2016 (11) TMI 1012 - HC - Income Tax

Section 14A Disallowance Denied Due to Sufficient Interest-Free Funds; Legal Expenses Allowed on Related Party Services

Commissioner of Income Tax, Jalandhar-I, Jalandhar Versus M/s Max India Limited

The HC upheld the assessee's position that disallowance under section 14A was not warranted as sufficient interest-free funds were available to cover ... Disallowance u/s 14A - expenditure relatable to the exempted income - earned exempted income by way of interest on Maharashtra State Electricity Bonds and earned by way of dividends - scope of the expression “for the purpose of business” - legal and professional expenses - Held that:- The funds/reserves of the appellant were sufficient to cover the interest free advances made by it to its sister company. We are entirely in agreement with the judgment of the Bombay High Court in Commissioner of Income Tax v. Reliance Utilities & Power Ltd.,[2009 (1) TMI 4 - BOMBAY HIGH COURT] para-10, that if there are interest free funds available a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds were sufficient to meet the investment - Decided in favour of assessee Allowance of legal and professional expenses - ITAT allowed the claim - Held that:- It is not possible to say that the conclusion arrived at by the Tribunal is absurd or perverse. It is a possible view. The services such as of the nature mentioned in the agreement between the assessee and M/s Max UK Ltd. would not necessarily be recorded in writing. Advice, introductions, information may well be communicated orally. The possibility of this is enhanced on account of the fact that these are group companies. Even if each of the facts by itself does not support the Tribunal’s conclusion taken together they certainly do. The Tribunal has, therefore, taken a possible view.- Decided in favour of assessee Issues Involved:1. Applicability of Section 14A for disallowance of expenses related to exempt income.2. Allowability of legal and professional expenses claimed by the assessee.Detailed Analysis:Re: Question (i)Issue: Whether the ITAT was justified in holding that no expense is attributable to the exempted income under Section 14A of the Income Tax Act, 1961.Facts and Arguments:- The assessee earned exempted income amounting to Rs. 3,46,97,852/- during the assessment year 2002-03.- The Assessing Officer (AO) disallowed Rs. 1.5 crores under Section 14A, assuming expenses were incurred to earn the exempt income.- The CIT (Appeals) enhanced the disallowance to Rs. 4,52,94,905/- based on the inability of the assessee to produce bank statements and other relevant documents.- The assessee contended that the investments were made from its own funds and not borrowed funds, thus no disallowance was warranted.Tribunal’s Findings:- The Tribunal noted that the assessee had sufficient interest-free funds to cover the investments yielding exempt income.- It was observed that the assessee had an aggregate of Rs. 179.74 crores of surplus funds, which was more than the investment of Rs. 123.87 crores in tax-free securities.- The Tribunal concluded that the absence of bank statements did not justify an adverse inference against the assessee.Legal Principles:- The presumption that if interest-free funds are available, they are used for investments yielding exempt income, as established in the case of Commissioner of Income Tax v. Reliance Utilities and Power Ltd. (2009) and HDFC Bank Ltd. v. Deputy Commissioner of Income Tax (2016).Court’s Conclusion:- The presumption in favor of the assessee was upheld, stating that the Department could have rebutted this presumption by obtaining records from the bank but chose not to.- Question No. (i) was answered in favor of the assessee.Re: Question No. (ii)Issue: Whether the ITAT was right in holding that legal and professional expenses are allowable despite the assessee’s failure to discharge its onus regarding the rendering of services by the payee.Facts and Arguments:- The assessee incurred Rs. 1.25 crores towards legal and professional charges paid to its associated enterprise, M/s Max UK Ltd.- The AO and CIT (Appeals) disallowed the deduction, stating that the assessee failed to provide evidence of services rendered.- The assessee argued that the services were rendered, resulting in an export turnover of Rs. 29 crores.Tribunal’s Findings:- The Tribunal found that the nature of services rendered by M/s Max UK Ltd. was supported by an invoice.- It accepted the assessee’s contention that the services were of a nature that did not necessarily require written evidence, especially considering the group company relationship.- The Tribunal concluded that the achieved export turnover prima-facie demonstrated that the services were rendered.Court’s Conclusion:- The Court held that the Tribunal’s conclusion was not perverse or absurd and was a possible view based on the facts.- Question No. (ii) was answered in favor of the assessee.Final Judgment:- The appeal was dismissed, and both questions were answered in favor of the assessee.