Source: http://itatonline.org/archives/dcit-vs-the-saraswat-co-operative-bank-limited-itat-mumbai-s-14a-rule-8d-disallowance-applies-also-to-dividends-received-from-strategic-investments-in-subsidiaries-s-40a2-disallowance-is-not-ap/
Timestamp: 2019-04-20 14:40:33+00:00

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The AO shall compute disallowance u/s 14A of the Act with respect to expenditure incurred in relation to earning of exempt income having regard to the accounts of the assessee as per mandate of Section 14A(2) of the Act. The primary onus is on the assessee to bring on record details of expenses incurred in relation to earning of exempt income as provided u/s 14A of the Act having regards to the accounts of the assessee. In the failure thereof the assessee to discharge primary onus, the AO shall record satisfaction and apply Rule 8D of Income-tax Rules, 1962 to compute disallowance u/s 14A of the Act of the expenditure incurred in relation to the earning of exempt income. We are also of the considered view, that strategic investment made by the assessee in its subsidiary Saraswat Infotech Limited as well in the other securities which are capable of yielding exempt income i.e. by way of dividend etc. which are exempt from tax shall be included while computing disallowance u/s 14A of the Act as per the scheme of the Act as contained in provisions of Section 14A of the Act as the statute does not grant any exemption to the strategic investments which are capable of yielding exempt income to be excluded while computing disallowance u/s 14A of the Act and hence the investment made by the assessee in subsidiary company M/s Saraswat Infotech Limited and all other securities which are capable of yielding exempt income by way of dividend etc shall be included for the purposes of disallowance of expenditure incurred in relation to the earning of exempt income , as stipulated u/s 14A of the Act. Our decision is fortified by the recent decision of Hon’ble Karnataka High Court in the case of United Breweries Limited v. DCIT in ITA No. 419/2009 vide orders dated 31-05-2016 and also decision of the tribunal in the case of ACIT v. Uma Polymers Limited in ITA no 5366/Mum/2012 and CO No. 234/Mum/2013 vide orders dated 30-09-2015.
(Impact of decisions in Garware Wall Ropes Limited v. Addl. CIT in ITA no. 5408/Mum/2012 dated 15-01-2014, EIH Associates Hotels Limited v. DCIT in ITA no. 1503/Mds./2012, Interglobe Enterprises Limited v. DCIT in ITA no. 1580/Del/2013 and J M Financial Limited v. ACIT in ITA no. 4521/Mum/2012 not considered).
The assessee is a co-operative society and has made payment for availing back end services for managing its IT infrastructure from its subsidiary company SIL. The assessee’s payment were held to be excessive and unreasonable as being payment made to related parties u/s 40A(2) of the Act and to the extent considered excessive and unreasonable , disallowances of the expenditure considered unreasonable and excessive were made by the AO, which disallowance was partly confirmed by learned CIT(A). We have considered and perused the provisions of Section 40A(2)(a) and 40A(2))b) of the Act and have observed that ‘co-operative society’ are not covered under the said provisions, while ‘association of person’ is covered under the said provision. It is also observed that while defining person u/s 2(31) of the Act, the law makers have not included ‘co-operative society’ while ‘association of person’ is included while the ‘co-operative society’ is defined u/s. 2(19) of the Act. Section 40A(2) of the Act applies to the person specifically named therein and since co-operative society does not found mention in Section 40A(2)(b) of the Act , the said section would not apply to co-operative society. The co-operative societies are governed by principles of mutuality and deductions are provided u/s 80P of the Act on fulfilling of the prescribed conditions, while the association of person is not governed by principle of mutuality. The Hon’ble Bombay High Court has in the case of CIT v. Manjara Shetkari Sahakari Sakhar Karkhana Limited (2008) 301 ITR 191(Bom) has held that provisions of Section 40A(2) of the Act are not applicable to co-operative society . While deciding the afore-stated question, the Hon’ble Court relied on the decision of Hon’ble Bombay High Court in the case of CIT v. Shivamrut Doodh Utpadak Sahakari Sangh Maryadit in Tax Appeal No. 62 of 1999 filed by Revenue whereby Hon’ble Bombay High Court confirmed the decision of the Tribunal and held that Section 40A(2) of the Act is not applicable to cooperative society. Thus, Respectfully following the decision of Hon’ble Bombay High Court in afore-stated cases, we hold that Section 40A(2) of the Act is applicable to co-operative society and thus, the additions made based on the premise that Section 40A(2) of the Act is applicable to co-operative society is not sustainable in law and hence is ordered to be deleted. Further, it is the say of the assessee that tax effect is neutral and there is no loss to the Revenue as the said subsidiary company SIL is also paying tax at the same rate and hence no prejudice is caused to the Revenue as the Revenue has got due taxes albeit paid by SIL who is subsidiary of the assessee on the charges received from assessee.
A reading of the circular shows that a duty is cast upon the assessing officer to assist and aid the assessee in the matter of taxation. They are obliged to advise the assessee and guide them and not to take advantage of any error or mistake committed by the assessee or of their ignorance. The function of the Assessing Officer is to administer the statute with solicitude for public exchequer with an inbuilt idea of fairness to taxpayers., ACIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd’s. (2007) 291 ITR 500(SC). Once the expenditure is found to be allowable as revenue expenditure as per provisions of the Act, the same are to be allowed as revenue expenditure under the Act while computing income chargeable to tax even if the tax-payer has given different treatment in its books of account by capitalizing the same in its books of account instead of debiting it to the Profit and Loss Account. This is the mandate of the Act which has to be followed as the taxes can only be collected by the authority of law.
true. is it not for fetched to get any assistance from AOs unless you substantially bribe them, that is the fact. so truth is always stranger than fiction.

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