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Case Number

I.T.A No. 4521.Mum/2012, Assessment Year 2009-10

Attorney(S)

Assessee by: Shri K. Shivaram and Shri Sanjay R. Parikh
Revenue by: Shri S.D Srivastava

Judges

Vijay Pal Rao, J.M
Narendra Kumar Billaiya, A.M

Acts

32 and 33 as under:32. Sub-ssection (2) and (3) to section 14A
Rule 8D of the Income Tax Rules.
Rule 8D of Income Tax Rules.3.
provisions of sub-section (2)
u/s. 14A r.w Rule 8D.12.
FINANCE ACT 2006
FINANCE ACT 2002
u/s. 14A L.W Rule 8D

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Smart Summary

Structured Summary of the Opinion (Tribunal) — Appeal for A.Y. 2009-2010

Factual and Procedural Background

This appeal by the assessee is directed against the order dated 11.04.2012 of the Commissioner of Income Tax (Appeals) for Assessment Year 2009-2010. During the year under consideration the assessee earned dividend income of Rs. 14,14,000/-, which is stated to be exempt under section 10(34) of the Income Tax Act.

The assessee itself made a disallowance of Rs. 1,40,000/- under section 14A. The Assessing Officer (AO), however, did not accept the assessee's position and applied Rule 8D of the Income Tax Rules to compute disallowance under section 14A, resulting in a disallowance of Rs. 7,61,37,727/- as per Rule 8D.

The assessee challenged the AO's action before the CIT(A). The CIT(A) confirmed the disallowance. The assessee then filed the present appeal before the Tribunal.

Legal Issues Presented

Whether Rule 8D of the Income Tax Rules can be applied by the AO to compute disallowance under section 14A without first recording a satisfaction (having regard to the accounts of the assessee) that the assessee's claim about expenditure is incorrect, as required by section 14A(2) and (3).
Whether disallowance under section 14A is warranted where the assessee's investments (approximately 97.82% of total investment in this case) are strategic, long‑term holdings in subsidiary and joint venture companies and the assessee contends no expenditure was incurred to maintain such investments.
Whether, in the absence of any material from the AO showing that expenditure was incurred in relation to the exempt income, the AO could nevertheless make a large Rule 8D based disallowance.

Arguments of the Parties

Appellant's (Assessee's) Arguments

Rule 8D cannot be applied without the AO recording satisfaction that the assessee's claim (that no or minimal expenditure was incurred in relation to exempt income) is incorrect having regard to the assessee's accounts.
The assessee's investments (Rs. 1,490.86 crores out of Rs. 1,524.08 crores — 97.82%) are strategic, long‑term investments in unlisted subsidiary companies and joint ventures; these are held for control and business purposes, not for earning dividend income on a portfolio basis.
Because these are long‑term strategic investments in group/subsidiary companies, no direct or indirect expenses were incurred for maintaining the portfolio; therefore no disallowance under section 14A should be made in respect of these investments.
Reliance was placed on the decision of the Hon'ble Jurisdictional High Court in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (328 ITR 81) and several Tribunal decisions (Garware Wall Ropes Ltd., Oriental Structural Engineers (P) Ltd., Kalyani Steels Ltd.) supporting the proposition that the AO must record satisfaction before applying Rule 8D and that where no expenditure is shown to have been incurred, section 14A / Rule 8D cannot be mechanically applied.

Respondent's (Revenue's) Arguments

It is immaterial whether investments are in subsidiary companies or unrelated companies; disallowance under section 14A must be computed as per Rule 8D of the Income Tax Rules (the AO applied Rule 8D and quantified the disallowance accordingly).
For the purpose of Rule 8D the entire investment as well as the entire expenditure booked to profit & loss account must be taken into account.
Once a proximate relationship between the expenditure and the exempt income is established, disallowance has to be made according to Rule 8D. The Revenue relied upon para 51 of Godrej & Boyce (supra) and the orders of the authorities below.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (328 ITR 81) — Hon'ble Jurisdictional High Court	Clarifies that section 14A(2) requires the AO to be not satisfied with the assessee's claim having regard to the accounts before applying the prescribed method; the satisfaction must be arrived at on an objective basis.	The Tribunal relied on paras 31–33 of Godrej & Boyce to emphasize that Rule 8D cannot be applied ipso facto; AO must first objectively examine accounts and be dissatisfied with the assessee's claim. The Tribunal applied this principle in assessing whether AO could invoke Rule 8D here.
CIT v. Walfort Share and Stock Brokers P. Ltd. ([2010] 326 ITR 1) — Hon'ble Supreme Court	Sets out principles that section 14A prevents deduction of expenditure in relation to income not forming part of total income and that once a proximate cause for disallowance is established, disallowance must be effected.	The Godrej & Boyce decision (relied on by the Tribunal) records the principles from Walfort (paras cited). The Tribunal considered these principles when evaluating proximate relationship and whether disallowance was warranted.
Garware Wall Ropes Ltd. v. Addl. CIT (Tribunal order dated 15/01/2014, ITA No. 5408/Mum/2012)	Applied the principle that where investments are in group concerns (subsidiaries) and no expenditure is shown to be incurred in relation to exempt income, S.14A/Rule 8D may not apply; AO must demonstrate expenditure incurred.	The Tribunal found Garware persuasive: when the assessee shows prima facie that no expenditure was incurred (investments in group companies for holding control), the AO must produce material to the contrary before applying S.14A/Rule 8D. This reasoning supported allowing the present appeal.
Oriental Structural Engineers (P) Ltd. v. ACIT (Tribunal Delhi Bench dated 02/12/2011) and confirmed by CIT v. Oriental Structural Engineers Pvt. Ltd. (Delhi High Court dated 15/01/2013)	Holds that where investments in subsidiaries are for commercial expediency and no expense/interest is attributable to earning exempt dividend income, disallowance under S.14A read with Rule 8D cannot be made (save limited adjustments as appropriate).	The Tribunal noted the Delhi Bench's approach and the High Court confirmation; it relied on that line of authority to conclude that when investments are strategic/group related and no expenditure is shown, S.14A/Rule 8D should not be mechanically applied.
Kalyani Steels Ltd. v. ACIT (Pune Bench dated 30/01/2014)	Tribunal authority dealing with similar facts where investments were in related/subsidiary concerns and the question of applicability of S.14A/Rule 8D was considered.	The Tribunal placed this decision among those supporting the proposition that AO must show expenditure was incurred in relation to exempt income before invoking Rule 8D when assessee demonstrates investments are strategic and no expenditure was incurred.

Court's Reasoning and Analysis

The Tribunal proceeded by examining (a) whether Rule 8D was applicable for the relevant assessment year and (b) whether the AO was entitled to apply Rule 8D without first being satisfied, on an objective basis having regard to the assessee's accounts, that the assessee's claim concerning expenditure was incorrect.

First, the Tribunal noted there was no dispute that Rule 8D was applicable for the assessment year under consideration. It also observed that in the prior assessment year (AY 2008-09) the Tribunal had upheld the AO's Rule 8D disallowance because the assessee had not furnished details required for computation under Rule 8D.

Turning to the facts of the present year, the Tribunal recorded that the assessee had specifically placed before the AO and the appellate authorities the fact that about 97.82% (approximately 98%) of the total investments were in subsidiary and joint venture companies, these investments were long‑term and strategic (for control and business purposes), and no direct or indirect expenditure was incurred for maintaining such investments or for earning dividend income on a portfolio basis.

The Tribunal then applied the legal principles laid down by the Hon'ble Supreme Court (Walfort) and the Jurisdictional High Court (Godrej & Boyce). Godrej & Boyce was interpreted to mean that section 14A(2) does not permit the AO to apply the prescribed method (Rule 8D) automatically; the AO must first consider the assessee's accounts and be objectively not satisfied with the assessee's claim as to expenditure. Only then does the statutory mandate arise to apply the prescribed method.

Applying these principles, the Tribunal found that the Department had not disputed that roughly 98% of the investments were in subsidiary concerns. The AO had not produced any material or contrary findings to show that the assessee had incurred expenditure in relation to the exempt dividend income. In these circumstances, and in the absence of any AO finding that expenditure had been incurred for earning the exempt income, the Tribunal held that there was no warrant for applying Rule 8D to make the large disallowance computed by the AO.

The Tribunal further relied on the line of Tribunal decisions (Garware, Oriental Structural Engineers, Kalyani Steels) which reached similar conclusions: where the assessee has prima facie shown that no expenditure was incurred in relation to exempt income arising from strategic/group investments, the AO must demonstrate otherwise before applying section 14A and Rule 8D.

Holding and Implications

Holding: The Tribunal allowed the assessee's appeal and deleted the disallowance made by the AO under section 14A read with Rule 8D (i.e., the disallowance as computed by the AO was set aside).

Implications:

Direct effect: The AO's Rule 8D based disallowance for the assessment year 2009-2010 was deleted and the appeal of the assessee was allowed.
Principled guidance applied: The decision reinforces that, consistent with the Jurisdictional High Court (Godrej & Boyce) and Supreme Court (Walfort) precedents cited in the opinion, an AO must first be objectively not satisfied with the assessee's claim (after examining accounts) before invoking the prescribed method (Rule 8D) under section 14A(2)/(3). The AO cannot mechanically apply Rule 8D where the assessee has shown (and the Revenue has not rebutted) that investments are strategic in subsidiaries and no expenditure was incurred to earn exempt income.
Scope of precedent: The Tribunal relied on existing High Court and Tribunal decisions; the order applies those authorities to the facts and does not purport to lay down a novel legal principle beyond the cited precedents.

Result: Appeal of the assessee allowed.

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Jm Financial Limited v. Cit

Vijay Pal Rao, J.M:— This appeal by the assessee is directed against the order dated 11.04.2012 of CIT(A) for A.Y 2009-2010. The assessee has raised following grounds in this appeal:—

2. During the year under consideration the assessee earned dividend income of Rs. 14,14,000/- which is exempt u/s. 10(34). The assessee has disallowed a sum of Rs. 1,40,000/- u/s. 14A. However the AO did not accept the disallowance made by the assessee and proceeded to make the disallowance u/s. 14A by applying Rule 8D. Accordingly, the AO made the disallowance of Rs. 7,61,37,727/- as per Rule 8D of Income Tax Rules.

3. Assessee challenged the action of AO before CIT(A) and contended that Rule 8D cannot be applied without recording the satisfaction that the claim of the assessee was not proper. It was further contended that the investment made by the assessee was strategic investment and in the subsidiary companies. Accordingly no expenditure was required to be incurred for maintaining the portfolio. CIT(A) did not accept the contention of the assessee and confirmed the disallowance made by AO.

4. Before us, the Ld. AR of the assessee has pointed out that though an identical issue was considered by the Tribunal for the A.Y 2008-2009 and it was held that Rule 8D is applicable for disallowance u/s. 14A in respect of exempt income, however for the A.Y 2008-2009, the assessee was asked to furnish the computation of expenditure disallowed by him which was not explained and, therefore, the disallowance made by AO was confirmed. The Ld. AR has submitted that the AO was required to record the satisfaction that the claim of the assessee is not correct having regard to the accounts of the assessee and only if the AO is not satisfied with the explanation offered by the assessee with regard to the accounts, he could apply Rule 8D. In support of his contention he has relied upon the decisions of Hon'ble Jurisdictional High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (328 ITR 81) and submitted that the major investment of the assessee company i.e Rs. 1490.86 crores out of Rs. 1524.08 crores which comes to 97.82% is strategic investment in unlisted subsidiary companies and joint venture companies and are long term investments. No expenses are incurred for maintaining the portfolio of these investments or for holding the same. Hence, no disallowance u/s. 14A can be made with respect to these investments. The Ld. AR has relied upon the decision of this Tribunal in the case of Garware Wall Ropes Limited v. Addl. CIT, dated 15/01/2014 In ITA No. 5408.Mum/2012. He has also relied upon the decision dated 02/12/2011 of Delhi Bench of this Tribunal in the case of Oriental Structural Engineers (P) Ltd. v. ACIT, as well as the decision of Pune Bench of. This Tribunal in the case of Kalyani Steels Ltd. v. ACIT dated 30.01.2014 and submitted that the Tribunal has dealt with an identical issue in these decisions and held that when the assessee has brought on record the fact to show that no expenditure has been incurred on the investment made in the subsidiary companies then the AO has to record its satisfaction for not accepting the claim of the assessee and also give the finding that expenditure has been incurred by the assessee for earning the exempt income. The Ld. AR has also relied upon the decision of Hon'ble Delhi High Court, dated 15.01.2013 in the case of CIT v. Oriental Structural Engineers Pvt. Ltd. whereby the decision of Delhi Bench of this Tribunal has been confirmed by the Hon'ble High Court.

5. On the other hand, the Ld. CIT(DR) has vehemently contended that it is immaterial whether the investment is in subsidiary companies or in unrelated companies. The disallowance of expenditure u/s. 14A has to be computed as per Rule 8D of the Income Tax Rules. The AO has calculated the amount of disallowance as per Rule 8D and, therefore, there is no question of accepting the disallowance made by the assessee which is not in accordance with the formula given in Rule 8D. The Ld. DR has submitted that for the purpose of disallowance under Rule 8D, the entire investment as well as the entire expenditure which is booked to the profit & loss account has to be taken into account. He has referred para 51 of the decision of Hon'ble Jurisdictional High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) and submitted that once the proximate relationship between the expenditure and the exempt income is established the disallowance has to be made as per Rule 8D. He has relied upon the orders of authorities below.

6. In rebuttal, the Ld. AR has submitted that Hon'ble High Court in para 32 and 33 has clearly laid down the principles for disallowance u/s. 14A and held that sub-section 2 does not ifso facto enable the AO to apply the method prescribed by the Rule straightaway without considering whether the claim made by the assessee in respect of expenditure incurred in relation to income which does not form part of the total income is correct. Thus the Hon'ble High Court has held that where the accounts of the assessee furnish an objective basis for the AO to arrive at a satisfaction in regard to correctness of the claim of the assessee of the expenditure, there would be no warrant for taking recourse to the method prescribed by the Rules.

7. Having considered the rival submissions as well as relevant material on record, we note that so far as applicability of Rule 8D is concerned, there is no quarrel on this point that for the A.Y under consideration Rule 8D is applicable. Further for the A.Y 2008-2009, the Tribunal held in para 15 as under:—

“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 2008-2009 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 CTT(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.”

8. As it is clear from the finding of Tribunal that the assessee failed to furnish the details of disallowance under section 14A and, therefore, the disallowance made by the AO was found by the Tribunal without any infirmity. For the year under consideration the assessee has specifically raised a point before the AO that 97.82% of the investment is in the subsidiary companies and joint venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature in the subsidiary companies on long term basis and, therefore, no direct or indirect expenditure is incurred. We find that the department has not disputed this fact that 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 nontaxable 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.”

9. After considering these principles as emerged from the decision of Hon'ble Supreme Court in the case of Walfort Share and Stock Brokers P. Ltd. (supra), Hon'ble Jurisdictional High Court has held in para 32 and 33 as under:—

“32. Sub-ssection (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)

33. Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of the expression “prescribed” in section 2(33), must be prescribed by rules made under the 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 already made or otherwise increasing the liability of the assessee under section 154.”

10. It has been made clear by the Hon'ble High Court that sub-section (2) does not ifso facto empower the AO to apply the method prescribed by Rules straightaway without considering whether the claim made by the assessee is correct.

11. The assessee has relied upon various decisions of this Tribunal wherein an identical issue has been considered. In the case of Garware Wall Ropes Limited v. Addl. CIT (supra), the Tribunal while deciding an identical issue has held in para 2.4 as under:—

“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 assessees own case for the assessment year 2008-2009, 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 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 v. 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.”

12. A similar view was taken by the Delhi Bench of this Tribunal in the case of Oriental Structural Engineers (P) Ltd. (supra) which has been confirmed by the Hon'ble Delhi High Court vide decision dated 15.01.2013 in para 6.3 as under:—

“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, La. 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 L.W 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% of the dividend 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.

14. In the result appeal of the assessee is allowed.

Jm Financial Limited v. Cit

Structured Summary of the Opinion (Tribunal) — Appeal for A.Y. 2009-2010

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Assessee's) Arguments

Respondent's (Revenue's) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Jm Financial Limited v. Cit

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