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Ferani Hotels Pvt. Ltd vs. ACIT (ITAT Mumbai)

COURT:
CORAM: ,
SECTION(S): ,
GENRE:
CATCH WORDS:
COUNSEL:
DATE: November 17, 2014 (Date of pronouncement)
DATE: November 24, 2014 (Date of publication)
AY: 2009-10
FILE: Click here to download the file in pdf format
CITATION:
S. 14A Rule 8D: No presumption can be drawn that investment in tax-free securities has come from own funds. The amount of disallowance has to be added to the book profits u/s 115JB

(i) As regards the claim qua disallowance of interest expenditure, the argument of sufficient capital, so that the same must be presumed as having been applied toward investments yielding tax exempt income, misses the point completely. The matter has to be decided on the basis of facts and not presumptions. Until and unless therefore it is shown and, again, with reference to the assessee’s accounts, that the investments have been financed from own capital, so that no part of the borrowed capital has been utilized for the purpose, no such presumption would hold, and the rule of apportionment, prescribed by r. 8D, mandatory w.e.f. A.Y. 2008-09, shall apply. The decision in the case of Reliance Utilities & Power Ltd. (supra) stands rendered in the context of section 36(1)(iii), and would thus be of little relevance. It needs to be appreciated that the disallowance u/s.14A is a statutory disallowance, constituting a complete code in itself. The said decision was cited before, and stands discussed by the hon’ble jurisdictional high court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom). Where therefore the assessee is able to show, with reference to its accounts, of the borrowed capital having financed a particular asset (or asset class), the interest cost relatable thereto would necessarily have to be consider as expended toward the same. So, however, if, as claimed, the borrowed capital is in the form of dedicated funds, i.e., specified activities and/or assets, so that the same stands utilized for the same purpose/s, and which would be where the terms and conditions of the borrowing have been met, there could be no presumption with regard to the borrowed funds having been used for any purpose other than the same and, accordingly, no part of the interest could be considered as having not been utilized for business purposes and, hence, toward financing the investment/s. The presumption of proportionate funding, on which the formula prescribed u/r. 8D(2)(ii) is premised, would not obtain in that case.

(ii) The only other issue arising in this appeal is with regard to the adjustment to the book profit qua the disallowance effected u/s. 14A of the Act. The disallowance of expenditure, interest or administrative, is only of that incurred by the assessee. If the same is not in the books of account, where we wonder it is? Both the income and expenditure, determining the net profit, which forms the basis for computing income under the Act, are only as per the books of account. The provision of section 14A only codifies the law, which is otherwise inherent in tax jurisprudence, that only the net income (i.e., net of the expenditure), from whatever source, is to be brought to tax and, consequently, only the net income, where tax-exempt, is to be so. Further, rule 8D prescribes a method/s toward determining the said income, i.e., on net basis, providing a uniform basis for ascertaining the amount of expenditure liable to be excluded in computing the income chargeable to tax. The legal basis for the relevant adjustment, i.e., qua the expenditure relatable to the exempt income, in determining the book profit, which is an alternate method of taxation, i.e., where the income computed under the regular provisions of the Act falls below the prescribed percentage of book profit, is per clause (f) of Explanation 1 below sub-section (2) of section 115JB.

3 comments on “Ferani Hotels Pvt. Ltd vs. ACIT (ITAT Mumbai)
  1. sorry our S C is taken for granted by revenue it seems, the revenue officers seem not able to understand simple english and import of very taxation statutes, if you introduce Hindi there would be a great menace by revenue, as we find the revenue does not understand any language properly what kind of great selection bu great UPSC these kinds of officers flooding the government.

    Let such officers better go for reasonable understanding of English or Hindi classes, else every tax payer’s life as also that of judges would be miserable.

    hon court need fine government of india properly to help it readjust itself, is my considered opinion.

    otherwise meaningless load of cases beset the functioning of indian court system, very sad corollary of great independence we won ,God only save the people, if God really comes on earth he would deliver his justice on these government public servants!

  2. great revenue takes the tax tribunal for granted is absolutely clear. i wonder sometimes why tribunals are not harsh on the revenue ?

    Not only tribunals, but high courts and then hon SC , such behavior of revenue itself is a clear wednesbury unreasonableness… why tribunals on just docilely accept the ignominy perpetrated by so called great revenue, tax payers would not, i am sure, the tax payers would teach them a lesson why the tax payers sooner or later use marked currency to catch the bad apples in the revenue, days are not far off, i believe!

  3. great revenue takes the tax tribunal for granted is absolutely clear. i wonder sometimes why tribunals are not harsh on the revenue ?

    Not only tribunals, but high courts and then hon SC , such behavior of revenue itself is a clear wednesbury unreasonableness… why tribunals on just docilely accept the ignominy perpetrated by so called great revenue, tax payers would not, i am sure, the tax payers would teach them a lesson why the tax payers sooner or later use marked currency to catch the bad apples in the revenue, days are not far off, i believe!

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