|CORAM:||Amit Shukla (JM), Sanjay Arora (AM)|
|SECTION(S):||115JA, 115JB, 14A, Rule 8D|
|CATCH WORDS:||Book Profits, exempt income|
|COUNSEL:||D. V. Lakhani|
|DATE:||October 17, 2014 (Date of pronouncement)|
|DATE:||October 24, 2014 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Various arguments on the applicability of s. 14A & Rule 8D where the AO has not recorded satisfaction, where the shares are held in strategic/ subsidiary companies, held as stock-in-trade, where there are surplus funds and the quantum of disallowance under Explanation (f) to s. 115JA/ 115JB considered|
(i) When it is said that rule 8D is mandatory (i.e., AY 2008-09 onwards), all that is meant is where the said expenditure cannot be reasonably ascertained with reference to the assessee’s accounts, toward which the AO is to issue his satisfaction or, as the case may be, dissatisfaction, he has no discretion in case of the latter in formulating a method of his own, nor indeed has the assessee, and is bound to adopt the prescription of rule 8D. The sole premise of law, it needs to be appreciated, including that mandated per rule 8D, is to arrive at as fair and just an estimation of the sum expended by the assessee in relation to income that is not subject to tax, as the facts and circumstances admit, without at the same time allowing it to degenerate into an arbitrary or subjective exercise.
(ii) Rule 8D is statutorily prescribed (refer section 14A(2)) only to remove the estimation exercise from the realm of arbitrariness or any subjectivity. Arbitrariness at the end of the assessing authority cannot be substituted by that at the assessee’s end, which is equally proscribed by law. The assessee speaks of the bulk, nay, almost the whole of its’ investment being in shares in subsidiary companies, which it claims is for strategic reason/s and not for income generation.
(iii) Toward this, the assessee’s argument is of the AO being precluded from proceeding to invoke rule 8D, otherwise mandatory for the current year, in view of his having not expressed his dissatisfaction with the assessee’s suo motu disallowance. No specific format has been prescribed for communication of his dissatisfaction by the AO, which is immanent in the assessment order in the present case. The assessee’s accounts are admittedly not maintained activity-wise, and its claim is de hors its accounts. We have already noted that the assessee’s accounts do not in any manner support its claim of the organizational resources being dedicated to the extent of 10% toward the investment activity.
(iv) We may, however, discuss the assessee’s claim on surplus funds, made with reference to the decision in Reliance Utilities & Power Ltd. (supra), so that there was, in its view, no need to apply the proportionate method advocated by rule 8D. …. The disallowance u/s.14A, it needs to be appreciated, 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. (supra). The relevant discussion appears at paras 85 & 86 (pgs. 135-137) of the reports, and considers the decision by it in Reliance Utilities & Power Ltd. (supra). It stands explained that section 14A has widen the theory of apportionment, which only seeks to effectuate the principle of only the net (i.e., net of all expenses) income, whether positive or negative, being liable to, or not so, to tax, i.e., as the case may be. Where therefore the assessee is able to show, with reference to its accounts, of the borrowed capital having financed a particular asset, the interest cost relatable thereto would necessarily have to be consider as expended toward the same. None of the decisions by the tribunal cited before us consider the decision by the hon’ble jurisdictional high court in Godrej & Boyce Mfg. Co. Ltd.
(v) The assessee has also earned interest income at Rs.2962.63 lacs. The said income is on long term investments and on loans forming part of current assets. The entire interest income is offered as, and admittedly, business income. As such, the fact of earning of interest income would in our view be by itself of little consequence. There is no claim, which would, where so, though need to be established, of the interest being on borrowings which stood relent on interest. Rather, all business expenses have been claimed and allowed there-against, i.e., in computing the net assessable income. In fact, our restoration, seen in perspective, is only with the view and toward the assessee being able to establish its case on the lines of dedicated funding, so that the matter gets decided on the basis of the facts, on which it rests, rather than on presumptions. The decision by the tribunal in Karnavati Petro Pvt. Ltd. (in ITA No. 2228/Ahd.(D)/2012 dated 05.07.2013) (to which no specific reliance though was made before us) would have no bearing in the matter;
(vi) The second issue raised by the assessee is for the adjustment of the amount disallowed u/s.14A in computing the book profit u/s.115JB. While the assessee’s stand is that the disallowance u/s.14A is toward computing the income under the regular provisions of the Act, no corresponding addition could be made while computing the book profit, the Revenue argues with reference to the specific provision of Explanation 1(f) to section 115JB(2). We have also gone through the case law, being decisions by the tribunal relied upon by the assessee (pgs. 83-121 of the compilation of case law). The same is on the premise that the provision of section 14A cannot be imported into Explanation 1(f) to section 115JA or, as the case may be, section 115JB, so that there could be no adjustment in computing the book profit there-under for the disallowance made u/s.14A. Our decision, which is in line with the several by the tribunal, is however not on the incorporation of the provision of section 14A (or any other provision for that matter) in Explanation 1(f) to section 115JB, nor is the decision based on the principle of incorporation. The expenditure disallowed u/s.14A is only that incurred and claimed by the assessee in respect of dividend income, exempt u/s.10. It is only on this basis, and this basis alone, that we have found Explanation 1(f) to section 115JB (s.115JA) to be providing a clear legal basis to the adjustment qua expenditure relatable to dividend income. That the amount disallowed u/s.14A provides a ready basis for determining the amount of such expenditure is another matter. It would be a complete fallacy and a travesty of facts, being without basis and wholly presumptuous to state or consider that the disallowance (u/s.14A) is qua notional expenditure and not against that actually claimed by the assessee and, further, per its books of account. Or does it mean to suggest that the expenditure claimed is outside the books of account? We say so as without doubt the adjustment under Explanation 1 could only be qua sums debited or credited and thus reflected in the accounts. In fact, in this regard, we have also clarified that where and to the extent there is a difference between the expenditure, i.e., as per the assessee’s books and that as claimed per its return of income, only the sum debited in books (to the profit and loss account) would hold. Further, the decision by the tribunal in Goetze (India) Ltd. vs. CIT  32 SOT 101 (Del), followed, inter alia, by the tribunal in Ovira Logistics Ltd. (in ITA Nos. 2439 & 3230/Mum(C)/2012 dated 30.08.2013), stands since reversed by the hon’ble high court in CIT vs. Goetze India Ltd.  361 ITR 505 (Del);