Income Tax Appellate Tribunal - Chennai
Shriram Properties Private Limited, ... vs Assessee on 3 July, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH : CHENNAI
[BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER
AND SHRI S. S. GODARA, JUDICIAL MEMBER]
I.T.A.No.1414/Mds/2012
Assessment year : 2008-09
M/s Shriram Properties Pvt. Ltd vs The Asstt. Commissioner of
Greams Dugar, 4th & 5th Floor Income-tax
149, Greams Road Company Circle VI(2)
Chennai 600 006 Chennai
[PAN AAFCS 5801D]
(Appellant) (Respondent)
Appellant by : Shri R. Sivaraman, Advocate
Respondent by : Shri Srinivasa Rao, CIT/DR
Date of Hearing : 03-07-2013
Date of Pronouncement : 08-07-2013
ORDER
PER N.S. SAINI, ACCOUNTANT MEMBER
This is an appeal filed by the assessee against the order of the ld. CIT(A)-V, Chennai, dated 17.4.2012.
2. The assessee has taken the following grounds of appeal:
"The order of CIT(A) is against law and facts of the case.
2. The learned CIT(A) erred in confirming the action of the Assessing officer in disallowing deduction u/s 80IB(10) of Rs.2,23,22,237 .
3. The learned CIT(A) erred in confirming the disallowance of deduction u/s 80IB(10) relying on the Hon'ble Income :- 2 -: I.T.A.No. 1414/12 Tax Appellate Tribunal, Lucknow "A" Bench decision in the case of Propene Products Limited Vs JCIT (12 SOT
158)[Luck]. In that case the assessee's gross total income was "Nil". i.e., there was loss to the assessee whereas in appellant's case the gross total income was Positive figure.
4. The CIT (A) ought to have held that deduction u/s.80IB(10) is allowable project wise.
5. The CIT(A) ought to have appreciated that the loss in eligible project should not be set off against income from eligible project as held by the Hon'ble Bombay High Court in the case of Hindustan Unilever Limited Vs DCIT 325 ITR 102 (Bom).
6. The learned CIT(A) erred in confirming the assessment of interest income of RS.3,20,87,420/-, being interest received from Shriram Properties & Infrastructure Private Limited (Rs.1,68,17,926), Bengal Shriram Hitech City Private Limited Rs.(72,89,783) and from Bank of Rs.79,79,712/- under the head "Other Sources".
7. The learned CIT (A) ought to have appreciated the fact that the appellant held 50% shares in Shriram Properties & Infrastructure Pvt Ltd and that Bengal Shriram Hitech City Private Limited is also coming within the purview of company under the same management of the appellant company and that the appellant has been assisting these companies which are also in real estate business in accordance with clause 11 of object clause of Memorandum of Association and hence the interest received from these companies is assessable under the head "Profits and gains from Business".
8. The learned CIT (A) erred in relying on the Supreme Court judgment in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd Vs CIT (227 ITR 172) to hold that the bank interest is assessable under the head "other sources". In the case of Tuticorin Alkali Chemical and Fertilisers Limited, the company had not commenced its business and the interest income was earned on short term Investment of funds borrowed for setting up of a factory and during construction of the factory, whereas in the appellant's case the company is doing business and the interest received from bank was on deposits made out of share capital.
:- 3 -: I.T.A.No. 1414/12
9. The CIT (A) ought to have appreciated that the interest income from the bank is assessable under the head business in the light of the Calcutta High Court judgment in the case of Eveready Industries India Limited Vs CIT (323 ITR 312).
10. The learned CIT (A) ought to have appreciated that interest income was earned by the appellant in the course of its business activities and hence the interest income is assessable under the head "Profits and gains of business".
11.The learned CIT (A) erred in confirming· the Assessing Officer's action of disallowing Rs.9,27,875/- u/s.14A of the IT Act 1961 r. w . Rule 80 of IT Rules 1962.
12.The learned CIT (A) ought to have appreciated that the Assessing Officer has not given any reason as to why he is not satisfied with the amount offered for disallowance u/s.14A(1) of Rs.15000/-. Only if the Assessing Officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee, Rule 8D can be applied. The appellant rely on the Delhi High Court decision in the case of Maxopp Investment Ltd Vs CIT (Delhi) (203 ITR 364).
13. For these grounds and other grounds that may be adduced before or during the course of appeal hearing, it is prayed that the appellant's claim i. for deduction u/s.80 IB (10) of Rs.2,23,22,237/- ii. for treating the interest income of Rs.3,20,87,420/- as business income iii. and for deleting the disallowance u/s.14A of IT Act r.w.Rule 8D of Income tax Rules of Rs.9, 12,875/-
may be allowed by the Hon'ble Appellate Tribunal. "
3. Ground No.1 of the appeal is general in nature and hence, requires no separate adjudication by us.
4. At the time of hearing, the ld. A.R of the assessee submitted that he is not pressing Ground Nos. 6 to 10 raised in the grounds of :- 4 -: I.T.A.No. 1414/12 appeal filed before the Tribunal and has also made an endorsement to this effect in the grounds of appeal filed before us. Therefore, these grounds of appeal of the assessee are dismissed for want of prosecution.
5. In Ground Nos. 2 to 5 of the appeal, the grievance of the assessee is that the ld. CIT(A) erred in confirming the action of the Assessing Officer in disallowing deduction u/s 80IB(10) of `2,23,22,237/-.
2. The brief facts of the case are that the assessee is in the business of real estate development. During the year under consideration the assessee fully completed two projects viz.
'Samruddhi' and 'Shreyas' and continued to carry out existing housing projects of 'Spandhana' and 'Coimbatore'. The assessee has shown income from these projects on percentage completion method. The assessee, in the return of income filed, claimed deduction u/s 80IB for an amount of ` `2,23,22,237/-. Since the assessee had shown a business loss, the Assessing Officer held that the assessee-company is not eligible to claim deduction un 80IB and hence, disallowed the same.:- 5 -: I.T.A.No. 1414/12
3. The assessee, being aggrieved by the said order of the Assessing Officer, filed appeal before the ld. CIT(A) and made the following submissions as quoted in the order of the ld. CIT(A):
(i) The reason given by the Assessing Officer to deny deduction claimed under section 80IB(10) is not correct. If the appellant's claim to assess the interest income under the head 'business' is allowed there will be positive income under th head 'business' and hence the appellant is entitled to the deduction under section 80IB(10).
(ii) As per section 80A(1), deductions specified in sections 80C to 80U shall be allowed from the gross total income. The gross total income of the appellant included income derived from two housing projects, which are entitled for deduction under section 80IB(10). Hence, the appellant is entitled to the deduction claimed under section 80IB(10).
(iii) Even if the appellant's claim for treating the interest income as Business income is not allowed, the appellant is entitled for the deduction under section 80IB(10), as the gross total income is a positive figure, and it includes income which is eligible for deduction under section 80IB(10)."
4. The ld. CIT(A), after considering the above submissions, dismissed the ground of appeal of the assessee by observing as under:
"I have carefully considered the appellant's submissions. I have already held above that that the interest. income was correctly returned by the appellant as 'income from other sources' and the :- 6 -: I.T.A.No. 1414/12 same is assessable under the head 'other sources' and the said income 'derived' from the housing project eligible for deduction under section 80 IB(10). Further the decision of the ITAT Lucknow 'A' Bench and in the case of Propene Products Ltd. vs Joint Commissioner of Income-tax, Special Range, Kanpur (12 SOT 158) is quite apt on the facts of the present case. In the said case the ITAT has held as under:
"11. On going through the cases cited by the Ld. authorized representative of the assessee, we find substance in the submission of the Ld. D.R. that the cases cited by the Ld. authorized representative of the assessee are not relevant to the facts of the case under consideration. It is relevant to state that the said cases cited by the Ld. authorized representative of the assessee, the issue was as to whether income from business eligible for deduction under Chapter VI-A could be set off against income/loss of non-eligible business and in that context it was held that deduction under Chapter VI- A is to be allowed on income from eligible business without being adjusted/ set off relating to non-eligible business. However, there is a decision of the Hyderabad Bench of I.T.A.T, in the case of Jt. CIT v. Dr. Reddy's Laboratories Ltd [2005] 272 ITR (AT) 38 which was also cited by the Ld. authorized representative of the assessee, wherein it was held that even if the assessee was having two units and both are entitled for deduction under Chapter VI-A, but one of the units was having profit and the other was incurring loss, it was held that the unit having profit will be entitled to claim deduction under section 80HH of the Act without adjusting losses of other unit. We are of the considered view that the said decision is not relevant after the decision of the Apex Court in the case of IPCA Laboratory Ltd. ( supra) wherein it has been held that for giving deduction under section 80HHC of the Act, the profits earned from export of both self-manufacturing goods and trading goods are to be considered and if after such adjustments there is a profit the assessee would be entitled to deduction under section 80HHC of the Act. It was "held that if there is a loss, the assessee would not be entitled to deduction. Their Lordships of the Apex Court while deciding the above case of lPCA Laboratory Ltd. (supra) also considered provisions of sections 80AB and 80B(5) of the Act. We also observe on going through the provisions of sections 80A, 80AB and 80B(5) of the Act that computation of income of eligible business is to be made in accordance with provisions of the Act as if such :- 7 -: I.T.A.No. 1414/12 eligible business was the only source of income of the assessee during the relevant assessment year for which determination of quantum deduction under Chapter VI-A is to be given. In the case before us, the assessee is entitled for deduction under section 80-IA of the Act and accordingly the assessee will be entitled to claim deduction under section 80-IA of the Act only if there is a gross total income .in respect of eligible business to which section 80- lA of the Act applies. In the case before us, there is no dispute to the fact that after taking into account the gross income of both the units which are eligible for deduction under section 80-lA of the Act i.e., Polymer Division and Dairy Division of the assessee, the assessee has Nil income i.e., there are losses in both the assessment years under consideration. The Apex Court has held in the case of Motilal Pesticides (I) (P.) Ltd. (supra) that the special deduction under Chapter VI-A of the Act is allowable on the net income and not on the gross income. Further, the Apex Court has also held in the case of CIT v. Kotagiri Industrial Co- operative Tea Factory Ltd. [1997] 224 ITR 604 1 that in view of express provision defining expression "gross total income" in clause (5) of section 80B of the Act, for the purpose of Chapter VI-A, it is necessary for the purpose of making deduction, to determine gross total income in accordance with other provisions of the Act. This means that gross total income must be determined by setting off against income, the business losses of earlier years as required under section 72 of the Act, before allowing deduction under the relevant section of Chapter VI-A. We observe that the Hyderabad Bench of ITAT while deciding the case of case of Dr. Reddy's Laboratories Ltd. (supra) has not considered the above decision of the Apex Court and/ or the decision of the Apex Court in the case of IPCA Laboratory Ltd. (supra) was not available. There is no dispute to the fact that gross total income has to be computed for the purpose of Chapter VI-A in accordance with provisions of the Act i.e., inter alia intra head and/or inter head losses have to be adjusted. If it is so, the loss incurred by the assessee in the eligible unit of Dairy Division are adjusted with profits of the eligible unit of Polymer Division, the gross total income of the assessee for both the assessment years comes to Nil i.e., there is a loss to the assessee. In view of the above, we are of the considered,view that the authorities below :- 8 -: I.T.A.No. 1414/12 have rightly held that the assessee is not entitled for deduction under section 80-lA of the· Act for both the assessment years under consideration, as the assessee has disclosed gross loss after considering the results of its both Polymer Division and Dairy Division, which are entitled for deduction under section 80-IA of the Act. Hence, we uphold the orders of the authorities below by rejecting grounds of appeal taken by the assessee." (emphasis supplied).
The ratio of the above said decision of the ITAT in the case of Propene Products Ltd. (supra) scarcely applies to the appellant's case. The appellant's business income, admittedly, is a negative figure and hence the appellant is not entitled to deduction under section 80IB(10). The grounds of appeal numbering 1 to 5 are, therefore, dismissed."
5. The ld. A.R of the assessee pointed out from the computation of income, a copy of which has been placed on record, that the assessee had computed the loss under the head 'profits and gains from business' at ` 64,49,445/-. The assessee, in the computation of income has shown interest income of ` 3,20,87,421/- under the head 'income from other sources. Thereafter, the gross total income of the assessee was computed at ` 2,56,37,975/-. It was the contention of the ld. A.R of the assessee that as the gross total income computed by the assessee in the computation of income was higher than the deduction of `2,23,22,237/- claimed u/s 80IB of the Act, the Assessing Officer was not justified in disallowing the deduction u/s 80IB to the assessee. Further elaborating his :- 9 -: I.T.A.No. 1414/12 arguments, he submitted by pointing out from page 2 of the computation of income wherein project-wise profit and loss has been arrived, that the assessee during the year had carried out four projects namely, 'Samruddhi', 'Shreyas, 'Spandhana' and 'Coimbatore'. He submitted that the assessee claimed deduction u/s 80IB from two projects i.e 'Samruddhi' where the assessee earned profit before tax of ` 60,38,290/- and project 'Spandhana' where the assessee earned profit before tax of ` 1,62,83,947/-. He pointed out that the total of the profits of these two projects works out to ` `2,23,22,237/- for which the assessee claimed deduction u/s 80IB of the Act in the computation of income filed alongwith the return of income. He further pointed out that in the 'Shreyas' and 'Coimbatore' projects, the assessee had incurred loss of ` 37,47,795/- and ` 59,03,089/- respectively and therefore, did not claim any deduction u/s 80IB of the Act. Further elaborating his submissions, he pointed out that the Assessing Officer has erred in not allowing deduction u/s 80IB as the assessee has computed business loss of ` 64,49,445/- from all its projects. It is his contention that according to section 80IB profit of each eligible unit has to be determined separately and deduction allowed on that u/s 80IB of the Act. His submission is that loss from other projects should not be adjusted against the profits of the eligible :- 10 -: I.T.A.No. 1414/12 projects while determining deduction allowable u/s 80IB of the Act to the assessee. In support of his submission, the ld. A.R of the assessee relied on the decision of the Hon'ble Madras High Court in the case of Viswas Promoters Pvt. Ltd. vs ACIT, [2013]255 CTR (Mad) 149, and submitted that the Hon'ble High Court has held that in that case the assessee had claimed deduction u/s 80IB in respect of flats measuring less than 1500 sq ft of built-up area and did not claim deduction in respect of flat exceeding an extent of 1500 sq ft. The Assessing Officer rejected the assessee's claim on the ground that deduction was for the project as a whole and all residential units in a project must satisfy conditions of having built up area of less than 1500 sq ft. The ld. CIT(A) held that within composite building project, if there were both eligible and ineligible units, assessee would be eligible to claim deduction in respect of eligible units. However, the Tribunal held that a project could not be approved in piecemeal and blocks of residential units were parts of a project and not project by itself and thereby denied assessee's claim of deduction u/s 80IB(10). The Hon'ble High Court, on appeal by the assessee, held that housing projects u/s 80IB refers to any building other than road, bridge or other super structure. Each block in the larger project by name 'Agrini' and 'Vajra' has to be taken as an independent building and hence a :- 11 -: I.T.A.No. 1414/12 housing project, for the purpose of considering a claim of deduction. Within a composite housing project, where there are eligible and ineligible units, the assessee can claim deduction in respect of eligible units in the project and even within the block, the assessee is entitled to claim proportionate relief in the units satisfying the extent of the built-up area. The assessee is entitled to claim deduction in respect of all blocks forming part of projects called 'Agrini'and 'Vajra', but to the extent of each of the blocks satisfying the conditions u/s 80IB(10), the assessee would be entitled to the relief on a proportionate basis and allowed the appeal of the assessee.
6. The ld. A.R of the assessee further placed reliance on the decision of the Bangalore Bench of the Tribunal in the case of Jindal Aluminium Ltd vs ACIT, [2012] 19 ITR (Trib) 255 (Bangalore) and submitted that in that case the assessee was engaged in manufacture and sale of aluminium extrusion and generation of wind energy. The business of generation of wind energy through windmills was situated at several places. Commercial generation at the first windmill started in the financial year 1997-98, the second started commercial generation in the financial year 2002-03 and the third in the financial year 2003-04. The assessee claimed and was allowed deduction u/s 80IA of the Act in respect of its first windmill unit, since assessment :- 12 -: I.T.A.No. 1414/12 year 2000-01. In the assessment year 2004-05 also the assessee claimed and was allowed deduction u/s 80IA being the fifth year of claim in respect of that unit. The ld. CIT in revision directed the Assessing Officer to make a fresh assessment allowing the deduction claimed u/s 80IA in accordance with law in the light of the observations. Pursuant to the order of the CIT u/s 263 of the Act the Assessing Officer passed an order adjusting the depreciation of the second and third windmill units with the profit of the first, and as a result wholly disallowing the deduction claimed u/s 80IA. The ld. CIT(A) confirmed the action of the Assessing Officer. On further appeal, the Tribunal held allowing the appeal of the assessee that at the stage of aggregation of income under the same head of income as well as under different heads of income, the losses intra-head as well as inter-head have to be adjusted. The primary step for considering the grant of deductions under Chapter VI-A is to determine th gross total income, which, in turn, is computed by aggregating the income from all the sources in the year after adjusting the losses of the current year under any head. The brought forward loss or unabsorbed depreciation are also reduced. The resultant figure is determined as gross total income. At the stage of aggregation of income there is no question of adjusting loss of any other business against the business :- 13 -: I.T.A.No. 1414/12 income of the undertaking eligible for deduction under Chapter VI-A of the Act. The gross total income of the assessee was at ` 8,03,26,598/- after adjusting the losses suffered by it in the eligible as well as profits of the non-eligible units. There were no brought forward losses or unabsorbed depreciation. The claim of deduction under section 80IA was in respect of eligible unit wind energy division at ` 4,72,28,143/- and the deduction u/s 80HHC of the Act was claimed in respect of other units at ` 15,51,440/-. Even if both the deductions were added the sum total was obviously less than the gross total income. The ld. CIT(A) was wrong in holding that losses suffered by the assessee in the two eligible units be reduced from the income of the other eligible unit before granting the deduction u/s 80IA.
7. On the other hand, the ld. CIT/DR vehemently argued in support of the orders of the lower authorities. He submitted that the assessee has shown business loss of ` 64,49,445/- and interest income of ` 3,20,87,421/- under the head 'income from other sources'. Thus, if deduction u/s 80IB is allowed then it would be allowed from interest income which is not the income from eligible undertaking of the assessee. He further argued that the decision of the Hon'ble Madras High Court in the case of Viswas Promoters Pvt. Ltd (supra) was not applicable to the facts of the assessee's case. According to him in :- 14 -: I.T.A.No. 1414/12 that case the assessee was doing a housing project wherein it had constructed flats of 1500 sq ft area and flats of more than 1500 sq ft area and in that circumstances, the Hon'ble High Court held that the assessee was eligible for deduction u/s 80IB proportionately in respect of flats constructed having built-up area upto 1500 sq ft. In the case of the assessee, the assessee is having four different projects and therefore, the facts are entirely different than that were before the Hon'ble Madras High Court. Further for the same reasons, he submitted that the decision of the Bangalore Bench of the Tribunal in the case of Jindal Aluminum Ltd (supra) was also not applicable in the case of the assessee.
8. We have considered the rival submissions, perused the orders of the lower authorities and materials available on record. The undisputed facts of the case are that the assessee is eligible for deduction u/s 80IB in respect of profits derived by it from its 'Samruddhi' and 'Spandhana' projects. Further the gross taxable income of the assessee was comprised of the following elements:
(i) Profit from 'Samruddhi' and 'Spandhana' : ` 2,23,22,237/-
(ii) Loss from two Projects viz.'Shreyas' and : ` 2,87,71,682/-
'Coimbatore'
(iii) Interest income : ` 3,20,87,421/-
Gross total income : ` 2,56,37,975/-
:- 15 -: I.T.A.No. 1414/12On the above facts, the issue before us is whether the assessee is entitled for deduction u/s 80IB of ` 2,23,22,237/- or not in view of the fact that though there is gross total income of higher amount of ` 2,56,37,975/-, but in view of the fact that amount computed under the head 'business income' by aggregating profits and losses of all business is loss of ` 64,49,445/-.
9. Sub-section (1) of section 80-IB provides that where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11B), there shall be allowed, in computing the total income of the assessee a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. Sub-section (2) states that this section applies to any industrial undertaking which fulfills all the conditions stipulated in this sub-section. Sub-section (4) of section 80-IB states that "the amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter.......". In the instant case, it is not in dispute that the :- 16 -: I.T.A.No. 1414/12 assessee has satisfied all other requisite conditions making the assessee eligible for deduction. On a cursory look at sub-section (4), it is apparently borne out that the amount of deduction is available in respect of the profits and gains derived from an industrial undertaking. If there is no profit from an industrial undertaking obviously there cannot be any question of allowing deduction under this section. Equally if there is a loss in an industrial undertaking in that case again there will not be any point in claiming deduction under this section. As this sub-section provides for granting deduction on the profits and gains derived from "such industrial undertaking", it is clear pointer for granting deduction in respect of profit earned by each of such eligible industrial undertakings separately. If there is a profit derived from such industrial undertaking, the deduction under section 80-IB will follow. The loss from such eligible industrial undertaking will go out of reckoning. There is no warrant for reducing the loss of one eligible undertaking from the profit of the other eligible undertaking. Such an interpretation will lead to violence to the unambiguous language of section, which otherwise talks of granting deduction in respect of the 'profits and gains derived from such industrial undertaking'. If we were to read the section in a way that has been read by the authorities below, then instead of the phrase extracted in the preceding line, it :- 17 -: I.T.A.No. 1414/12 should have been 'aggregate of profits and gains derived from such industrial undertakings'. It is, therefore, abundantly clear that there is no reference to the aggregate of profits from all the eligible industrial undertakings. We are, therefore, of the considered opinion that if there is profit derived from a particular industrial undertaking, that will qualify for deduction without reduction of loss suffered by any other eligible industrial undertaking(s).
10. Section 80IB(13) reads as under:
(13) The provisions contained in sub-section (5) and sub-
sections (7) to (12) of section 80-IA shall, so far as may be, apply to the eligible business under this section22."
11. Sub section(5) of section 80IA reads asunder:
"(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made."
12. Thus, a reading of the above provisions shows that for determining the amount which qualifies for deduction u/s 80IB(1), one has to compute the income from eligible business as if the eligible :- 18 -: I.T.A.No. 1414/12 business was the only source of income of the assessee. In other words, the income or loss from other business or other activities are to be ignored for the purpose of determining the amount which is eligible for deduction u/s 80IB(1) of the Act.
13. Section 80A(1) provides that in computing total income of the assessee, there shall be allowed from the gross total income the deductions specified in sections 80-C to 80-U. Sub-section (2) further provides that the aggregate amount of deductions under this Chapter shall not in any case exceed the gross total income of the assessee. The gross total income has been defined under section 80B (5) to mean 'the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter.' It therefore follows that the primary step for considering the grant of deductions under Chapter VI-A is to determine the gross total income, which, in turn, is computed by aggregating the income from all the sources in this year after adjusting the losses of the current year under any head. The brought forward loss or unabsorbed depreciation etc., are also reduced. The resultant figure is determined as gross total income. To put it simply gross total income is the income available at the disposal of the assessee immediately before allowing deductions under Chapter VI-A. If the gross total income is say Rs. 100 and the assessee is :- 19 -: I.T.A.No. 1414/12 entitled to deduction under section 80-IB at Rs. 150, then the amount of deduction under section 80-IB will be restricted to Rs. 100 as per the mandate of section 80A which provides that the deductions shall be allowed from the gross total income and the aggregate amount of all the deductions shall not in any case exceed the gross total income of the assessee. If however the amount of eligible relief under section 80-IB is say Rs. 90, then full amount will be eligible for deduction because the amount of the eligible relief does not exceed the gross total income. Therefore it is mandatory to work out the eligible amount of deduction under various sections of Chapter VI-A individually and then such aggregate amount has to be restricted to the amount of gross total income as computed under section 80B(5), which means the income available after adjusting all the brought forward losses and unabsorbed depreciation etc.
14. Thus, a careful reading of all the above provisions shows that what is relevant for ascertaining the amount which is allowable deduction u/s 80IB are -
(i) Amount of profit derived from eligible business; and
(ii) The amount of gross total income of the assessee The amount of profit derived from eligible business qualifies for deduction u/s 80IB subject to the amount of gross total income of the :- 20 -: I.T.A.No. 1414/12 assessee . There is absolutely no relevance for this purpose of the amount which is arrived at by aggregating income from all the different business of the assessee which is the amount assessable as business income of the assessee.
15. We are reminded of the celebrated judgment rendered by the Hon'ble Supreme Court in the case of CIT v. Canara Workshop (P.) Ltd. [1986] 161 ITR 3201 in which the assessee was engaged in the manufacture of automobile spares. The products manufactured by it were covered by the list in the Fifth Schedule to the Income-tax Act. During the relevant period, the assessee commenced another activity, that is the manufacture of alloy steels, which was also an industry covered in the Fifth Schedule. The assessee sustained loss in the alloy steel industry but profit in the other industry. It claimed deduction in respect of the profit without reducing the loss from the alloy steel industry. The ITO held that the assessee will be entitled to deduction under section 80E on the profits from the manufacture of automobile parts only after setting off the loss in alloy steel manufacture. The High court decided the point in assessee's favour. The revenue assailed the judgment of the Hon'ble High Court before the Hon'ble Supreme Court. While affirming the view taken by the Hon'ble High Court, it was held that in computing the profits for the purpose of :- 21 -: I.T.A.No. 1414/12 deduction under section 80E, the loss incurred by the assessee in the manufacture of alloy steels (a priority industry) could not be set off against the profits of the manufacture of automobile ancillaries (another priority industry) and hence the assessee was entitled to deduction at the specified rate on the entire profits of the automobile parts industry included in the total income without deducting there from the loss in the alloy steel manufacture. Facts involved in the instant appeal are mutatis mutandis similar.
16. The Hon'ble Andhra Pradesh High Court in the case of CIT v. Visakha Industries Ltd. [2001] 251 ITR 4711 has also taken the similar view by holding that the deductions contemplated under section 80HH and 80-I are to be allowed with reference to the profits of the particular industrial undertaking and not with reference to the total income of the assessee and therefore loss in an other unit cannot be set off against the profits of eligible unit.
17. In the instant case, we observe that gross total income of the assessee is ` 2,56,37,975/- after adjusting losses suffered by the assessee in the other two 'projects viz. 'Shreyas' and 'Coimbatore'. There are no brought forward losses or unabsorbed depreciation. The claim of deduction u/s 80IB in respect of the two eligible units viz. 'Spandhana' and 'Samruddhi' of ` 2,23,22,237/- is obviously less than :- 22 -: I.T.A.No. 1414/12 the gross total income. In our considered opinion, the Assessing Officer as well as the ld. CIT(A) erred in interpreting the relevant provisions when they held that the losses suffered by the assessee from two projects, viz. 'Shreyas' and 'Coimbatore' be reduced from the profits of the other two units viz. 'Spandhana' and 'Samruddhi' for granting deduction u/s 80IB. Accordingly, the impugned orders of the lower authorities are set aside. The Assessing Officer is directed to allow deduction u/s 80IB on the profits derived by the assessee from two projects viz. 'Spandhana' and 'Samruddhi' of ` 2,23,22,237/-. Thus, the grounds of appeal of the assessee are allowed.
18. Ground Nos. 11 & 12 of the appeal are directed against the order of the ld. CIT(A) in confirming the action of the Assessing Officer in disallowing ` 9,27,875/- u/s 14A of the Act r.w.Rule 8D of the IT Rules.
19. The brief facts of the case are that the assessee received dividend income of ` 1,58,45,280/- and claimed the same as exempt. In the return of income filed, the assessee did not disallow any amount u/s 14A towards expenditure incurred to earn the exempt income. During the course of assessment, the Assessing Officer required the assessee to give the actual calculation of expenses incurred for earning the dividend income as per Rule 8D of the IT :- 23 -: I.T.A.No. 1414/12 Rules The assessee submitted that ` 15,000/- was the expenditure incurred to earn the exempt income. The Assessing Officer, however, disallowed ` 9,27,875/- u/s 14A of the Act.
20. On appeal, the ld. CIT(A) confirmed the disallowance observing that the amount offered for disallowance of ` 15,000/- in the course of assessment proceedings was substantially low when compared to the transactions of the assessee and also has no basis whereas the Assessing Officer has worked out the disallowance in accordance with the provisions of law. The applicability of Rule 8D to the present assessment year is also not under dispute. The assessee has also not challenged the working of disallowance made by the Assessing Officer under Rule 8D.
21. The ld. A.R of the assessee relied on the order of the Chennai 'A' Bench of the Tribunal in the case of of the assessee's group concerns namely, Shriram Transport Finance Company Ltd. vs ACIT in I.T.A.No. 701/Mds/2012 and Shriram City Union Finance Ltd vs ACIT, in I.T.A.No. 702/Mds/2012, consolidated order dated 28.6.2012 passed in assessment year 2008-09 and submitted that the Tribunal in that case had deleted the disallowance on the ground that the Assessing Officer has not given any finding to the effect that the claim of the assessee that it had not incurred any expenditure or it had :- 24 -: I.T.A.No. 1414/12 incurred only so much of expenditure was incorrect which was a must for invoking the provisions of section 14A of the Act. He submitted that in the case of the assessee also no such finding has been given by the Assessing Officer and therefore, following the above quoted order of the Tribunal, the grounds of appeal of the assessee should be allowed.
22. On the other hand, the ld. CIT/DR fully justified the orders of the lower authorities.
23. We have considered the rival submissions, perused the orders of the lower authorities and materials available on record. The undisputed facts of the case are that the assessee has received dividend income during the year of ` 1,58,45,280/- which was claimed as exempt. The assessee, during the course of assessment proceedings, submitted that ` 15,000/- was incurred towards earning of this dividend income and hence, this expenditure should be reduced from the dividend income while allowing exemption of dividend income. The Assessing Officer, however, applying Rule 8D and section 14A of the Act computed the disallowance of ` 9,27,875/- and disallowed the same while computing the income of the assessee
24. On appeal the same was confirmed by the ld. CIT(A). :- 25 -: I.T.A.No. 1414/12
25. The ld. A.R has relied upon the decision of the Chennai 'A' Bench of the Tribunal in the case of assessee's group concerns i.e Shriram Transport Finance Company Ltd and Shriram City Union Finance Ltd (supra) wherein the Tribunal, in the consolidated order passed in the case of these concerns, while deleting the disallowance made on similar facts and circumstances, held as under:
12. We have heard both sides, perused the materials available on record and the decisions relied on by both counsels. In the case of ACIT vs. SIL Investment Ltd. (supra), the Delhi Bench of the Tribunal in its order in para 27 held as under:
"27. In the present case, the AO did not bring any evidence on record to establish that any expenditure had been incurred by the assessee company for earning the exempt income. In the absence of such evidence, it was wrong on the part of the AO to proceed to compute disallowance of the expenses u/s 14A of the Act by merely applying Rule 8D(2)(iii) of the Rules."
The above view was taken by the Tribunal taking into consideration various decisions of the Tribunal including the decision of the Delhi Bench in the case of DCIT vs. Jindal Photo Ltd. and the High Courts.
13. The Delhi Bench of the Tribunal in the case of DCIT vs. Jindal Photo Limited in I.T.A. No. 814(Del)2011 by order dated 23.09.2011 for the assessment year 2008-09 also considered this issue and held that satisfaction of the Assessing Officer is a pre-requisite to invoke the provision of Rule 8D of the Income Tax Rules. While holding so, the Tribunal observed as under:
"10. Now. Coming to ground No.3, the Department alleges that the CIT(A) has erred in restricting the addition u/s 14A of the Act to ` 19,43,022, as against that of ` 31,01,542/- made by the AO. This issue was also there before the Tribunal in the assessee's case for assessment year 2007-08. On behalf of the assessee, it has been contended that Rule 8D of the I.T. Rules was not applicable for that year; that however, in the year under consideration, no satisfaction has been recorded by the AO as to how the assessee's calculation is not correct; that however, the :- 26 -: I.T.A.No. 1414/12 AO still went on to apply Rule 8D to the case; that the ld. CIT(A) also applied Rule 8D but gave only part relief to the assessee by reducing the interest, whereas regarding 0.5% of exempt investments, he approved the action of the AO; and that once Rule 8D cannot be applied, the assessee's working is to be accepted.
11. The ld. DR, on the other hand, has strongly supported the impugned order in this regard also, contending that the ld. CIT(A) has excluded security taken from customers .
12. The ld. CIT(A), it is seen, restricted the disallowance u/s 14A to ` 19,43,022/-, calculating the disallowance of expenditure in terms of section 14A read with Rule 8D of the Rules as follows:-
a) Direct expenses attributable to earning of exempt income: NIL
b) Average exempt investments 37,82,57,180/-
c) Average assets 157,64,90,333/- d) Interest payments made by the assessee 2,15,625/- e) Interest disallowed: (d) x (b)/(c) = 51,736/- f) 0.5% of exempt investments = 18,91,286/- Total disallowance u/s 14A [ (e) + (f) ] = 19,43,022/-.
13. The Tribunal (supra), for assessment year 2007-08, had held as follows:-
"17. We have heard the parties on this issue and have perused the material on record. During the year, the assessee had earned exempt dividend income of ` 17,97,010/- in respect of investment made in mutual funds. In the return of income filed, a suo moto disallowance of expenses to the tune of `` 1,73,038/- had been made by the assessee u/s 14A of the Act. In the assessment order, the AO made a disallowance of ` 32,18,475/- by applying the method provided in Rule 8D of the I.T. Rules, 1962. This was done without pointing out any inaccuracy in the method of apportionment or allocation of expenses, as adopted by the assessee. All through, the assessee was maintained that the assessee was during the year, carrying on manufacturing activities at its manufacturing units at several places. Its head :- 27 -: I.T.A.No. 1414/12 office was at Delhi. The assessee had maintained separate books of account for each unit. Common expenses incurred at the head office and the branches were attributed to all the units including the head office. Investment in mutual funds, which gave rise to exempt dividend income, was done through the head office. It was the case of the assessee that to earn such dividend income, no direct expenditure was required and no expenses were incurred to make investment of surplus amounts in mutual funds. The suo moto disallowance had, however, been made by the assessee keeping in consideration, the provisions of section 14A of the Act.
18. Now, as per section 14A(2) of the Act, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee's total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e., under Rule 8D of the I.T. Rules. However, in the present case, the assessment order does not evince any such satisfaction of the AO regarding the correctness of the claim of the assessee. As such, Rule 8D of the Rules was not appropriately applied by the AO as correctly held by the CIT(A). It has not been shown by the AO that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an ad hoc disallowance was made. The onus was on the AO to establish any such expenditure . This onus has not been discharged. In "CIT v. Hero Cycles" (P&H) 323 ITR 518, under similar circumstances, it was held that the disallowance u/s 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions in "ACIT v. Eicher Ltd." 101 TTJ (Del)369, that it was held that the burden is on the AO to establish nexus of expenses incurred with the earning of exempt income before making any disallowance u/s 14A of the Act. In "Maruti Udyog v. DCIT" 92 ITD 119(Del), it has been held that before making any disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. In "Wimco Seedlings Limited v. DCIT":- 28 -: I.T.A.No. 1414/12
107 ITD 267 (Del) (TM), it has been held that there can be no presumption that the assessee must have incurred expenditure to earn tax free income. Similar are the decisions in:
1. Punjab National Bank v. DCIT, 103 TTJ 908(Del);
2. Vidyut Investment Ltd., 10 SOT 284(Del); and
3. D.J. Mehta v. ITO, 290 ITR 238(Mum.)(AT).
19. In view of the above, finding no error with the order of the CIT(A) on the point at issue, the same is hereby confirmed. Ground No.3 is thus rejected."
14. In the year under consideration, it is seen that it is not incorrect when the assessee contends that no satisfaction has been recorded by the AO regarding the assessee's calculation being incorrect. Even so, Rule 8D of the Rules has been applied.
This, in our opinion, is not correct. Such satisfaction of the AO is a pre-requisite to invoke the provisions of Rule 8D of the Rules. The ld. CIT(A), therefore, erred in partially approving the action of the AO."
14. The Hon'ble Delhi High Court in a batch of appeals in the case of MAXOPP Investment Ltd. vs. CIT & Others (supra) elaborately dealt the issue of applicability of provisions of section 14A read with Rule 8D for the assessment years prior to the assessment year 2008- 09 and also the applicability of the said provision for the assessment years subsequent to assessment years 2008-09. The Hon'ble High Court in paras 29 to 31 and 36 to 40 held as under:
29. Sub-section (2) of Section 14A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only 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 the said Act.
In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of :- 29 -: I.T.A.No. 1414/12 such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub- section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. Rule 8D
30. As we have already noticed, sub-section (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is - "such method as may be prescribed". We have already mentioned above that by virtue of Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes introduced Rule 8D in the said Rules. The said Rule 8D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which :- 30 -: I.T.A.No. 1414/12 does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules.
31. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under Section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of :- 31 -: I.T.A.No. 1414/12 expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the total income, is taken. Do sub-sections (2) and (3) of Section 14A and Rule 8D apply retrospectively ?
32. ........ ............... ................. ................
33. ........ ............... ................. ................
34. ........ ............... ................. ................
35. ........ ............... ................. ................
36. Insofar as sub-sections (2) and (3) of Section 14A are concerned, they have also been introduced by virtue of the Finance Act, 2006 with effect from 01.04.2007. This is apparent, first of all, from the Notes on Clauses of the Finance Bill, 2006 [Reported in 281 ITR (ST) at pages 139-140]. The said Notes on Clauses refers to clause 7 of the Bill which had sought to amend Section 14A of the said Act. It is specifically mentioned in the said Notes on Clauses that:-
"This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years."
37. Furthermore, in the Memorandum explaining the provisions in the Finance Bill, 2006 [281 ITR (ST) at pages 281- 281], it is once again stated with reference to clause 7 which pertains to the amendment to Section 14A of the said Act that:-
"This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years."
38. We may also refer to the CBDT Circular No.14/2006 dated 28.12.2006 and to paragraphs 11 to 11.3 thereof. Paragraph 11 dealt with the method for allocating expenditure in relation to exempt income and paragraphs 11.1 and 11.2 explained the basis and logic behind the introduction of sub- section (2) of Section 14A of the said Act. Paragraph 11.3 :- 32 -: I.T.A.No. 1414/12 specifically provided for applicability of the provisions of sub- section (2) and it clearly indicated that it would be applicable "from the assessment year 2007-08 onwards".
39. It is, therefore, clear that sub-sections (2) and (3) of Section 14A were introduced with prospective effect from the assessment year 2007-08 onwards. However, sub-section (2) of Section 14A remained an empty shell until the introduction of Rule 8D on 24.03.2008 which gave content to the expression "such method as may be prescribed" appearing in Section 14A(2) of the said Act.
40. From the above discussion, it is clear that, in effect, the provisions of sub- sections (2) and (3) of Section 14A would be workable only with effect from the date of introduction of Rule 8D. This is so because prior to that date, there was no prescribed method and sub-sections (2) and (3) of Section 14A remained unworkable."
15. The Hon'ble High Court held that it is a condition precedent for the Assessing Officer while determine the amount of expenditure incurred in relation to exempt income that he must record that his dissatisfaction with the correctness of the claim of the assessee in respect of the expenditure incurred in relation to exempt income. The Hon'ble High Court held that sub-section (3) of section 14A is an offshoot of sub-section (2) of section 14A and therefore, sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income, which does not form part of total income. The Hon'ble High Court held that sub-section (2) deals with cases, where the assessee specifies that expenditure had been incurred in relation to income, which does not form part of total income. The Hon'ble High Court held that if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in both cases, the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income, which does not form part of total income under a prescribed method, which is Rule 8D of the Income Tax Rules. The Hon'ble High Court further held that sub-sections (2) and (3) of section 14A are workable only with effect from the date of introduction of Rule 8D i.e. 24.03.2008 because prior to that date, there was no prescribed method and sub-sections (2) and (3) of section 14A remain unworkable.
16. Therefore, finding of the Assessing Officer that the claim of the assessee that it had not incurred any expenditure or it had incurred only so much expenditure is incorrect is a must for invoking the provision of sub-section (2) of section 14A of the Act." :- 33 -: I.T.A.No. 1414/12
26. We find that in the course of assessment proceedings, the assessee filed a letter stating as under:
"..................... ................. With regard to expenses in connection earning dividend income we wish to submit that only 5 transactions were made during the year In connection with Investments in Mutual Fund (MF) and 8 transactions were made for redeeming the MF investments. Therefore, the expenses viz. salary and conveyance charges that could have Incurred would be about Rs.15,000/- Only. Hence, we request you to kindly treat this amount of Rs.15,000/- as expenses incurred In earning the exempt income. We therefore request you to appreciate that rule 8D of IT Rules 1962 does not apply".
Further, we find that the relevant observation of the Assessing Officer in the assessment order reads as under:
"The submission made by the assessee is not considered satisfactory. The expense incurred for earning the above income as per rule 8D of IT Rules 1982 is calculated as below:"
27. Thus it is observed that the claim of the assessee that only `15,000/- was incurred for earning exempt income was rejected by the Assessing Officer without recording any reason as to why the same was found as not satisfactory. In our considered view, unless the Assessing Officer reaches a satisfaction after examination of accounts on the basis of reasons recorded in the assessment order that the claim of quantum expenditure of the assessee as incurred in relation to the exempt income is not acceptable then, the Assessing Officer has :- 34 -: I.T.A.No. 1414/12 no jurisdiction to invoke the provisions of Rule 8D of the IT Rules. In the instant case, in the absence of any reason for considering the claim of the assessee as unsatisfactory, in our considered view, the invocation of Rule 8D by the Assessing Officer was without jurisdiction and consequently unsustainable. We, therefore, delete the disallowance of ` 9,12,875/- and direct the Assessing Officer to restrict the disallowance u/s 14A to ` 15,000/- only. Thus, the grounds of appeal of the assessee are allowed.
28. In the result, the appeal of the assessee is allowed. Order pronounced on Monday, the 08th of July, 2013, at Chennai.
Sd/- Sd/-
(S. S. GODARA) (N.S.SAINI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 08th July, 2013
RD
Copy to: Appellant/Respondent/CIT(A)/CIT/DR