If the exempted income and the taxable income are earned from one and indivisible business, then the apportionment of the expenditure cannot be sustained.
PFA
Reference sections: 123(2) and Schedule II Schedule II to the Companies Act, 2013 requires depreciating the asset over its useful life unlike Schedule XIV of the Companies Act, 1956 which specifies minimum rates of depreciation to be provided by a company. Normally, prescribed companies who have to follow the accounting standard prescribed under the new […]
PFA
Pursuant to C&AG's Report `Performance Audit on Appreciation of Third Party (Chartered Accountants) - Reporting in Assessment Proceedings' for the year ended March, 2014, the President, in terms of the authority given to him by the Council at its 331st meeting held in February, 2014, has constituted a Group comprising of the following members:
ICAI forms group to take action against erring Members in CAG Report
Council Affairs/M-626/2015, Dated-24th January, 2015
ALL MEMBERS OF THE COUNCIL
Dear Sir,
Pursuant to C&AG's Report `Performance Audit on Appreciation of Third Party (Chartered Accountants) – Reporting in Assessment Proceedings' for the year ended March, 2014, the President, in terms of the authority given to him by the Council at its 331st meeting held in February, 2014, has constituted a Group comprising of the following members:-
- CA. Sanjiv Kumar Chaudhary, Convenor
- CA. G. Sekar
- CA. Shiwaji Bhikaji Zaware
- CA. Sumantra Guha
- CA. Shyam Lal Agarwal
CA Aakanksha Khanna Kapoor, Deputy Director would act as Secretary to the aforesaid Group.
Yours faithfully,
( V. Sagar )
( V. Sagar )
CIT Vs. Hero Cycles Ltd. (Punjab & Haryana High Court) Disallowance under Section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand
PFA
Section 14A disallowance cannot be made if no expenditure found to be incurred to earn exempt income
CIT Vs. Hero Cycles Ltd. (Punjab & Haryana High Court), ITA No. 331 of 2009 (O&M), Date of decision: November 4, 2009
Facts of the Case-
The assessee is engaged in manufacturing of cycles and parts of two-wheelers in multiple units. It earned dividend income, which is exempted under Section 10 (34) and (35). The Assessing Officer made an inquiry whether any expenditure was incurred for earning this income and as a result of the said inquiry addition was made by way of disallowance under Section 14A (3), which was partly upheld by the CIT (A). The Tribunal held that there was no nexus with the expenditure incurred and the income generated. Held BY ITAT
The assessee is engaged in manufacturing of cycles and parts of two-wheelers in multiple units. It earned dividend income, which is exempted under Section 10 (34) and (35). The Assessing Officer made an inquiry whether any expenditure was incurred for earning this income and as a result of the said inquiry addition was made by way of disallowance under Section 14A (3), which was partly upheld by the CIT (A). The Tribunal held that there was no nexus with the expenditure incurred and the income generated. Held BY ITAT
We have perused the same and find that the plea of the assessee that the entire investments have been made out of the dividend proceeds, sale proceeds, debenture redemption etc., is borne out of record. In fact the CIT (Appeals) has also come to a categorical finding that in so far as other units are concerned, none of their funds have been utilized to make the investments in question.
One aspect which is evident that the interest income earned by the main unit, Ludhiana, exceeds the expenditure by way of interest incurred by it, thus obviating the application of Section 14A of the Act. Even with regard to the funds of the main unit, Ludhiana the funds flow position explained shows that only the non-interest bearing funds have been utilized for making the investments. At pages 3 to 6 of the paper book are placed the details of the Bank accounts, wherein the amount of dividend, sale proceeds of shares, debenture redemption etc. have been received and later on invested in the investments in question. Such funds are ostensibly without any burden of interest expenditure. Thus, on facts we do not find any evidence to show that the assessee has incurred interest expenditure in relation to earning to the tax exempt income in question. We find that all the details in question were produced before the Assessing Officer and the CIT (Appeals) also. The entire evidence in this regard, which is submitted before the lower authorities have been compiled in the paper book, to which we have already adverted to in the earlier part of the order. Therefore, merely because the assessee has incurred interest expenditure on funds borrowed in the main unit, Ludhiana, it would not ipso-facto invite the disallowance under Section 14A, unless there is evidence to show that such interest bearing funds have been invested in the investments which have generated the 'tax exempt dividend income.'
As noted earlier, there is no nexus established by the Revenue in this regard and therefore, on a mere presumption, the provisions of Section 14A cannot be applied. Thus, we find that the CIT (Appeals) erred in part sustaining the addition. In fact, in the absence of such nexus, the entire addition made was required to be deleted.
Held by High Court
In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under Section 14A was not sustainable.
Disallowance under Section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand.
In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible.
PFA
S. 14A No disallowance towards exempt income earned on strategic investments
Interglobe Enterprises Ltd.Vs. DCIT (ITAT Delhi), I.T.A. No.1580/Del/2013, I.T.A. No.1362 & 1032/Del/2013, Date- 04.04.2014
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. 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 ofthe 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 ofthe 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 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 percentage ofthe 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 14Aread 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.L.) (I.T.A. 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 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.
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