TaxTMI 
TaxTMI 
2006 (3) TMI 229
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....partake the character of a business activity. This finding is erroneous and based on surmises and conjectures. 4. The authorities below should have held that entire interest outgo is an allowable deduction under section 36(1)(iii) of the Income-tax Act. 5. The assessment order is bad and wrong in law. 6. The Assessing Officer ought to have determined the losses to be carried forward in accordance with law. 7. The appellant prays that it may permitted to add, amend order forgo all or any of the above grounds of appeal." 2. I.T.A. No. 3722/D/2005 by the assessee is directed against the order of the CIT(A)-XIV, New Delhi dated 16-8-2005 for the assessment year 2001-02 whereby the CIT(A) confirmed the penalty under section 271(1)(c) of the Income-tax Act, 1961. 3. Since both the matters arise on the same facts and of the same assessee for the same assessment year, therefore, both the appeals were heard together and we dispose of the same by this common order. 4. We have heard the learned representatives of both the parties and gone through the observations of the authorities below and details pointed out by the learned representatives of bot....
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....We may also mention here that comparison of the Balance Sheet as at 31-3-2001 with 31-3-2000 would show that there is a decline in the loans from Rs. 39.49 crores to Rs. 35.08 crores as at 31-3-2001. Thus, there is no fresh net inflows from loans as at 31-3-2001. As the funds are old for which the interest has been allowed in the past, it is requested that interest may be allowed in this year as well being incurred for the purpose of company's business." 5.2 The Assessing Officer considering the reply of the assessee in the light of the fact that shares are held by the assessee in investment (as stated by the assessee and also written in its memorandum and articles of association) and the earning dividends is inextricably linked with it, observed that following analysis emerges:- 5.3 The assessee has earned dividend of Rs. 20,00,690 which it has treated as exempt under section 10(33) in its return. As per section 10(33) dividend received from domestic company shall not be includible in the total income of the assessee. Section 115-O states that "Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section,....
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....le only if any income is made or earned." The Assessing Officer on consideration of the facts and the case laws observed that now since the dividend income is no longer taxed under the head 'Income from other sources', in view of the insertion of sections 14A and 115-O, the decision of the Hon'ble Supreme Court is no longer valid. Consequently, any expense incurred for the purpose of acquiring shares on which dividend income was earned during the year (for whatever reasons) would also be disallowed. The Assessing Officer accordingly disallowed the amount of the interest of Rs. 3,93,69,566 on the basis of above facts. The Assessing Officer after computing the total income reduced the brought forward losses adjusted to the extent of income and he treated the taxable income of the assessee at 'nil'. 5.5 The assessment order was challenged before the CIT(A) and it was submitted that the investment made by the assessee in the equity share capital of Jindal Group is primarily as promoter, to acquire controlling interest, management etc. of group companies. As such the shares are held by the assessee as part of its business activity, the business being that of....
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....rther submitted that section 14A deals with those expenses, which are incurred by it in relation to income which does not form part of the total income under this Act. The expression 'in relation to' has to be read in a broader sense. The words 'in relating to' signify or imply a direct and proximate relationship between expenditure and income. It cannot cover any expenditure relating to the source but not attributable to exempt income. It was submitted that in a case of one indivisible business, section 14A does not have any applicability. The assessee submitted that it holds shares as apart of the promotes' stake and not as investment simpliciter. The main activity of the assessee is to have control over the investee companies. It was submitted that section 14A of the Act can apply at best to an expenditure incurred in relation to income which does not form part of the total income. The provisions of section 14A clearly postulates disallowance of expenditure only in a case where it is proved that the expenses incurred have a real relationship with the income which does not form part of the total income. 5.8 It was further submitted that section 115-O ....
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....sessee and held that the provisions of section 14A are attracted in the case of the assessee. The addition made by the Assessing Officer was accordingly confirmed. The findings of the CIT(A) in paras 5,5.1,5.2,5.3, 5.4, 5.5, 5.6 and 6 are reproduced as under:- "5. I have carefully considered the facts of the case and have gone through the order of the Assessing Officer and the contentions raised by the appellant. I find that the undisputed facts are that the appellant borrowed certain unsecured loans, which were invested in the equity shares. The appellant paid interest of Rs. 3,93,69,566 on the said loans. Therefore, the facts show that the appellant has financed its investment in equity shares from out of the unsecured loans taken by it. In other words, there is a direct nexus established between the interest bearing loans taken by the appellant and the investment made in the equity shares. 5.1 The appellant has tried to make out a case that it has made investment in the equity share capital of Jindal Group of companies primarily as a promoter in order to acquire controlling interest and management of the Group Companies and, therefore, it should be treated to b....
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.... 10(33) and 115-O, the ratio of the above cited decision of the Apex Court cannot be applied for allowing any deduction in respect of the expenditure incurred since the dividend income is no more includible in the total income. In view of this, I find merit in view of the Assessing Officer that any expense incurred for the purpose of acquiring shares on which dividend income has been earned would not be allowable as a deduction. As already discussed hereinabove, there is a direct nexus between the investment of interest bearing loans in the investment in shares, on which dividend income has been earned. On these facts, it is held that the appellant is not entitled to claim deduction of interest expenses incurred on the loans borrowed which were utilized for investment in the shares. 5.3 Coming to the decision of the I.T.A.T., Mumbai Bench in case of Mafatlal Holding Ltd in I.T.A. No. 2935/M/02 vide order dated 23-4-2003, I find that the thrust of the observations made by the I.T.A.T. is in a different perspective. In that case, the main 'business' of the assessee was investment in shares and it carried on the activities in respect of the ingredients of an investmen....
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....h interest pay-out as discussed herein above. The facts of the case clearly show that the interest-bearing loans have undisputedly been utilized for investment in shares yielding dividend income, which is exempted from tax by virtue of section 10(33) of the Act. On these facts, it cannot be said that the provisions of section 14A are not to be invoked. 5.4 Coming to the legal position, certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income, is being used to reduce the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principle of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. By the Finance Act, 2001,....
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....re expenditure incurred for the purpose of the business should be allowed, although a part of the expenses may have been incurred for earning the non-taxable profits. Therefore, in my humble view, the principles of law laid down by the Apex Court in the above case stand superseded by the insertion of new provision in the form of section 14A of the Act. 5.6 On an overall consideration of the facts of the case and the legal position. I am of the considered view that the provisions of section 14A are attracted in the case of the appellant. The addition made by the Assessing Officer on this account is accordingly upheld. 6. In the result, the appeal is dismissed." 5.11 The learned counsel for the assessee reiterated the submissions made before the CIT(A). He has submitted that the assessee is a promoter of Jindal Group of companies and shares are held as stock-in-trade. He has referred to page 39 of the paper book to show the main aims and objects of the company. He has submitted that the assessee being promoter is already accepted by the department in the earlier years. He has filed copy of the assessment order for the assessment year 1995-96 and submitted t....
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.... in the case of CIT v. Cocanada Radhaswami Bank Ltd [1965] 57 ITR 306. The learned counsel for the assessee further submitted that heads of the income does not decide the nature and character of the income because it depends upon the intention and objects. He has submitted that the dividend is income from other sources as specified in the Act, therefore, it is to be held as income from other sources. However, he has contended that if the real character of the dividend income was the business income, therefore, the interest is deductible under section 36(1)(iii) of the Act. He has relied upon the decision of the Hon'ble Gujarat High Court in the case of Addl CIT v. Laxmi Agents (P.) Ltd [1980] 125 ITR 227. He has further submitted that the assessee claimed deduction under section 36 of the Act which is also accepted in the earlier year. He has further submitted that the borrowings are made by the assessee for the purpose of business for making investment to acquire the control in the Jindal group of companies. He has further submitted that income is there on transfer of the shares securities and dividend income. Source of the income is the sale of shares and in earlier years on ....
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....n issue and has only made the observation on the basis of submissions of the assessee. The learned D.R. also referred to page 86 of the paper book which is a schedule of stock-in-trade of the shares and submitted that there is no movement of the shares and the position of investments are static except in the case of the shares of Jindal Steel & Power Ltd. in which on 31-3-2000 the number of shares were 1,54,378 and the same have increased as on 31-3-2001 at 1,86,625 shares. The learned D.R. pointed out that the position of the remaining shares are same as were held in the earlier year and in the year under consideration and as such the assessee has not been able to show as to what income is earned on transfer of the shares. He has further submitted that there is no transfer of the shares in the years under consideration. Therefore, the assessee has only source of income from dividend, which is exempt under the Act and as such there is no business activity of sale and purchase of the shares in the year under consideration because there is no change in the investment and as such the authorities below were justified in rejecting the claim of the assessee for deduction of the interest ....
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....mount which has been charged to tax under sub-section (1) or the tax thereon." 5.15 Section 14A of the Income-tax Act inserted by the Finance Act, 2001 with effect from 1-4-1962 provides:- "14A. For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee 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." 5.16 Section 10(33) as is relevant to the assessment year under appeal provides that any income by way of dividend referred to in section 115-0 would not form part of total income. 5.17 Before dealing with the facts of the case, it would be relevant to discuss the case laws relied upon by the learned counsel for the assessee. In the case of Chugandas & Co. the Hon'ble Supreme ....
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....herefore, the interest paid on the borrowings was deductible from the business income and not from the dividend income. On further appeal, the Tribunal found, after referring to the balance sheet of the assessee-company, that investments made by the assessee were all trade investments, and related to the business activities of the assessee. According to the Tribunal, therefore, the investments made by the assessee in the present case were not investments simpliciter but they were for the purpose of business of the assessee. The relevant question was referred on the issue was (2) Whether, on the facts and the circumstances of the case, the Tribunal was right in holding that though the income from dividend has to be assessed under a separate head, the payment of interest by the assessee on amounts borrowed for purposes of investments must be allowed as business expenditure? The Hon'ble High Court considered the question in the light of the requirement of section 36(1)(iii) of the Act and held that if once it is established that capital was borrowed for the purpose of business, it is immaterial how that borrowed capital was applied because all that clause (iii) of section 36(1) re....
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.... of Excellent Commercial Enterprises & Investments Ltd. held that the assessee-company having earned dividends on shares held as stock-in-trade, same was rightly treated as income from business and not income from other sources and brought forward loss under section 72 was rightly allowed against the dividend income. 5.23 The I.T.A.T. (S.M.C.-I), Delhi Bench, New Delhi in the case of Maxpak Investment Ltd. New Delhi in I.T.A. No.2632 (Delhi)/2003 vide order dated 14-9-2004 considered the facts that the assessee is a Public Limited Company engaged in investment business. The assessee holds certain shares/securities as investment for the purpose of earning dividend income and capital appreciation. Certain investments are held as trade investments with an intention to trade in the same or for the purpose of acquiring or retaining controlling interest in the companies whose shares are acquired. The I.T.A.T. (S.M.C.-I) Delhi Bench after going through the material on record observed that undisputedly the assessee is purchasing shares to earn the dividend and also purchased shares for trading purpose. Separate accounts have been maintained for the same. Whatever investment is mad....
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....older in respect of the amount which has been charged to tax under sub-section (1) of section 115-O or the tax thereon. The liability to pay additional tax on dividends declared and paid by the domestic company under section 115-O of the Act is notwithstanding anything contained in any other provisions of the Act and is subject to the provisions of section 115-O. The section 115-O(1) beginning with the expression 'notwithstanding anything contained in any other provisions of this Act' is to give the provisions of section 115-O(1) in case of conflict, an overriding effect over any other provisions of the IT Act, 1961. It is thus clear that section 115-O(1) is a specific provision overriding in case of conflict, the general provisions. The sub-section (5) of section 115-0 has made it clear that no deduction under any other provisions of Income-tax Act shall be allowed to the company or a shareholder in respect of dividend income which has been charged to tax under section 115-O(1) or the tax thereon. Thus, this sub-section has restricted the allowability of all deductions, which may otherwise be allowable under any other provisions of the Act, against dividend income. It mean....
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....rified as a result of insertion of section 14A and the decisions of various courts not allowing the apportionment of interest against dividend income are of no help to the assessee. The purpose of inserting section 14A is to nullify the decision, in Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450(SC) to the extent it relates to the cases of indivisible business. The Appellate Tribunal also observed that it is common knowledge that no dividend could be earned without making investment as the dividend could have been earned only after investments are made. When it is found that the investments in shares are made out of borrowed capital, it is then not understood as to why interest paid on such borrowings should not be regarded as expenditure incurred in relation to earning of dividend income. The amount of such interest is, therefore, required to be deducted from the dividend income before computing the amount of dividend on which the exemption under section 10(33) is to be allowed. The Appellate Tribunal allowed the appeal of the Revenue in this case. 5.27 On consideration of the above facts and legal proposition mentioned above, we are of the view that the fac....
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....tion under section 36(1)(iii) of the Act. The CIT(A), however, did not accept the contention of the assessee because according to him the shares are clearly held by the assessee as investment portfolio as was evident from the assessee's own balance sheet which was found to be in accordance with the memorandum and articles of association. The CIT(A) also found that the assessee-company is not engaged in the business of trading in shares which could be categorised to be in the nature of business activity. The CIT(A) also found that the assessee has simply held these shares as investment and if the same helps the assessee to control the management of Jindal group of companies, it cannot partake the character of business activity. The CIT(A) found that only income arising from the holding of shares as investment in dividend income which is clearly assessable under the head "Income from other sources". The assessee at page 39 of the paper book filed a copy of the memorandum of association of the assessee showing the main objects of the assessee-company. However, on going through such memorandum of association, we find that the CIT(A) was justified in rejecting the contention of the ....
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..... There is only further investment in the equity shares of Jindal Steel and Power Ltd. as mentioned above. Therefore, these facts clearly supports the findings of the CIT(A) that the shares were held by the assessee- company as investment portfolio only which is evident from the assessee's own balance sheet and was in accordance with the memorandum and articles of association. The CIT(A), therefore, decided the point against the assessee. We may also mention that the assessee has filed copy of the profit and loss account ending 31-3-2001 at page 84 of the paper book in which the income is shown under various heads which includes interest on loans, dividend, interest on income-tax refunds, miscellaneous income and sale of securities. This would also show that the assessee was not trading in the shares either in the preceding assessment year or in the assessment year under appeal. The assessee also filed copy of the computation of income at page 77 of the paper book in which the assessee has shown net loss as per profit and loss account and also shows the loss on trading operation (speculative loss). The assessee has claimed reduction on account of dividend income exempt under se....
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....se of activity and (ii) it must be carried on with a profit motive. This issue also came to be considered by the Delhi High Court in the case in Bharat Development (P.) Ltd. v. CIT [1982] 133 ITR 470 where it was observed that the expression "business" is a word of indefinite import. In taxing statute, it is used in the sense of a occupation or profession which occupies the time, attention and labour of the person, normally with the object of making profit. To regard a activity as business there must be a course dealings either actually continued or contemplating to be continued with the profit motive, and not for support or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency continuity and transaction of purchase and sale in class of goods and the transaction must ordinarily be entered into with a profit motive. Now when we apply the ratio of the aforesaid decisions to the facts of the present case, we find that in this case the actions of the assessee is not actuated by the profit motive. In fact, we find very few transactions of purchase and sale of shares of group companies except what had already been made in the earl....
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.... for the purpose of acquiring and controlling the management of Jindal group of companies because according to the learned counsel for the assessee no profit is earned from some of the other companies by way of dividend for several years. The facts and the circumstances mentioned above clearly prove that the purpose of the assessee was to earn the dividend because there was no clement of business activity for the purpose of earning profit in the year under consideration. The only source of income of the assessee is dividend earned by the assessee from other companies in whose share investment have been made out of borrowed funds. Merely because the assessee has shown the investment of the shares as claimed stock-in-trade in the balance sheet by itself would not prove that the assessee was doing any business activity or trading activity dealing in the shares in the year under consideration. In assessment order for the assessment year 1995-96, the Assessing Officer did not consider the case of assessee for applicability of sections 14A and 115-0 of the Income-tax Act. The Assessing Officer merely mentioned the version of assessee. Therefore, this assessment order would not support co....
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....fact is clearly distinguishable on facts because in that case the S.M.C. Bench found that separate accounts have been maintained by the assessee to show that whatever investment is made for the purchase of shares for keeping them as investment, they have been shown separately and whatsoever investment is made for the purchase of trading have been shown separately under the head "Stock in hand". In this case, the Assessing Officer has himself accepted the claim of the assessee that it is dealing in the shares for investment purposes and dealing in shares for trading purposes. However, in the appeal before us, the assessee could not prove that it had been engaged in trading in shares. The assessee might have shown the investment in the shares in the stock-in-trade but nothing has been proved on record that the assessee was at all engaged in the trading activity and as such merely showing the investments in the shares as stock-in-trade is not enough to prove the contention of the assessee. The contention of the assessee was that it made investment shares for the purpose of controlling the group companies of Jintlal group. That c itself would show that the investment in the shares coul....
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....hus be appreciated that out of the total interest expenditure of Rs.3,93,69,566 interest expenditure of at the most Rs. 1,44,74,238 could be relatable to earning of dividend income. We do not agree with the alternative contention of the learned counsel for the assessee. It is established clearly on record that entire borrowed unsecured loans were invested in the purchase of equity shares upon which the assessee paid interest of Rs. 3,93,69,566 on the said loans. It is also established that the dividend income of Rs. 20,03,690 was earned by the assessee out of the investment in shares. Merely because the assessee did not earn dividend out of the investment in certain shares by itself would not prove that the provisions of section 14A are not applicable in this case. It is not a hard and fast rule that on each and every investment in shares, the assessee would earn dividend. The earning of the dividend is not certain, unless the concerned company declared and distributed the dividend because it depends on various factors. The established facts are that the entire borrowed unsecured loans have been invested in the shares for the purpose of earning dividend. Therefore, once th....
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....the Income-tax Act. The penalty order was challenged before the CIT(A) and written submissions were made. The CIT(A), however, dismissed the appeal of the assessee because of the fact that the disallowance of interest was confirmed by invoking the provisions of section 14A of the Income-tax Act. The assessee is in appeal before us on various grounds of appeal. In the grounds of appeal, it is stated that the CIT(A) has erred on facts and in law in not holding that the penalty under section 271(1)(c) of the Income-tax Act is invalid, bad in law and void ab initio. It is also mentioned that the CIT(A) failed to appreciate the fact that there was no recording of satisfaction prior to the initiation of penalty proceedings by the Assessing Officer which is sine, qua non for levy of the penalty under section 271(1)(c) of the Income-tax Act and thus penalty proceedings were bad in law ab initio. It is also stated that the assessee has neither concealed the particulars of income nor furnished inaccurate particulars thereof so as to be liable to penalty under section 271(1)(c) of the Income-tax Act. It is also stated that the addition is made due to bona fide difference of opinion between th....
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....ny proceedings under this Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty. The bare reading of the aforesaid provisions would make it clear that the Assessing Officer has to form his own opinion and record his satisfaction before initiating penalty proceedings. Merely because the penalty proceedings have been initiated, it cannot be assumed that such a satisfaction was arrived at in the absence of the same being spelt out by the order of the Assessing Authority. In the present case before us, the Assessing Officer has nowhere recorded his satisfaction with regard to the concealment of the particulars of income or furnishing inaccurate particulars of income in the assessment order or while dealing with the addition on account of disallowance of the interest paid on the borrowed funds by the assessee. The Assessing Officer after computing the taxable income at 'nil' has initiated the penalty proceedings under section 271(1)(c) of the Act by mentioning "Penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961 have been initi....
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.... require a strict construction the provisions being penal in nature, would stand frustrated." 13. The Hon'ble Delhi High Court in the case of Auto Lamps Ltd. held:- "The bare reading of the above order passed by the Assessing Officer on 6-2-2003, shows that there is no application of mind and no opinion has been formed and no satisfaction has been recorded by the Assessing Officer before or at the time of initiating penalty proceedings. In fact, in the impugned order it is recorded that penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of the income had been initiated separately. This itself shows that without even mentioning the essential ingredients which the Assessing Officer is obliged to record for initiation of penalty proceedings, the impugned order was passed to pass an order initiating penalty proceedings while passing the assessment order in a routine manner would be an apparent violation of the relevant provisions. In our opinion, the impugned order clearly suffers from the infirmity of non-application of mind. The Assessing Officer had failed to record requisite satisfaction in consonance with the settled principles of law....