controlling interest was not

disputed by the Revenue. In such circumstances, we are not in a position to

appreciate the arguments of the ld. Departmental Representative that

assessee received dividend exempted from tax for which assessee incurred

expenditure also so that section 14A r.w. Rule 8D is applicable. In our

opinion, the issue considered by the Tribunal in the case of Shriram Capital

Ltd (cited supra) is squarely applicable to the facts of case wherein the

Tribunal observed that when the assessee made an investment in companies

on the ground of ‘’commercial expediency’’ which are assessee’s sister/group

companies with the a view to strengthen the capital base and that investment

in that company cannot be construed as made for the purpose of earning

dividend u/s.14A r.w. Rule 8D. Further, in the case of M/s. J.M. Financial

Limited for the assessment year 2009-2010 in ITA No.4521/Mum/2012 vide

order dated 26.03.2014, the Tribunal considered similar issue and held as

under:-

19 ITA Nos.512 & 513/Mds/2015

“We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. In the instant case, the only dispute is regarding determination of disallowance of expenditure for earning tax free dividend income of Rs. 18,17,68,458/- the assessee disallowed on its own Rs. 16.50 lakhs u/s 14A. Despite being asked by the AO to furnish the disallowance under rule 8D, the assessee did not furnish the details. The provisions of rule 8D inserted by the IT (Fifth Amendment) Rules 2008 with effect from 24.3.2008 are applicable for A.Y. 2008-09 and onwards. Therefore, the revenue authorities are bound to follow the mandatory provisions for calculation of disallowance u/s 14A. Therefore, we do not find any infirmity in the order of the CIT(A) upholding the action of the AO for disallowing the deduction u/s 14A read with rule 8D. The contention of the assessee that the AO without satisfaction being reached invoked the provisions of Rule 8D, in our opinion, does not hold good especially in absence of non-furnishing of details for the purposes of calculation of disallowance at Rs. 16.50 lakhs by the assessee on its own. In this view of the matter and in absence of any distinguishable feature brought to our notice by the learned Counsel for the assessee against the order of the CIT(A), we do not find any infirmity in the same. Accordingly the same is upheld and the ground raised by the assessee is dismissed.”

20 ITA Nos.512 & 513/Mds/2015

out of the total investment about 98% of the investment are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. Therefore, prima facie the assessee has made out a case to show that no expenditure has been incurred for maintaining these long term investment in subsidiary companies. The AO has not brought out any contrary fact or material to show that the assessee has incurred any expenditure for maintaining these investments or portfolio of these investments. In the case of Godrej & Boyce Mfg. Co. Ltd. (supra) Hon’ble Jurisdictional High Court while dealing with the issue of disallowance u/s 14A and application of Rule 8D has recorded the principles as laid down by the Hon’ble Supreme Court in the case of Walfort Share and Stock Brokers P. Ltd. [2010] (326 ITR 1,) in para 31 as under:- (a) “The mandate of section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income. (b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) The principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and non taxable income of an indivisible business;

(d) The basic principle of taxation is to tax net income. This principle applies even for the purpose of section 14A and expenses towards non-taxable income must be excluded; (e) Once a proximate cause for disallowance is established – which is the relationship of the expenditure with income which does not form part of the total income – a disallowance has to be effected. All expenditure under the provisions of the Act has to be disallowed under section 14A Income which does not form part of the total income is broadly adverted to as exempt income as an abbreviated appellation.”

21 ITA Nos.512 & 513/Mds/2015

“32. Sub-section (2) and (3) to section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Sub-Sections(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 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."

(The proviso was inserted earlier by the Finance Act of 2002 with retrospective effect from May 11, 2001)

22 ITA Nos.512 & 513/Mds/2015

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 assessment year beginning on or before April 1,2001, either to reassess under section 147 or pass an order enhancing the assessment or reducing the refund

23 ITA Nos.512 & 513/Mds/2015

already made or otherwise increasing the liability of the assessee under section 154.”

“We have considered the rival submission and carefully perused the relevant records. So far as the issue regarding disallowance u/s 14A in the case where no dividend has been received, the same is covered against the assessee by the order of Tribunal in assessee’s own case for the assessment year 2008-09, wherein the Tribunal has followed the decision of special bench of Tribunal while deciding the issue. Therefore, we do agree with the finding of the Tribunal on this point. Further since the assessee has raised the new plea in the year under consideration that no expenditure had been incurred by the assessee for earning the exempt income or for the investment in question. We find merit and substance in the contention of the assessee on this point because the investment has been made by the assessee in the group concern and not in the shares of any un- related party. Therefore, the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. Further the investment were made long back and not in the year under consideration. Therefore, in view of the fact that the investment are in the group concern we do not find any reason to believe that the assessee would have incurred any administrative expenses in holding these investments. The AO has not brought on record any material to show that the assessee has incurred any expenditure in relation to the income which does not form part of the total income. Section 14A has within it implicit the notion of apportionment in the cases where the expenditure is incurred for composite/indivisible activities in which taxable and non taxable income is received

24 ITA Nos.512 & 513/Mds/2015

but when no expenditure has been incurred in relation to the exempt income then principle of apportionment embedded in section 14A has no application. The object of section 14A is not allowing to reduce tax payable on the non exempt income by deducting the expenditure incurred to earn the exempt income. In the case in hand it is not the case of the revenue that the assessee has incurred any direct expenditure or any interest expenditure for earning the exempt income or keeping the investment in question. If there is expenditure directly or indirectly incurred in relation to exempt income the same cannot be claimed against the income which is taxable. For attracting the provisions of section 14A- “there should be proximate cause for disallowance which has relationship with the tax exempt income as held by the Hon’ble Supreme Court in case of CIT Vs. Walfort Share and Stock Brokers P. Ltd. ( 326 ITR 1). Therefore, there should be a proximate relationship between the expenditure and the income which does not form part of the total income. In the case in hand the assessee has claimed that no expenditure has been incurred for earning the exempt income, therefore, it was incumbent on the AO to find out as to whether the assessee has incurred any expenditure in relation to income which does not form part of the total income and if so to quantify the expenditure of disallowance. The AO has not brought on record any fact or material to show that any expenditure has been incurred on the activity which has resulted into both taxable and non taxable income. Therefore, in our view when the assessee has prima facie brought out a case that no expenditure has been incurred for earning the income which does not form part of the total income then in the absence of any finding that expenditure has been incurred for earning the exempt income the provisions of section 14A cannot be applied. Accordingly we delete the addition/disallowance made by AO u/s 14A r.w. Rule 8D.”

25 ITA Nos.512 & 513/Mds/2015

“'6.3 We have carefully considered the submissions and perused the records. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that only interest of Rs 2,96,731/- was paid on funds utilized for making investments on which exempted income was receivable. Further, Ld. Commissioner of Income Tax (Appeals) has observed that in respect of investment of Rs 6,07,775,000/- made in subsidiary companies as per documents produced before him, they are attributable to commercial expediency, because as per submission made by the assessee, it had to form Special Purpose Vehicles (SPY) in order to obtain contracts from the NHAI and the SPVs so formed engaged the assessee company as contract to execute the works awarded to them (i.e. SPVs) by the NHAI. In its profit and loss account for the year, the assessee has shown the turnover from execution of these contracts and therefore no expense and interest attributable to the investments made by the appellant in the PSVs can be disallowed u/s 14A LW. Rule 8D because it cannot be termed as expense/ interest incurred for earning exempted income. Under the circumstances, Ld. Commissioner of Income Tax (Appeals) is correct in holding that disallowance of a further sum Rs 40,556/- calculated@2%ofthedividend earned is sufficient. Under the circumstances, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals), hence we uphold the same.” 13. In view of the above discussion and facts and circumstances of the case we agree with the view taken by this Tribunal in the above stated cases and accordingly hold that the assessee has brought out a case to show that no expenditure has been incurred for maintaining the 98% of the investment made in the subsidiary companies, therefore, in the absence of any finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the AO is not justified, accordingly the same is deleted.

2008-09 & 2009-10 in ITA No.1362 & 1032/Del/2013, the Tribunal vide

order dated 04.04.2014 held as under:-

26 ITA Nos.512 & 513/Mds/2015

27 ITA Nos.512 & 513/Mds/2015

relation to" appearing in section 14A of the said act. The context does not suggest that a narrow meaning ought to be given to the said expression. It is pertinent to note that the provision was inserted by virtue of the Finance Act, 2001 with retrospective effect from 01/04/1962. In other words, it was the intention of Parliament that it should appear in the statute book, from its inception, that expenditure incurred in connection with income which does not form part of total income ought not to be allowed as a deduction. The factum of making the said provision retrospective makes it clear that Parliament wanted that it should be understood by all that from the very beginning, such expenditure was not allowable as a deduction. Of course, by introducing the proviso it made it clear that there was no intention to reopen finalized assessments prior to the assessment year beginning on 01/04/2001. Furthermore, as observed by the Supreme Court in Walfort (supra), the basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure and on the same analogy the exemption is also in respect of net income. In other words, where the gross income would not form part of total income, it's associated or related expenditure would also not be permitted to be debited against other taxable income.

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That is certainly not the purport of the said provision. The expression “in relation to” does not have any embedded object. It simply means “in connection with” or “pertaining to”. If the expenditure in question has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the said Act. In Walfort (supra), the Supreme Court made it very clear that the permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the heads of income and is chargeable to tax. The Supreme Court further clarified that if an income like dividend income is not part of the total income, the expenditure/deduction related to such income, though of the nature specified in sections 15 to 59, cannot be allowed against other income which is includable in the total income for the purpose of chargeability to tax. Similarly the Hon'ble Bombay high Court in the case of Godrej & Boyce Manufacturing Co. Ltd. observed as under:- “In order to determine the quantum of the disallowance there must be a proximate relationship between the expenditure and the income which does not form part of total income. Once such a proximate relationship exists the disallowance has to be affected., All expenditure incurred in the earning of income which does not form part of total income has to be disallowance subject to compliance with the test adopted by Supreme Court in Walfort and it would not be permissible to restrict the provision of section 14A by an artificial method of interpretation.”

However, we find that the calculation of disallowance under Rule 8D(iii) made by the Assessing Officer and upheld by Ld CIT(A) is not correct In view of the fact that Assessing Officer had included the value of total investments for calculation of disallowance whereas in our opinion the value of those investments should have been included which were made for the purpose of earning exempt income. The assessee had made significant investments in the shares of subsidiary companies which are definitely not for the purpose of earning exempt income. The Hon'ble Tribunal in I.T.A. No.3349/Del/2011 in the case of Promain Ltd., after relying upon a Kolkatta judgment of Tribunal in I.T.A. No.1331 has held that strategic investment has to be excluded for the purpose of arriving at disallowance under Rule 8D(iii). The Tribunal had relied upon the findings of Kolkatta Tribunal in the case of Rei Agro Ltd. v.

29 ITA Nos.512 & 513/Mds/2015

DCIT in I.T.A. No./ 1331/Del/2011 dated 29.7.2011. The relevant portion of Tribunal findings as contained in the Kolkatta Tribunal are reproduced below:- “(iii) Further in Rule 8D(2)(ii), the words used in numerator B are “the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance sheet as on the first day and in the last day of the previous year”. The Assessing Officer was wrong in taking into consideration the investment of `₹103 crores made during the year which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. Thus,. It is not the total investment at all beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. The term “average of the value of investment” is used to take care of cases where there is the issue of dividend striping. iv) Under Rule 8D(2)(iii), what is disallowable is an amount equal to ½ percentage of the average value of investment the income from which does not or shall not form part of the total income/. Thus, under sub clause (iii), what is disallowed is ½ percentage of the numerator B in Rule 8D(2)Iii). This has to be calculated on the same lines as mentioned earlier in respect of Numerator B in the Rule 8D(2)(ii). Thus, not all investments become the subject matter of consideration when computing disallowance u/s 14A read with Rule 8D. The disallowance u/s 14A read with Rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. (A.Y.) (I.T.A. No.1331/Kol/2011 dated 29.7.2011.” Following the above judicial precedents, we held that value of strategic investments should be excluded for the purpose of

30 ITA Nos.512 & 513/Mds/2015

disallowance under Rule 8D)iii) facts, we direct the Assessing Officer to calculate the disallowance under Rule8D(iii) by excluding the value of strategic investments in the calculation of disallowance. As regards disallowance under Rule 8D(i) and 8D(ii) we have already held that no disallowance is warranted.

assessment year 2009-2010 in ITA No. 4448/Del/2013 and

C.O.No.11/Del/2014, the Tribunal vide order dated 19.01.2015 observed as

under:-

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Communication expenses 88223 Services Tax 2387 Auditors remuneration 25000 Legal & professional charges 184400 Consultancy charges 3912217 Maintenance expenses 4368 Entertainment/business promotion 226304 Newspapers, Books & Periodicals 54988 Rent 24000 Traveling/Conveyance expenses 553923 ROC filing fee 7500

Total expenses 5086380 3.1. As per the appellant's AR, the above. expenses are directly attributable to the appellant's income earned from training as expenses like consultancy charges, entertain/business promotion, traveling/conveyance etc. have nothing to do with the investments made by the company. As per the balance sheet, there are no fresh investments during the relevant assessment year and as per the appellant's AR, the source of these investments is out of interest free unsecured loans. Further, no interest expenses are debited in the P&L A/c. The only expenses which can be attributed to exempt income likely to be earned in future are the auditor's remuneration and legal & professional charges. Considering this aspect and the peculiar facts of the case, I am of the view that a disallowance of Rs.50,OOO/- would serve the interest of justice and therefore the appellant gets Rs. 17,27,733/- from the disallowance made by the AO under Rule 8O(2)(iii). Thus, grounds Nos. 1 & 2 are partly allowed as the disallowance of Rs. 50,000/- is sustained.”

9.1 In view of the above, we find that Ld. CIT(A) was right to some extent in deleting the disallowance of RS. 17,27,733/-, but on the other hand we find no basis on which he has sustain the adhoc disallowance of Rs. 50,000/-. In this regard, we find considerable cogency and force in the submissions of the assessee’s counsel as discussed above that there was no basis for the Ld. CIT(A) to sustain ad-hoc disallowance of Rs.50,OOO/- by holding that "the only expenses which can be attributed to exempt income likely to beearned in future are the auditor's remuneration and legal & professional charges". The auditor's remuneration and legal & professional charges incurred for maintenance of statutory books and its audit etc. were required to be incurred irrespective of whether the Company had any income or not and hence, there was

32 ITA Nos.512 & 513/Mds/2015

absolutely no basis for considering a part of such expenditure towards earning of exempt income. In this connection, reliance is placed on Gujarat High Court judgment in the case of CIT vs. Suzion Energy Ltd. 354 ITR 630, in which the Court confirmed the deleting of disallowance u/s 14A in respect of interest expenses incurred for investments in subsidiaries and administrative expense such as staff salary of corporate office, audit fees, building rent and communication expenses. In view of the above, the cross objection filed by the assessee deserve to be allowed.

9.2 We also find that the case law cited by the Ld. Counsel of the assessee i.e. Hon’ble Jurisdictional Delhi High Court judgment dated 5.9.2014 in the case of Commissioner of Income Tax-IV vs. Holcim India P. Ltd. in ITA No. 486/2014 & ITA No. 299/2014 has dealt the similar issue and decide the issue against the Revenue by adjudicating as under “3. The respondent-assessee, a subsidiary of Holderind Investments Ltd., Mauritius, was formed as a holding company for making downstream investments in cement manufacturing ventures in India. In he return of income filed for the Assessment Year 2007-08, therespondentassessee declared loss of Rs. 8.56 Crores approximately. The respondent-assessee had declared revenue receipts of Rs. 18,02,274/- which included interest of Rs. 726/- from Fixed Deposit Receipts and profit on sale of fixed assets of Rs. 16,52,225/-. As against this, the respondent assessee had claimed administrative and miscellaneous expenses expenditure written off amounting to Rs. 8.75 Crores. For the Assessment Year 2008-09, the assessee had filed return declaring loss of Rs. 6.60 Crores approximately. The assessee had declared revenue receipts in the form of foreign currency fluctuation difference gain of Rs. 12,46,595/-. It had claimed expenses amounting to Rs. 7.02 Crores as personal expenses, operating and other expenses, depreciation and financial expenses. 4. In the two assessment orders, the Assessing Officer held that the respondent-assessee had not commenced business activities as they had not undertaken any manufacturing activity or made downstream investments. The respondent-assessee, after receiving approval of Foreign Investment Promotion Board (FIPB) dated 20.12.2000 acquired shares capital of Ambuja Cement India Ltd. This, the Assessing Officer felt, was not sufficient to indicate or hold that the respondent

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assessee had started their business. He accordingly disallowed the entire expenditure of Rs. 8.75 Crores for the Assessment Year 2007-08 and Rs.7.02 Crores for the Assessment Year 2008- 09.

“5.6 In view of the above discussions, I hold that the appellant is engaged in the business of holding of investment is entitled to claim expenditure provided there is a direct connection between expenditure incurred and business of the assessee company. In the instant case. the expenditure incurred is on salaries of employees of the assessee company and other operating expenses of the company. The appellant has also admitted that the said expenditure have been incurred in order to protect their

34 ITA Nos.512 & 513/Mds/2015

investment as well as exploration of new investments”. 6. For the Assessment Year 2008-09, the same reasoning was adopted and followed. 7. However, the CIT(A) issued notice and called upon assessee, why Section 14A should not be invoked? The Section postulates that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of the expenditure incurred in relation to income which does not form part of the total income. Since the business of the respondent-assessee was to act as a holding company for downstream investments and as it was an accepted fact that they had incurred expenses to protect their investments and explore new avenues of investments, the provisions of Section 14A were applicable. The exact reasoning given by the CIT(A) in this regard in respect of the Assessment Year 2007-08 is as under:- “5.8....Thus, as admitted by the appellant; since business of the appellant exclusively is to act as a holding company for downstream investment in order (sic) companies and the admitted fact that they incurred the expenses to protect their investments and to explore new avenues of investments clearly show, that in the facts of the appellant's case the provision of Section 14A of the Act are clearly applicable”. [underlining is as per the original order of CIT(A)] 8. The aforesaid reasoning given by CIT(A) was ambiguous and unclear, hence, clarity was sought from the counsel for the appellant Revenue on their stand and stance. Learned senior standing counsel for the appellant Revenue was asked to elucidate and has stated that “the stand of the assessee contained a contradiction to the extent that on the issue of setting up of business, it was stated that the assessee had incurred expenditure on acquiring the shares, therefore, the assessee could not now take a different stand than the one taken in the first issue”. (The aforesaid submission has been recorded verbatim). 9. The said statement has left us equally confused and perplexed. Is it the Revenue‟s contention that expenditure made by investment companies should be disallowed under Section 14A of the Act as income or investment is not taxable? This is not clearly stated. We proceeded to read and examine the subsequent observations and findings of the CIT(A).

35 ITA Nos.512 & 513/Mds/2015

36 ITA Nos.512 & 513/Mds/2015

explore new avenues of investments and, when it comes to applicability to Section 14A, it is argued to the contrary. This contradiction belies the claim made by the appellant. There is no adhoc disallowance. As regards, findings or nexus, specific opportunity has been granted to the appellant based on the facts and submissions made by the appellant, I am satisfied that the expenditure has been incurred by the appellant company in relation to investments which gives rise to income which does not form part of total income.

5.14 Thus from the above discussions, I am of the considered view that once the business of the appellant is of holding investment then it has to be held that in view of specific provisions contained in Section 14A and despite the fact that there is no exempt income that expenditure incurred was for holding and maintaining Investment.

5.15 Therefore, by applying the above judicial decision to the facts of the instant case, I find admittedly and indisputable, entire expenditure incurred to the tune of Rs. 8,75,35,452/- has been incurred for investment and hence in the light of the above factual position, the entire expenditure is not allowable in view of Section 14A of the Act. Thus, disallowance made by the Assessing Officer is confirmed though on a different ground and as such, the appeal preferred by the appellant is dismissed”.

"4....While deciding the appeal for A.Y. 2007-08, vide my order dated 01.08.2012, I have given the finding that AO was not correct in disallowing the expenses on the ground of noncommencement business. In the said order however I have upheld the disallowance u/s 14A by giving a detailed finding therein.

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Since in the year underconsideration the same facts exists as were existing in assessment year 2007- 08 and the appellant has also made the same submissions as were given during the appellate proceedings for assessment year 2007- 08, therefore relying on my order dated 01.08.2012 vide which I have adjudicated the appellant's appeal for assessment year 2007-08, I hold that in the year under consideration also that no disallowance can be made on account of noncommencement of business. However the addition of Rs. 7,02,54,564/- is to be made on account of disallowance u/s 14A because the appellant has admitted time and again that their main business activity is to act as a holding company for downstream investment in other companies which are engaged in manufacturing cement and that the expenses of Rs. 7,02,54,564/- have been incurred by them under to protect their investments and to explore new avenues of investments.

Thus in view of the findings given in assessment year 2007-08, the addition of Rs. 7,02,54,564/- stands confirmed on account of disallowance under section 14A.

38 ITA Nos.512 & 513/Mds/2015

his own words, their stand before us. During the course of hearing, the submission raised was that the shares would have yielded dividend, which would be exempt income and therefore, the CIT(A) had invoked Section 14A to disallow the entire expenditure. The aforesaid submission does not find any specific and clear narration in the reasons or the grounds given by the CIT(A) to make the said addition. Possibly, the CIT(A), though it is not argued before us, had taken the stand that the respondentassessee had made investment and expenditure was incurred to protect those investments and this expenditure cannot be allowed under Section 14A.

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years 2006-07, 2007- 2008 & 2008-09 in ITA Nos. 240, 241 &

850/Mum/2012, the Tribunal vide order dated 20.03.2015 observed as

under:-

40 ITA Nos.512 & 513/Mds/2015

‘’5.We have heard the rival submission and perused the material before us. We find that while deciding the appeal for the AY.2005- 06 the FAA had deleted the addition made by the AO following his order for the AY.2004-05,that the then FAA had held that assessee was holding strategic investment, that same was inherent part of overall planning, that there was no change in facts of the case that year as compared to the facts of AY.2004-05.

It is found that assessee had made investment in Taj group of companies only and it is part of Taj Group, that except for one or two companies most of the companies wherein it had made investment are in the same business or in the business related with the hotel industries. It is a fact the AO has not pinpointed as to what was the expenditure that was incurred by the assessee for earning tax free income. Incurring of expenditure by an assessee, is the precondition for making disallowance u/s.14A of the Act. The logic behind introducing the section was that the assessee should not claim or get two deductions-.i.e. offering no tax exempt income on one hand and claiming expenditure on other hand. Incurring of expenditure for earning exempt income has to be proved as a matter of fact. There cannot be any guess work or presumption about incurring of expenditure. If the assessee claims interest expenditure or other expenditure (administrative)for earning exempt income, definitely a disallowance can be made. But,if no claim is made then the AO should not invoke the provisions of section 14A.The assessee must have incurred some expense is a very general and vague phrase and does not indicate the incurring of expenditure. The word may leave the door open. In the case of J.M. Finance (supra),to which one of us was the party, it has been held that if no expenditure was incurred for earning tax free income no disallowance should be made.

It is said that fact of each case are different so, without highlighting the facts of that case no addition should be made on the basis of general presumption. The FAA in the present case, had held that the every assessee would keep watch over the market to maximise its profit but he had missed one important aspect that the assessee was holding the shares of group concerns for strategic purposes and for selling and buying and selling them frequently. In absence of the finding as to how much was the sum incurred by the assessee under the head administrative expenses ,it is not possible for us to uphold the order of the FAA for the year under consideration. We further find that the FAA had not brought on record as to how the facts of earlier two AY.s. were different from the facts of the year consideration. In the case of Aroni Commerci - als Ltd.(362ITR403)the Hon’ble Bombay High Court has held as under:

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Though the principle of res judicata is not applicable to tax matters as each year is separate and distinct ,nevertheless where facts are identical from year to year, there has to be uniformity and in treatment. Hon’ble jurisdictional High Court in the case of Gopal Purohit (336ITR287)has held that that there should be uniformity in treatment and when facts and circumstances for different years were identical particularly in the case of the same assessee Analysis of the above two judgments lay down that the principle of consistency can be ignored only in certain conditions and without pinpointing the difference of facts for a particular year with the facts of earlier year/s consistency should be maintained. Considering the peculiar facts and circumstances of the case, we are reversing the order of the FAA. Effective ground of appeal raised by the assessee for the year under consideration, is allowed in its favour.

ITA/850/Mum/2012-AY.2008-09.

6.The facts of the case under consideration are similar to the facts of earlier year-the only difference is of disallowance made. The AO had made disallowance of Rs.6.19 Lakhs for the year under appeal as against the disallowance of Rs.6.55 lakhs made for the earlier year. Following our order for the earlier year, we decide the effective ground of appeal in favour of the assessee.

7.The effective ground for the year under appeal is identical to the grounds raised in the two earlier assessment years i.e. disallowance u/s. 14A of the Act. During the year the assessee had received dividend income of Rs. 1.07 Crores and it was claimed exempt u/s. 10(34) of the Act. The assessee itself offered disallowance of Rs. 1.18 Lakhs u/s. 14A of the Act. The disallowance consisted of entire interest expenditure and a portion of administrative expenses. Applying the provisions of Rule 8D of the Income-tax Rules, 1962 the AO made a disallowance of Rs. 7.16 Lakhs. During the appellate proceedings, the FAA after considering the submission of the assessee upheld the order of the AO. We find that the assessee itself had made disallowance of interest expenditure and part of administrative expenses for the year under consideration. As the facts and circumstances of the matter are almost similar to the facts of earlier two assessment years, therefore, following the same we decide the effective ground of appeal in favour of the assessee.

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cannot be said that the assessee made investment in the shares of Shriram

Retail Holdings Pvt. Ltd, Shriram Credit company Limited, Shriram Holdings

(Madras) Pvt. Ltd and Shriram Life Insurance company limited, for the

purpose of earning tax free dividend income. On the other hand, the

assessee invested to have a controlling internal in these companies and

strengthen the capital base and liquidity base of these companies. Thus in

the group companies, the assessee company have controlling interest in

Shriram City Union Finance Ltd, a public limited company whose equity shares

are listed in stock exchange. Shriram Credit Company Ltd has controlling

interest in M/s.Shriram Insight Share Brokers Ltd. These facts were not

contradicted by the Department and finally these facts will definitely enhance

the profitability of the assessee company as well as market share of the

assessee’s business by this investment. Being so, in our opinion disallowance

made by the Assessing Officer at �9,53,58,713/- for the assessment year

2010-2011 and 11,56,55,300/- for the assessment year 2011-12 is at very

high side. Thus considering the earlier order of the Tribunal on this issue for

the assessment year 2008-09 in assessee own case, we are of the opinion

that the above entire expenditure cannot be disallowed. However, we cannot

rule out the incurring of management expenses by the assessee to earn

exempt income and considering this aspect, we are inclined to direct the

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Assessing Officer to disallow `15 lakhs for each assessment year. In the

result, this ground of the assessee is partly allowed in both appeals.

the addition by Commissioner of Income Tax (Appeals) made by the

Assessing Officer under the head ‘’providing access to branch network’’ of

�25,00,00,000/-.

deduction of �25 crores towards providing access to branch net work. The

Assessing Officer asked the assessee company to explain the nature of

expenditure, names and address of the persons to whom these amounts were

paid and details of TDS made. The assessee took a plea before the

Assessing Officer that the expenditure was incurred to bind or commit the chit

fund companies for a period of 10 years to agree to provide access to their

branch network and agency force. It was the plea of the assessee before the

Assessing Officer that these payments by themselves do not entitle

assessee or its nominees to get any service free of cost. The Chit

companies are not obliged to provide any service free of cost to assessee

or its nominees. It has to pay for services if they avail of any services.

The payments made by assessee was only for ensuring that the chit

companies shall provide services and the details for payment of 25.00

crores are as follows:-

44 ITA Nos.512 & 513/Mds/2015

SHRIRAM CHITS TAMIL NADU PVT LTD �. 8,00,00,000

SHRIRAM CHITS PVT LTD �. 7,00,00,000

SHRIRAM CHITS (KARNATAKA) PVT LTD �10,00,00,000 ---------------------------- Total ` 25,00,00,000/- ---------------------------

It was pleaded by the assessee before AO that the payment

being made by assessee to access the branch network and agency

force of Shriram Chits. Shriram Chits is not required to provide or

render any services or to do any other act free of cost for the

consideration received, other than to keep its branch network in

act and ready for use, whenever requested for by assessee or its

nominees.

12.1 Further, it was submitted by the assessee before AO that the

assessee holds 74% of shares Shriram Life Insurance Company (SLIC)

and Shriram General Insurance Company (SGIC) and the three chit fund

companies to whom amounts were paid, has vast network of branches,

agency force and information, which are beneficial for SLIC and SGIC,

and on account of these payments, the three chit fund companies are

under obligation to keep the branch network intact and ready to use

whenever requested for by the assessee or its nominees. It is also

45 ITA Nos.512 & 513/Mds/2015

stated that the datas would enable the insurance companies to do

insurance business.

12.2 The assessee also submitted before AO that it had hold 74% of

shares in Shriram General Insurance Company Limited & Shriram Life

Insurance Company Limited and also stated that Shriram Chits

Tamilnadu Private Limited, Shriram Chits (Karnataka) Private Limited,

Bangalore and Shriram Chits Private Limited, Hyderabad are engaged in

the business of Chit funds and has a vast net work of branches and

agency force.

12.3 It was submission of the assessee before the AO that the above amount was paid to the 3 Chit Companies viz Shriram Chits Tamilnadu Private Limited, Shriram Chits (Karnataka) Private Limited, Bangalore and

Shriram Chits Private Limited, Hyderabad to keep the branch network of

the three chit companies intact and ready to use whenever requested for

by assessee or its nominee. It is not paid to create new network. It is

paid' for keeping the infrastructure and human resource intact i.e.

ready to use condition so as to enable SCL or its nominees to use any

time.

12.4 According to the assessee these datas would enable the insurance

companies to do insurance business. As the assessee is having interest

in the business of these companies, assessee’s business interest is

46 ITA Nos.512 & 513/Mds/2015

involved. The expenditure has been incurred for the purpose of

assessee’s business. According to assessee in the earlier year, a similar

claim made has been allowed by the Assessing Officer only after

consideration of all these facts and circumstances. The three chit

companies have accounted for the amount paid by the assessee

company as revenue receipt only in their books of accounts and offered

for taxation.

12.5 In view of the above, the assessee took a plea before the AO that

the above expenditure incurred by the assessee is not Capital

Expenditure. By this payment, no asset has been created. Payment

made in the course of and for the purpose of carrying on business or

in the field of trading activity it is to be treated as revenue expenditure

even though the payment is of a large amount and may not have to be

made periodically. For the above reasons, it was submitted by the

assessee that the expenditure is allowable as business expenditure and

it cannot be Capital Expenditure.

12.6 However, the above arguments of the assessee was rejected by

the AO and treated it as capital expenditure and disallowed the same.

12.7 Against this, the assessee carried the appeal before the

Commissioner of Income Tax (Appeals).

47 ITA Nos.512 & 513/Mds/2015

the assessee company entered into an agreements with Shriram Chits

Private Ltd, Hyderabad, Shriram Chits (Karnataka) Private Limited,

Bangalore and Shriram Chits Tamil Nadu Private Limited, Chennai on

01.12.2008 for doing the Life insurance business in India on the

representation of the assessee. The terms of the agreements entered

by the assessee with three companies were identical and discussed in

the assessment order. By virtue of the entering of three agreements

on 01.12.2008 with three chit fund companies, the assessee was

required to pay a total consideration of �.58 crores and payment was

made in two instalments i.e. �.33 crores during the A.Y. 2009-10 and

�.25 crores during the A.Y. 2010-11. It is seen from the terms of

agreements that the consideration was paid for the right of access to

entire branch network of the chit fund, companies for a period of 10

years. The chit fund companies have a wide network in the state of

Tamilnadu, Karnataka and Andhra Pradesh as stated by the assessee,

The nature of assets such as obtaining of right to access the branch

network of chit fund companies is an intangible asset. The right of

access to the entire network branch and agency force both present

and future owned by chit fund companies was made available to the

assessee company i.e. SCL for a period of 10 years and consideration

48 ITA Nos.512 & 513/Mds/2015

was paid towards acquiring right to access to the network. This

particular right was acquired by the assessee company vide

agreements dated 01.12.2008. The nature of the rights acquired by

the assessee company was akin to business or commercial rights of

similar nature being intangible assets as defined under Explanation 3

to sec.32(1) of the IT Act. The benefit for the use of the right

extends over a period of 10 years. The network was already owned

by chit fund companies. The assessee company acquired the right to

access the network of the subsidiary companies for a period of 10

years by way of agreements executed on 01.12.2008. The Sunlan

Life Insurance Ltd. and Sunlan Ltd. have recognized that the

assessee company possessed the established brand but the assessee

company did not have branch network to distribute its various

financial products. Therefore, the assessee company acquired the

right of access to the entire branch network of subsidiaries for a

specified consideration. The 3 chit companies were not supposed to

do any work for "assessee company. The right of access to network

of the chit fund companies for a period of 10 years was granted to

the assessee for a specified consideration. The consideration was

required to be paid in 2 instalments in the financial year 2008-09 and

also financial year 2009-10. The CIT(A) observed that the manner of

payment is not relevant for deciding whether the expenditure

49 ITA Nos.512 & 513/Mds/2015

incurred for acquiring intangible asset was a capital or a revenue

expenditure. Therefore, Commissioner of Income Tax (Appeals) of

the considered view that the nature of the claim of expenditure

incurred by the assessee is not a revenue expenditure but a capital

expenditure for acquiring an intangible asset like business or

commercial right to access the network of its subsidiaries and

associates. According to the Commissioner of Income Tax (Appeals)

this intangible right was acquired by the assessee during the FY 2008-

09 relevant to Ay 2009-10 and therefore same is not allowable as

revenue expenditure during the assessment year under consideration.

The stand taken by the assessee that the impugned expenditure is

revenue expenditure placing reliance on High Court of Punjab &

Haryana in the case of CIT vs. Groz Asia Ltd. reported in 214 Taxman

205 is not acceptable to the CIT(A) as the decision rendered by the

Punjab & Haryana High court was on the different set of facts and the

issue was not under consideration of sec.32(1)(ii) and Explanation 3 of

the IT Act. The issue under consideration is whether right of access is

a intangible asset and whether such right was acquired by the

assessee for use of 10 years for a specified consideration in view of

the specific provision in the law u/s 32(1)(ii) and Explanation 3 of the

IT Act. In view of the specific facts the case, the CIT(A) observed that

the nature of expenditure of �.58 crores incurred by the assessee is a

50 ITA Nos.512 & 513/Mds/2015

capital expenditure. Since the entire claim of expenditure is treated as

incurred towards acquiring intangible asset and nature of expenditure

is treated as capital expenditure, he observed that the question of

disallowing the same u/s 40(a)(ia) does not arise in this case. Against

this, the assessee is in appeal before us.

entered into an agreements with three companies viz. Shriram Chits

Private Limited, Hyderabad, Shriram Chits (Karnataka) Private

Limited, Bangalore and Shriram Chits Tamil Nadu Private Limited

Chennai on 01.12.2008 for doing the life insurance business in India

on the representation of the assessee company. The terms of the

agreements entered by the assessee with three companies were

identical. By virtue of entering of three agreements the assessee

company was required to pay a total consideration of �58 crores and

payment was made in two instalments i.e �33 crores during the A.Y.

2009-2010 and �25 crores during the assessment year 2010-2011. It

was seen from the terms of agreements that the consideration was

paid for the right of access to entire branch network of the chit fund

companies for a period of ten years. The chit fund companies have a

wide network in the state of Tamilnadu, Karnataka and Andhra

Pradesh as stated by the assessee. The right of access to the entire

51 ITA Nos.512 & 513/Mds/2015

network branch and agency force both present and future owned by

chit fund companies was made available to the assessee company

i.e. SCL for a period of 10 years and consideration was paid towards

acquiring right to access to the network. This particular right was

acquired by the assessee company vide agreements dated

01.12.2008. The benefit for the use of the right extends over a

period of 10 years. The issue here is not about creation of network.

The network was already owned by chit fund companies. The

assessee company acquired the right to access the network of the

subsidiary companies for a period of 10 years by way of agreements

executed on 01.12.2008. The Sunlan Life Insurance Ltd. and Sunlan

Ltd. have recognized that the assessee company possessed the

established brand but the assessee company did not have branch

network to distribute its various financial products. Therefore, the

assessee company acquired the right of access to the entire branch

network of subsidiaries for a specified consideration. The 3 chit

companies were not supposed to do any work for "assessee

company. The right of access to network of the chit fund companies

for a period of 10 years was granted to the assessee for a specified

consideration. The consideration was required to be paid in 2

instalments in the financial year 2008-09 and also financial year

2009-10. The manner of payment is not relevant for deciding

52 ITA Nos.512 & 513/Mds/2015

whether the expenditure incurred for acquiring intangible asset was a

capital or a revenue expenditure. Therefore, Commissioner of Income

Tax (Appeals) of the considered view that the nature of the claim of

expenditure incurred by the assessee is not a revenue expenditure but

a capital expenditure for acquiring an intangible asset like business or

commercial right to access the network of its subsidiaries and

associates. The stand taken by the assessee is that the impugned

expenditure is revenue expenditure placing reliance on High Court of

Punjab & Haryana in the case of CIT vs. Groz Asia Ltd. reported in 214

Taxman 205.

Income Tax (Appeals) that the expenditure incurred towards right of

access to data as capital expenditure on the reason that consideration

was paid for the purpose of acquiring of right of access to entire

branch network of the chit fund companies for the period of ten years.

In our opinion, the payment in a lump sum which is for a period of

ten years does not necessarily make the payment a capital one. It may

still possess Revenue character in the same way as a series of

payments. If there is a lump sum payment but there is no possibility of

a recurrence, it is probably of a capital nature, though this is by no

means a decisive test. If the payment of a lump sum closes the liability

53 ITA Nos.512 & 513/Mds/2015

to make repeated and periodic payments in the future, it may

generally be regarded as a payment of a revenue character and also if

the ownership of the money whether in point of fact or by a resulting

trust be still in the taxpayer, then there is acquisition of a capital asset

and not an expenditure of a revenue character. Further, income tax

law does not allow all the deduction as expenses, which a prudent

trader would make in computing its profits. The money may expend

on grounds of commercial expediency but not of necessity. The test

of necessity is whether the intention was to earn trading receipts or to

avoid future recurring payments of a revenue character. Expenditure

in this sense is equal to disbursement which, to use a homely phrase,

means something which comes out of the trader’s pocket. Thus, in

finding out what profits there be, the normal accountancy practice

may be to allow as expense any sum in respect of liability which have

accrued over the accounting period and to deduct such sums from

profits. But the income tax laws do not take every such allowance as

legitimate for purpose of tax. A distinction is made between an actual

liability in praesenti and a liability de future which, for the time being,

is only contingent. The former is deductible but not the latter. Thus in

our opinion payment in lump sum cannot be a reason to treat as

capital expenditure and disallowed the same. If the expenditure is

incurred for the purpose of business, is made possible as obligation

54 ITA Nos.512 & 513/Mds/2015

and there is possibility that such made necessary in view that

expenditure cannot be held as enduring benefit.

payment and whether the expenditure is capital or revenue which is

wholly and exclusively used for the purpose of business carried on

by the assessee.

expediency, it is to be allowed. When it is incurred wholly and

exclusively for the purpose of business, then reasonableness of the

expenditure is to be judged from the point of view of the

businessmen and the commercial expediency is a matter entirely left

to the judgment of the assessee as held by Madras High Court in the

case of Amarjothi pictures vs. CIT 69 ITR 755 and Aluminium

Corporation of India Ltd vs. CIT 86 ITR 11(SC). In our opinion, the

businessman is only the best judge to determine the business

expediency and therefore when he claims that he has incurred

certain expenditure for the business expediency, his version is

ordinarily be accepted. Further, it does not mean that the Assessing

Officer cannot be entitled to enquire or investigate as to whether the

said expenditure was actually incurred by the businessman. If it is

incurred wholly and exclusively for business consideration, a

55 ITA Nos.512 & 513/Mds/2015

businessman is the best judge of his business expediency but it does

not affect, right and duty of the Assessing Authorities to know

whether it was incurred for the business purpose and for any other

purpose.

17.1 In the case of CIT vs. IBM Global Services India P. Ltd,

366 ITR 293, the Karnataka High Court held as under:-

‘’As per the agreement entered into between the parties, the assessee had paid consideration to the transferor company. While filing the returns, the said transaction has been disclosed by the assessee and claimed it as revenue expenditure. In the instant case, insofar as payment for getting domestic customer database is concerned, it was clear that, assessee had only got right to use that database; the company which has provided such database was not precluded from using such database. Hence, the expenditure incurred was for the use of database and not for acquisitions of such database.’’

17.2 In the case of Wipro GE Medical Systems Ltd. vs. Deputy

Commissioner of Income Tax 81 TTJ (Bang) 455, the Tribunal held

as under:-

‘’The payments in question are made under a tripartite agreement and such agreement was entered into the normal course of business. The entire payment was for the benefit of the assessee’s business both in the short run and in the long run. As regards the compensation paid to retrenched employees, the payment is for business consideration and it is a part of recruitment expenses. The assessee, by virtue of the agreement with IGE, got a composite package covering even the employees who were manning the medical diagnostic equipment division and approximately 2/3rd of the total strength of that division aggregating to 150 in number were taken over by the assessee and to the extent remaining 69 employees the assessee and GE together contributed �45 lakhs as subsidy for the employees who were to be allowed to voluntarily retire from service. By

56 ITA Nos.512 & 513/Mds/2015

terminating the employees of the erstwhile company and paying compensation thereof, the assessee did not get any benefit of an enduring nature and did not acquire any capital asset at all. Therefore, this payment if part of regular business expenditure incurred by the assessee for the purpose of its business. The payment of �22,50,000 paid by the assessee is just like recruitment cost. The cost of recruiting the rest of the employees were necessary for the purpose of business.. Therefore, the compensation payment of �22,50,000 is revenue expenditure. As regards the payment made towards access to information base and for transition of customer order filing this payment again, is for business consideration and it cannot be accepted that the amount was paid for obtaining information useful for a long period and that the same could be treated as plant. There is no question of acquisition of any asset when the assessee made the payments and acquired the information about the customer base. That will help the assessee to carry on its business very efficiently and in a more profitable manner. The payment of �28.80 lakhs, is, therefore, a proper business expenditure allowable as deduction.

expenditure resulted in enduring benefit. Thus, he disallowed the claim of

the assessee by treating it as capital expenditure. According to ld. AR the

expenditure incurred has not resulted in acquiring any tangible or

intangible property or acquiring any asset of enduring benefit so as to treat

it as capital expenditure. Basically, the expenditure would be capital in

nature if it is made with a view to bring into a profit making asset or

business advantage which resulted in bringing enduring benefit. The

purpose of incurring the expenditure is to be seen if the expenditure is

incurred with a view to bring into existence an asset or advantage for

enduring benefit of the business it would, unless the circumstances show

otherwise, be in the nature of a capital expenditure. The quantum of the

57 ITA Nos.512 & 513/Mds/2015

expenditure cannot be reason to decide nature of expenditure. The

amount spent no matter, the nature of the expenditure depend upon the

acquisition of assets in permanent nature and if the aim and object of

expenditure is to bring new asset into existence or on the other hand if it is

incurred for running a business or working it with a view to produce profit

it would be revenue expenditure. Usually, while deciding the nature of

expenditure one has to see the following points:- i) If the expenditure is with the intention or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business i.e. being carried on, or for existence of the business i.e. going on, or for a substantial replacement of an existing business asset it would be capital expenditure. ii) If on the other hand, the expenditure, although for the purpose of acquiring an asset or advantage is for running of the business or for working out that asset with a view to produce profit, it would be revenue expenditure. iii) If the outgoing is so related to the carrying on or the conduct of the business that may be regarded as an integral part of the profit earning process or operations and not for acquisition of asset of a permanent nature the condition of which is the precedent for the running of the business then it would be expenditure of a revenue nature.

iv) Special knowledge or technical knowledge, or patent or a trade mark, is an asset if it is acquired for payment for use and exploitation for a limited period and what is acquired is not an asset or advantage of an enduring nature and at the end of the agreed period that advantage or asset reverts back to the giver of that special knowledge or owner or patent or trade mark it would be expenditure of revenue nature. v) If it is intrinsically a capital asset, it is immaterial whether the price for it is paid once and for all or periodical or whether it is paid out of capital or income or linked up with

58 ITA Nos.512 & 513/Mds/2015

the net sales. The out going in such a case would be of the nature of capital expenditure.

vi) If the amount is incurred for acquisition of an asset of an enduring nature is in the capital field though payment has been made in small amounts or periodical instalments. vii) A lumpsum amount incurred would not cease to be revenue expenditure or get into or converted into capital expenditure merely because it is payment made in lumpsum. It is the intention and object with which expenditure incurred and not the method or the manner in which the payment is made or the sources of such payment. viii) If the expenditure is recurring and incurred during the course of business or manufacturing it would be revenue expenditure. ix) An asset or advantage of an enduring nature does not mean that it may last for ever. If the capital asset, in its nature, a short lived one, the expenditure incurred over it does not, for that reason, cease to be a capital expenditure.

x) It is not the law that if an enduring advantage is obtained the expenditure for securing it must be treated as capital expenditure if advantage acquired is to carry on the business then it would be revenue expenditure.’’ 18.1 On the above proposition, we find that though the expenditure

incurred by the assessee got the benefit to the assessee for more than

one year that expenditure itself cannot be called/treated as capital

expenditure on the simple reason that it does not bring into existence

any new asset in the field of capital or in other words no new asset was

developed by incurring that expenditure and even the accounting

treatment given by the assessee cannot be conclusive to treat

expenditure as capital. In this case, expenditure for the purposes of

59 ITA Nos.512 & 513/Mds/2015

access to data relating to business of the assessee so as to increase the

‘Business’ of the assessee. This expenditure stands incurred for the

purpose of running the business. It is not per se capital in nature. By

incurring this expenditure, it cannot be said that any capital asset stands

acquired by the assessee and it was incurred for the purpose of running

the business and such nature of expenditure cannot be said that

resulted in enduring benefit. The ld. DR argued that the assessee having

admittedly incurred the expenditure in capital field, it cannot be

retracted from the same; its books of accounts reflecting its

understanding represents its current state of affairs. However, it is to be

noted that the assessee has not considered the expenditure in the field

of capital account. The assessee has treated it as Revenue expenditure

only. As such, there is no force in the argument of the ld. DR that the

expenditure shall be always treated as capital expenditure. As the

expenditure has not resulted in capital asset, so has to be recorded as

expenditure in capital field. It should be noted that the assessee had to

incur this kind of expenditure year after year so as to be in business

subsequently even the advantage secured from earlier expenditure

would get dissipated. Further, we place reliance on the judgment of

Supreme Court in the case of Alembic Chemical Works vs. CIT (177 ITR

377) wherein held that just because an expenditure is debited in books

towards the business being competitive and prudence and conservatism

60 ITA Nos.512 & 513/Mds/2015

being fundamental accounting assumptions, capitalization of such

expenses or ascribing lasting abiding value to such expenses, could only

be done on sound footing and cogent basis. Thus, in our opinion the

expenditure cannot be attributed to capital expenditure.

crores for assessment year 2009-10 and �25 crores for assessment

year 2010-2011 and payment of �33 crores is subject matter of

dispute. In the assessment year 2009-2010, the Assessing Officer

allowed the claim of �33 cores as Revenue Expenditure. This was a

subject matter of proceeding u/s.263 of the income by the

Commissioner of Income Tax and the Commissioner of Income

Tax vide order dated 18.02.2014 observed as under:- ‘’(1) The assessee company had claimed an expenditure of ₹33 crores towards proving access to branch network. (2) The assessee company had made the aforesaid payment to M/s. Shriram chits Karnataka Pvt. Ltd for obtaining information and services for the purpose of business requirements of Shriram Life Insurance Co.Ltd and M/s. Shriram General Life Insurance Ltd, wherein the assessee company had 74% stake. (3) The Assessing Officer had accepted the assessee company’s agreement and allowed the above expenditure as revenue without verification .

3.2 The Ld. CIT further opined that :- (i) The assessee company had substantial interest in M/s. Shriram Life Insurance Co. Ltd and M/s. Shriram General Life Insurance Ltd. and the expenditure incurred towards the same is not the business expenditure of the assessee company. (ii) The amount paid to the three chit companies mentioned herein

61 ITA Nos.512 & 513/Mds/2015

above was in lieu of the rights for obtaining services over a period of ten years. (iii) The assessee company had entered into agreement with the above said three companies giving arise to contractual obligations however tax was not deducted at source for the payments made in accordance with Section 194C of the Act, thereby attracting the provisions of section 40(a)(ia) of the Act. 3.3 Based on the above findings, the ld. CIT held as follows:- ‘’ I have gone through carefully the facts available on the record and the arguments put forth by the Executive Director. From the nature of transaction, it is clear that the transaction is nothing but contractual in nature. The assessee company has not deducted the tax deductible at source as per the provisions of Section 194C of the Act. As per the provisions of 40(a)(ia), if the TDS liable to be deductible is not deducted by the assessee, then the expenditure has to be disallowed and the same can be allowed as expenditure only in the year in which, the assessee deducts tax at source as per the provisions of Income Tax Act. Accordingly, the expenditure of ₹33 crores claimed by the assessee cannot be allowed for the assessment year 2009-2010. It can be allowed in the year in which, the assessee deducts the tax and remits the same to the Government of India account. 8. In view of the above, the Assessing Officer is hereby directed to re-do the assessment of the assessee for the assessment year 2009-2010 accordingly’’. 19.1 The assessee carried the appeal before the Tribunal. The

Tribunal has decided the issue in favour of the assessee in ITA

No.724/Mds/2014, dated 02.1.2015 by observing that

5.1. We have heard both the parties and carefully perused the materials available on record. From the above facts, we find that the Ld.CIT had made several observations based on the materials which have already been examined by the Ld. Assessing Officer while passing the assessment order. Having made such observations the Ld.CIT had finally concluded as follows:- (i) The nature of transactions amounts to contractual obligations (ii) The assessee company did not deduct at source for the payments made.

62 ITA Nos.512 & 513/Mds/2015

(iii) Provisions of section 40(a)(ia) of the Act will be attracted in this case. (iv) Accordingly the expenditure of `33 crores claimed by the assessee cannot be allowed for assessment year 2009-10 however, it can be allowed in the year in which the assessee deducts the tax and remits the same to the Government of India account.

5.2. From the above it is apparent that the Ld.CIT has only examined the agreement which have been already considered by the Ld. Assessing Officer. Though he has made several observations, there were no other findings other than, non deduction of tax at source and applicability of Section 40(a)(ia) of the Act. The Ld. A.R. during the course of proceedings before the Ld.CIT had submitted the letters from the recipients of the payments from the assessee company wherein they have stated that they had declared the amount received from the assessee as their income and paid the tax duly. The amended second proviso to Section 40(a)(ia) of the Act was also referred. The Tribunal in the case of Rajeev Kumar Agarwal Vs. Additional Commissioner of Income Tax in ITA No.337/Agra/2013 vide order dated 29th May, 2013 has held that “the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No.2) Act, 2004.” In such circumstances, it cannot be construed that the Ld. Assessing Officer had passed the order without application of mind. He has considered all these facts and had consciously decided the matter. From the above facts, it appears that the Ld.CIT has passed the order U/s.263 based on difference of opinion and by reviewing the issue which was already decided by the Ld. Assessing Officer. Moreover, it is pertinent to mention at this juncture that the decision rendered in the case of Merilyn Shipping and Transports Vs. Additional CIT in 16 ITR (Trib) 1 is also in favour of the case of the assessee. In the aforesaid case the order of the learned Judicial Member was upheld by the Hon’ble Vice President sitting as the Third Member wherein it was held that:- “the provisions of Section 40(a)(ia) are applicable only to the amounts of expenditure which are payable as on the dated 31st March of every year and it cannot be invoked to disallow which had been actually paid during the previous year, without deduction of TDS”. Considering all these facts and the discussions mentioned herein above, we are of the considered view that the Ld.CIT has erred in setting aside the order of the Ld. Assessing Officer by invoking Section 263 of the Act and directing the Ld.A.O to re-do the assessment of the assessee for the Assessment year 2009-10. Therefore, we hereby quash the order passed by the Ld.CIT U/s.263 of the Act.

63 ITA Nos.512 & 513/Mds/2015

19.2 Thus, it means for the assessment year 2009-2010, the same

issue was considered by the Tribunal and decided in favour of the

assessee by annulling the order of CIT passed under section 263 of

the Income Tax Act by observing that the provisions of

sec.40(a)(ia) cannot be applied, so as to disallow the expenditure

by placing reliance on the order of the Special Bench Merilyn

Shipping and Transports cited Supra as the amount is not

outstanding at the end of the close of the financial year and it was

already paid by the assessee. In other words, the Tribunal accepted

the impugned expenditure as revenue expenditure and it has to be

allowed though it was not subject to TDS.

19.3 Further, it is also brought to our notice that the

Commissioner of Income Tax (Appeals), while disposing the appeal

for the assessment year 2010-2011, made an observation that the

Assessing Officer is at liberty to take remedial measures after

following the due process of law for claim of �33 crores as

deduction for the assessment year 2009-2010. It is to be here

noted that the Commissioner of Income Tax (Appeals) is concerned

with the adjudication of issues raised before him for the assessment

year 2010-2011. In our opinion, the Commissioner of Income Tax

64 ITA Nos.512 & 513/Mds/2015

(Appeals) cannot travel beyond the assessment year in appeal

before him. He has exceeded his jurisdiction in making such

observation for assessment year 2010-2011 as there is no dispute

before him for the assessment year 2009-2010. More so, when this

issue was decided by Tribunal in favour of the assessee vide order

dated 02.01.2015, the Commissioner of Income Tax (Appeals) not

justified in giving such direction. Accordingly, we expunge the

above observations by placing reliance on the order of the co-

ordinate bench in the case of Sun Metal Factory (I) (P) Ltd vs.

ACIT, 124 ITD 14, wherein held that

‘’The appellant authority can give findings and directions only in respect of year/period which is before that authority and no direction or finding can be given in respect of other years. The Commissioner of Income Tax (Appeals) after holding that the addition made by the Assessing Officer are not based on the evidence found during the search, the same cannot enlarge the scope of appeal for giving the direction to the Assessing Officer for reopening of the assessment for the assessment year 1999-2000. The Commissioner of Income Tax (Appeals) has failed to record a categorical finding justifying the direction given to the Assessing Officer when the Assessing Officer himself had not chosen for reopening the assessment. Asst. CIT vs. Rajaram & Brothers (2005) 193 CTR (MP) 248; (2005) 274 ITR 122 (MP) followed; CIT & Anr. Vs. Foramer France (2003) 185 CTR (SC) 512; (2003) 264 ITR 566 (SC), CIT vs, Banwarilal & Sons (P) Ltd, ( 2002) 175 CTR (Del) 124; (2002) 257 ITR 518 (Del), ITO vs. Murlidhar Bhagwan Das (1964) 52 ITR 335 (SC), Pt. Hazari Lal vs. ITO (1960) 39 ITR 265 ( All),Raj Kishore Prasad vs. ITO (1990) 88 CTR (All) 152; (1992) 195 ITR 438 (All) and Abdul Wahid Gehlot vs. ITO (2005) 93 TTH (Jd) 232 relied on.

19.4 Being so, taking consistent view, we are of the opinion

65 ITA Nos.512 & 513/Mds/2015

that expenditure is to be allowed as revenue expenditure only.

Thus, this ground is allowed

confirming the addition relating to expenditure incurred for exempt

income while computing the book profit u/s.115JB.

year 2010-2011 are that the assessee was against the action of the

Assessing Officer in disallowing an interest of �9,53,58,713/- u/s.14A of

the Income Tax Act while computing the book profit u/s.115JB towards

expenses relating to exempt income. The ld. Authorised Representative

for assessee reiterated the submissions regarding the computation of the

book profit u/s.115JB of the I.T. Act. The Commissioner of Income Tax

(Appeals) has already confirmed the finding of the Assessing Officer for

determining the disallowance of �9,53,58,713/- u/s.14A r.w.r 8D of I.T.

Rules for the same reasons, the CIT(A) confirmed the disallowance made

by the Assessing Officer for the purpose of computation of book profit

u/s.115JB.

by the Assessing Officer for these two assessment years by invoking

provision u/s.14A r.w. Rule 8D, was already adjudicated by us in our

66 ITA Nos.512 & 513/Mds/2015

earlier para of this order. In our opinion, disallowance made u/s.14A r.w.

Rule 8D cannot be added while computing book profit u/s.115JB of the

Act that the disallowance is only disallowance for the purpose of

computing taxable income of the assessee in the normal course. There is

no provision in the Act to add these kind of disallowance while computing

book profit u/s.115JB and it cannot change the book profit on this count.

Therefore even if there is an addition in view of provision u/s.14A r.w.Rule

8D, that cannot be added back to compute the book profit u/s.115JB.

This ground is allowed.

513/Mds/2015 are partly allowed.

Order pronounced on Friday, the 26th day of June, 2015, at Chennai.

Sd/- Sd/- (च�ला नागे�� �साद ) (चं� पूजार� ) (CHALLA NAGENDRA PRASAD) (CHANDRA POOJARI) �या�यक सद�य/ JUDICIAL MEMBER लेखा सद�य/ ACCOUNTANT MEMBER चे�नई/Chennai. �दनांक/Dated:26.06.2015. 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.