AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (7) TMI 1011
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....ture amounting to Rs. 1,31,97,494/- under the provisions of Section 14A of the Act, in the same proportion as the Dividend Income bears to th total receipts, for the purpose of computing income from Business or Profession and also for computing the Adjusted Book Profit u/s 115JB of the Act. 3. The CIT (A) erred in not considering the alternate contention of the Appellant of first reducing the gross establishment expenditure by the amount already disallowed by the Appellant in its Return of Income amounting to Rs. 5,67,34,086 as well as the expenditure disallowed by the Assessing Officer during assessment proceeding amounting to Rs. 73,93,030 and only considering the balance establishment expenditure for proportionate disallowance under the provisions of section 14A of the Act as well as for computing the Adjusted Book Profit u/s 115JB of the Act. 4. The CIT (A) erred in confirming the disallowance of the alternate claim of the Appellant that should any part of the expenses of the Appellant, including interest, be disallowed, the Appellant should be permitted to capitalize such expenses and enhance the cost of acquisition of the shares to which the said expenses re....
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....pellant craves leave to add to, alter or amend, the above Ground of Appeal as and when advised". 4. Grounds No. 1,2,3 & Additional Ground : The brief facts relating to the above grounds are that during the assessment proceedings, the AO noted the assessee was having activities of purchasing the share in group companies for the purpose of controlling interest and also promoted some of the companies for which assessee borrowed the funds and paid the interest. The assessee claimed the deduction of such interest u/s. 36(1) (iii) of the Income Tax Act. The AO further noted that the assessee's balance sheet as on 31.03.2004 reflect total unsecured loan at Rs. 1062.8 crore, while the investment made in various shares was at Rs. 1727.83 crores. The profit and loss a/c. for F.Y 2003-04 reflect that assessee paid/claimed gross interest of about Rs. 75.21 crores, while it had received dividend of Rs. 6.16 crores which was claimed as exempt. The assessee also reflected receipt of interest of Rs. 7.28 crores. The assessee in computation of total income had suo moto disallowed Rs. 39 crores u/s. 14A of the Act. On enquiry from AO for the method and calculation of such amount, the assessee ....
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....n State Warehousing Corporation (2000) 242 ITR 450(SC) was no more applicable. The AO further held that sec.14A does not seek to distinguish between the intention/purpose of the assessee for its activity resulting in exempt income and also incidental by product in the form of dividend. The AO discussed in detail the order of the co ordinate Delhi Bench of the Tribunal in the case of Everplus Securities & Finance Ltd. 101 ITD 151 and also referred to the judgment of Hon'ble Madras High Court in the case of K. S. Venkati Subbiah Reddier 221 ITR 181 and Hon'ble Delhi HC in the case of Bharat Development Pvt. Ltd. 133 ITR 470 for the proposition that purchasing of shares for controlling interest cannot be treated as business activities. In respect of contention of the assessee that the dividend income was incidental to the business activity of the assessee, the AO rejected it by relying on the decision of the Hon'ble Bombay High Court judgment in the case of Amritaben R. Shah 238 ITR 777 and M/s. Macintosh Finance Pvt. Ltd. of Hon'ble ITAT, Mumbai 'F' Bench. The AO also rejected the alternative contention of assessee that dividend was received on the total value of investment of Rs. 93....
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....ling interest and therefore, takes active interest in the business of these companies. the assessee had made investments only in the wholly owned subsidiaries and in associated companies. That the entire investments were made for business purposes for having control over subsidiary and associated companies. He, therefore, has contended that the interest expenditure incurred by the assessee is otherwise allowable as business expenditure u/s 36(1) (iii) of the Act. In the context of disallowance under the provisions of section 14A, the Ld. AR relying upon the decision of the Hon'ble Delhi High Court in the case of 'Joint Investment Private Limited vs.CIT' reported in 372 ITR 694 and of the Hon'ble Punjab & Haryana High Court in the case of 'PCIT vs. Empire Package Pvt. Ltd.' [ITA No. 415 of 2015 date of decision 12.01.2016] has contended that disallowance u/s 14 A cannot exceed the exempt income earned during the year. He has further submitted that the law declared by the High Court of the other State, in the absence of any contrary decision of the Jurisdictional High Court is binding on the Tribunal. He has further relied upon various case laws to stress the point that even if th....
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....ch was interpreted and applied by the Assessing Officer. (vi) The disallowance of other expenses is also made only under Section 14A in paragraph 4 at page 12, the Heading whereof reads as follows: "4. Apportionment and disallowance of other expenses in case of the activities of the HO vis-à-vis Section 14A for normal computation and u/s 115KJB." (vii) The disallowance is only under Section 14A is established conclusively and for this purpose reference is made to the computation of income in paragraph 14 at page 24, wherein the following additions are made in words quoted herein below "i. Interest u/s 14A (per para 3) 75,20,81,011 ii. Other expenses u/s 14A (para 4) 1,31,97,494" GROUND BEFORE CIT(A) AND HIS ORDER ARE ONLY ON SECTION 14A 2 (i) In view of the fact that the disallowance was made only under Section 14A, the Ground of Appeal preferred by the Appellant to the CIT (A) was also confined to Section 14A. This is clear from Ground 2 in the aforesaid Appeal which reads as under: "2.(a) The ITO erred in disallowing the entire interest expenditure of Rs. 75,20,81,011/- under the provisions of Section 14A, for the purpo....
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....and the Punjab & Haryana High Court have taken this view in the following two cases respectively: a) Joint Investments Pvt. Ltd. vs. CIT - 372 ITR 694 (Del) b) PCIT vs. Empire Package - ITA No.415 of 2015 dt. 12/1/16 (P&H) Delhi High Court has unambiguously observed that the window for disallowance in Section 14A is only to the extent of expenditure incurred in relation to the tax exempt income. The Punjab & Haryana High Court dismissed the Departmental Appeal in the above case where the following question was raised by it. "Whether in the facts and circumstances of the case, the Hon'ble ITAT is justified in law to hold that the disallowance made under Section 14A read with Rule 8 D cannot exceed the exempt income, in the absence of any such restriction being there in the relevant section or rule?" (ii) Mumbai Benches of the Hon'ble Tribunal as also others have taken the above view. Some of such Hon'ble Tribunal Orders are as follows: a) Syntel Ltd. vs. JCIT (OSD) - ITA No.3413/N/2007 (ITAT Mumbai) b) Daga Global vs. ACIT - ITA No.5592/M/2012(ITAT Mumbai) c) Sahara India Ltd. vs. DCIT (2014) 148 ITD 336 (ITAT Delhi) ....
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....elevant facts are on record in respect of the item." (ii) DCIT vs. Maruti Udyog Ltd. (101 TTJ 760) (Delhi Tribunal) In this case, the Delhi Bench of the Tribunal (Shri K. C. Singhal and Shri G. S. Pannu) applied the above decision of the Apex Court. The Tribunal entertained a question which had not been raised earlier at any stage. (iii) Birmala L. Mehta - 299 ITR 1 (Bombay High Court) In this case, the Bombay High Court observed as follows: "Article 265 of the Constitution of India unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law." (iv) Balmukund Acharya - 310 ITR 310 (Bombay High Court) In this case, the Bombay High Court applied the above decision of Nirmala L. Mehta and at page 318 in paragraph 32 observed as follows: "Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconceptions or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure th....
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....come which does not form part of the total income under the I.T. Act. That under sub-section (2) to section 14A, it is mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with such method as may be prescribed. However, the assessing officer is required to adopt the prescribed method if having regard to the accounts of assessee, he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income. The Ld. DR has further stated that the expenditure includes both direct and indirect expenditure incurred in relation to the exempt income. That there is fundamental difference between the "Receipt" and "Income". He has further contended that this concept has to be understood and applied in reference to "Dividend" and "Income by way of dividend". That 'income by way of dividend' which can be claimed as exempt u/s 10 (34) of the Act refers to the total dividends received minus the expenditure incurred in relation to the earning of such dividends. That the concept of income includes ....
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..... This concept has to be understood and applied in reference to "Dividend" and "Income by way of dividend" which is used in various provisions of the Act both prior to insertion of section 14A of the Act or thereafter so to arrive at the correct import of the provision of section 14A, its interpretation and the objective and intent of the Hon'ble Legislature for promulgating these provision. (b) The constitutional bench of Hon'ble Supreme Court ( Bench consisting of five Hon'ble judges) dealt with this issue in the case of Distributors ( Baroda )(P) Ltd V/s. Union of India (1985) 22 Taxman 49 through dealing with section 80M of the Act (omitted w. e. f. 01.04.2004 but related to dividends and deduction /relief out of receipt of dividend). Hon'ble Apex Court traced, considered and explained the history of introduction of such provisions related to dividend in this landmark judgement. (c) The Hon'ble Constitutional bench of Supreme Court while dealing with the construction of sec. 80M of the Act, overturned, its earlier decision of 3 Member Bench in the case of Cloth Traders ( P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 and observed that "To perpetuate an erro....
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....gislature could certainly be attributed the intention to prevent double taxation but not to provide an additional benefit which would go beyond what is required for saving the amount of dividend from taxation once again in the hands of the assessee. Bearing in mind these prefatory observations in regard to the legislative object, we may now proceed to construe the language of section 80M. 15. Section 80M(1) opens with the words 'where the gross total income of an assessee ....... includes any income by way of dividends from a domestic company' and proceeds to say that in such a case, there shall be allowed in computing the total income of the assessee, a deduction 'from such income by way of dividends' of an amount equal to the whole of such income or 60 per cent of such income, as the case may be, depending on the nature of the domestic company from which the income by way of dividends is received. The opening words describe the condition which must be fulfilled in order to attract the applicability of the provision contained in sub-section (1) of section 80M. The condition is that the gross total income of the assessee must include income by way of divide....
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.... belonging to the specified category. Therefore, the words 'such income by way of dividends' must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. It is obvious, as a matter of plain grammar, that the words 'such income by way of dividends' must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. Consequently, in order to determine what is 'such income by way of dividends', we have to ask the question : what is the income by way of dividends from a domestic company included the gross total income and that would obviously be the income by way of dividends computed in accordance with the provisions of the Act. It is difficult to appreciate how, when we are interpreting the words 'such income by way of dividends', we can make a dichotomy between the category of income by way of dividends included in the gross total income and the quantum of the income by way of dividends so included. This Court observed in Cloth Traders ( P.) Ltd.'s case (....
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....ied percentage of such income. Now when in computing the total income of the assessee, a deduction has to be made from 'such income by way of dividends', it is elementary that 'such income by way of dividends' from which deduction has to be made must be part of the gross total income. It is difficult to see how the language of this part of sub-section (1) of section 80M can possibly fit in if 'such income by way of dividends' were interpreted to mean the full amount of dividend received by the assessee. The full amount of dividend received by the assessee would not be included in the gross total income: what would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. If that be so, it is difficult to appreciate how far the purpose of computing the total income from the gross total income any deduction should be required to be made from the full amount of the dividend. The deduction required to be made for computing the total income from the gross total income can only be from the amount of dividend computed in accordance with the provisions of the Act which would be forming part of the gross total income. ....
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.... the head "Profits and Gains of Business or Profession", is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business." 3.3. It is in view of such interpretation clearly distinguishing the difference of "dividends receipts" and "Income by way of dividends" one has to consider following provisions of the Act as how the same is applicable for sec.14A of the Act. (i) Section 2(22) of the Act define "dividend" as inclusive definition being distribution of accumulated profits in cash or kind. (ii) Section 4 of the Act is the charge of income tax on "Total income". (iii) The section 2(45) of the Act provide an exhaustive definition of "total income" as "Total amount of income referred to in sec.5, computed in the manner laid down in this Act." (iv) Sec.5 of the Act defines the scope of "Total income". (v) Sec.8 of the Act though has heading as "dividend income" but the same is to categorize the time when such dividend (both final or interim) is to be included in total income. (vi) Sec.10 (34) is the section for consideration which can be broken as follows for understandi....
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....al income * under this chapter(i.e under various head) * No deduction * shall be allowed * in respect of * expenditure incurred * by the assessee * in relation to * "income" * which does not from * part of the total income under this Act. The provisions, therefore, clearly envisaged that following the matching principle for various receipts from various resources an assessee has to compute income under various head. It is after computation of income under various heads, the income which does not form part of total income has to be identified and the expenditure considered for computing such exempt income is required to be disallowed u/s. 14A of the Act. As per settled law the concept of income includes a loss i. e. negative income or zero i. e. nil income. As per matching principle, there can be positive receipt resulting into positive income or loss or nil income. Similarly, from a source there can be nil receipt which may result into loss i. e. negative income or nil income. There can be a receipt (sec.66 r. w. Chapter VII) the income resulting there from though includable but no in....
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....sec.15 to 59 cannot be allowed against any other income which is includable in the total income. Hon'ble Supreme observed that basic principle of taxation is to tax the net income, i.e gross income minus the expenditure and on the same analogy the exemption is also in respect of net income. In other words, where the gross income would not form part of total income, its associated or related expenditure would also not be permitted to be debited against other taxable income. The Supreme Court made it very clear that the permissible deduction enumerated in sec.15 to 59 are now to be allowed only with reference to income which is brought under one of the heads of income and is chargeable to tax. [Note: The above observation and ratio were duly considered by Hon'ble Delhi High Court in the case of Maxopp Investment Ltd V/s.CIT - (2011) 15 Taxmann.com 390 (Delhi)]. b) The AO relied on the decision of Hon'ble ITAT Delhi in the case of Everplus Securities &Finance Ltd (101 ITD 151) wherein relying on the observation particularly in respect of clause 5 of sec.115-O (para 5.15 of the Hon'ble ITAT order), the Hon'ble ITAT considered Hon'ble ITAT Kolkata Ben....
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.... 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 4501. (SC) to the extent it relates to the cases of indivisible business. (iv) 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. c) Hon'ble ITAT Mumbai in the case of Kankhal Investment & Trading Co. P. Ltd. V/s. ACIT - (2009) 116 ITD 492 (Mum) dealt with similar facts. (i) Hon'ble ITAT in this order at para 8 & 9 considered following facts; "8. In the course ....
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....ving Mills 26 ITR 765 and Amalgamation Pvt. Ltd 226 ITR 188 at para 19 and 20 held that "19. In view of the above legal position, we are of the view that where a specific head is provided in respect of a particular income, then such income must be computed under that very head irrespective of the nature of income. In the case of a company in the business of holding shares, if investment in shares is disposed off then income therefrom has to be computed only under the specific head 'Capital Gains' and this legal position is not even disputed by the assessee's counsel and the assessee itself has also declared the income under the head 'Capital Gains'. Further dividend income is also to be computed under the specific head 'Income from other Sources' if such income is taxable. Since dividend income is exempt under section 10(33) of the Act, the question of computing such income does not arise. There is no other receipt arising or accruing to the assessee from the business of holding investment in shares. Therefore, the entire receipts from such business has to be excluded from the head 'Profits and gains from business or profession' since such receipts falls under the specific....
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....are to be considered under other heads then, question of deduction under the head 'Profits & gains from business or profession' would not arise. As already pointed out receipts and expenditure must go together. We may clarify that the receipt may be actual or to be received in future. The receipt may be on accrual basis. There may be cases that there is no receipt in one year and it may be received in next year. In such cases, the loss may be computed because receipts may be expected in next year. The crux of the matter is that there must be receipts either actual or on accrual basis before a deduction can be allowed therefrom. Consequently, if receipts, in respect of which expenditure are incurred, are considered under other heads, then question of determining any income under the head 'Profits or gains from business or profession' does not arise. Hence, the contention of the assessee is rejected". d) A larger bench of Hon'ble supreme court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd ( 1997 ) 227 ITR 172 considered the issue of computation of income under various heads. e) Hon'ble HIGH COURT OF MYSORE in the case of United Breweries ([1973] 89 ITR....
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.... 36 (1) (iii) of the act. At para 4.4 of that order Hon'ble ITAT held that the assessee had been making only long term strategic investment in group companies the income from which either in the form of long term capital gain or in the form of dividend is exempt from tax. Therefore, the expenditure incurred in relation to such investment is required to be disallowed under section 14 A of the act. However, interest relating to the borrowings used in the purchase of trading shares from which dividend had been received is required to be excluded from such disallowance. In reference to allowability of interest, Hon'ble ITAT at para 5.5 held that "We have carefully considered the various aspects of the matter. The ld. AR for the assessee has argued that trading and investment in shares was business of the assessee and therefore, the borrowed funds used for making advances for acquisition of shares have to be considered as used for the purpose of business and no disallowance should be made. We are unable to accept the contentions raised. The assessee had advanced money for purchase of shares of the group companies for the purpose of acquiring controlling interest and fo....
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.... as the limited issue raised by respondent No. 1 in the assessment order was as to the quantum of the exemption under section 10(33) that was available and not to disallow any part of the expenditure claimed, hence it was not open to the revenue to expand the scope of appeal by invoking the provisions of section 14A of the Act to disallow the expenditure incurred; * (B)Whether on the facts and in the circumstances of the case, the Tribunal ought to have held that no disallowance could be made under section 14A of the Act and hence erred in setting aside the issue relating to calculation of disallowance under section 14A of the Act to respondent No. 1; * (C)Whether the Tribunal erred in directing respondent No. 1 to apply rule 8D of the Rules for computing the amount of disallowance under section 14A of the Act." * The assessee has, in addition, filed a Petition under Article 226 of the Constitution in order to challenge the constitutional validity of the provisions of section 14A and of rule 8D Hon'ble Jurisdictional High Court held that "Section 14A ensures that the shareholder, whose income from dividend is not included in the total income o....
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....rred to earn the exempt income against taxable income. This is against the basic principles 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". Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective 6f the fact whether any such income has been earned during the financial year or not. 4. The above position is further clarified by the usage of term 'includible' in the Heading to section 14A of the Act and also the Heading to Rule-8D of I.T. Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section 14A of the Act does not use the word "income of the year" but "income under the Act". This also indicates that for invoking disallowance ....
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....rly it is the income which does not form part of total income which is required to be considered u/s 14 A of the IT Act. In sec 10(34) of the act it is income by way of dividend and not the receipt of dividend which is exempted. Further such income by way of dividend is referred to the provision of section 115-O of the act i e not all the income by way of dividend is exempt sec 115-O (1) of the IT Act deals with the additional income tax chargeable on domestic company on any amount declared, distributed, or paid by such company by way of dividend. For domestic company this is in the form of appropriation while the same is receipt in the hands of shareholder. Sec 115-O (5) of the act restrict any deduction under any other provision of the act to be allowed to shareholder in respect of such dividend receipt. It is therefore for computing income by way of dividend from the dividend receipt so to claim exempt u/s 10(34) of the act, no expenditure can be allowed under any provision. With due regards to ratio of various case laws relied on by appellant, such proposition were never considered by the respective court or Hon'ble ITAT and therefore the ratios are distinguishable on ....
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....culating the interest attributable to earning of dividend or business or any other income. iv. The entire interest expenditure having been relatable to earning of dividend income which is exempt u/s. 10(34) of the I.T. Act, 1961, the action of the AO in disallowing the same is justified. v. Ratio of Hon'ble ITAT order in the case of M/s. Everplus Securities and Finance Ltd. (SUPRA) is squarely applicable in the facts and circumstances of the assessee's case. vi. Even the claim of the appellant that net interest expenditure of Rs. 67.93 crs. Claimed as allowable u/s. 36(1)(iii) should be allowed is also baseless. The assessee has not claimed such netting either in its return of income or during its assessment proceedings before the AO . c) In reference to disallowance to administrative expenditure, ld.CIT(A) at para 9 page 13 considered (in brief) following facts and submission of the assessee. i. Disallowances are on the basis of conjecture and surmises. ii. Ho'nble ITAT Delhi bench ratio in the case of Vimco Seedling Ltd. V/s. DCIT 100 ITD 267 is applicable which permits the disallowances for expenditure which has direct nexus ....
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....rities have made no addition on account of any disallowance under section 36(1)(iii) of the Act. However in the body of the order of the AO as well of the impugned order of the Ld. CIT(A), discussion has been made regarding the non-admissibility of claim of deduction of the interest expenditure even u/s 36(1)(iii) of the Act. Reliance has also been placed by the AO in this respect on the certain decisions of the Tribunal more particularly in the case of "Everplus Securities &Finance Ltd" (101 ITD 151) (supra). Though, no addition has been by the AO on account of disallowance of interest expenditure even u/s 36(1)(iii), yet this issue being discussed by the lower authorities, for the sake of completeness, we deem it fit to adjudicate this issue also so that no issue may be left unaddressed. 11. The Ld. DR, in this respect, has placed strong reliance on the observations of the lower authorities and also on his written submissions as reproduced above. The ld. AR, however, in this respect, has reiterated his submissions that the assessee is an investment & finance company and a promoter of new companies in hi-tech field. As a business activity, the assessee holds investment in th....
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....t assessable under the head 'Profits & Gains from Business/Profession' but were assessable either under the head 'Income from other sources' or under the head 'Capital Gains'. However, we find that the above contentions have been duly discussed by the Hon'ble Delhi High Court in the case of "Eicher Goodearth Ltd. vs. CIT" has discussed the above issue and has held as under: "The judgments in Cocanada Radhaswami Bank (supra) and United Commercial Bank (supra) and the subsequent judgments in Western States Trading (P) Ltd. v. CIT [1971] 80 ITR 21 (SC) and Brooke Bond & Co. Ltd. v. CIT [1986] 162 ITR 373/28 Taxman 426E (SC) are authorities that the heads of income enumerated in the Income Tax Act in Section 14 do not denote their essential characteristics. In other words that a business or an individual receives some amount which may be assessed as income of a particular kind would not be conclusively determinative of that character. In the facts of the present case, that principle, in the opinion of the Court, would squarely apply. If indeed the assessee had invested and subscribed to the rights issue in order to retain the control it originally did in Eicher Tractors Ltd....
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....spect of expenditure incurred wholly and exclusively for making or earning such income provided the expenditure is not in the nature of capital expenditure. That , since there was no dispute that the shares in question were purchased by the assessee for the purpose of acquiring controlling interest in the company and not for earning dividend hence, the expenditure incurred by way of interest on the loan taken by the assessee for the said purpose cannot be held to be an expenditure incurred wholly and exclusively for the purpose of earning income by way of dividends, and, therefore, it would not be allowable as a deduction under Section 57(iii) of the Act. However, the Hon'ble Bombay High Court in para 4 of the judgement (supra) has observed as under: "4. It may be pertinent to mention the distinction in the language used by the Legislature in Sections 37(1) of the Act and 57(iii) of the Act. Section 37 provides for deduction of expenditure incurred wholly and exclusively "for the purpose of business" whereas Section 57(iii) provides for deduction only of expenditure incurred wholly and exclusively "for the purpose of making or earning such income". "Such income" refers to ....
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....pediency" as under: "The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency." 17. The Hon'ble Supreme Court thereafter considering the various aspects of the matter has concluded as under: "We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. ....
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....the sister concern was a subsidiary of the assessee company and the assessee company being the holding company had a deep interest in its subsidiary, hence the loan advanced to subsidiary was out of commercial expediency. 19. Though, in the case in hand, issue is not regarding the interest free advance to the sister concerns, yet, the proposition of law laid down by the Hon'ble Supreme court can be very well applied in this case as the assessee being an investment & finance company and a promoter of new companies and having interest in the business of these companies has made the investments for business purposes for having control over these subsidiary and associated companies. In the light of the proposition of law laid down by the Hon'ble Bombay High court in the case of "CIT, Panaji, Goa vs. Phil Corpn. Ltd." (supra), Hon'ble Delhi High Court in the case of "Eicher Goodearth Ltd. vs. CIT" (supra) and the Hon'ble Supreme Court in "S.A. Builders vs. CIT" (supra);it is held that no disallowance in this case is attracted u/s 36(iii) of the Act. 20. Even otherwise, the lower authorities though have discussed in their respective orders the issue of disallowance u/s 36(iii) but ....
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....se of disallowance. 23. The contention of the Ld. DR in this respect is that since the entire investments were long term, made for the purpose of having control in the management of subsidiaries/group companies, hence the entire interest expenditure was incurred in relation to exempt dividend income and therefore the AO has rightly disallowed the entire interest expenditure. 24. On the other hand, the Ld. AR, has placed strong reliance upon the decision of the Hon'ble Delhi High Court in the case of 'Joint Investment Private Limited vs. CIT' (supra) and of the Hon'ble Punjab & Haryana High Court in the case of 'PCIT vs. Empire Package Pvt. Ltd.' [(supra)] to contend that disallowance u/s 14 A cannot exceed the exempt income earned during the year. 25. We have heard the learned representatives of both the parties and have also gone through the records on this issue. It is pertinent to mention here that assessment year involved in this case is AY- 2004-05. Sub-section (2) of section 14A stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income "in accordance with such method as ....
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....e, the entire interest expenditure can not be attributed to earning of exempt dividend income only. Even an investor normally does not invest merely for earning of dividends. It also takes into consideration the possibility of rise in price of shares which may result into taxable capital gains also. The Hon'ble Delhi High Court in the case of Joint Investment Private Limited (supra) has held that section 14 of the Act or rule 8D cannot be interpreted so as to mean that the entire tax exempt income of the assessee is to be disallowed. That the window for disallowance is indicated in Section 14A and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income. This proportion or portion of the tax exempt income surely cannot swallow the entire amount of tax exempt income. Similar view has been taken by the Hon'ble Punjab & Haryana High Court in the case of 'PCIT vs. Empire Package Pvt. Ltd.'(supra). The Hon'ble Delhi High Court in the case of "M/s Cheminvest Ltd. vs. CIT" (2015) 61 taxman.com 118, wherein also the assessee had made strategic investments in subsidiaries/Group Companies for retaining control over them but has not rec....
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....ven in the grounds of appeal as originally filed before the Tribunal. However, the assessee by way of subsequent letter raised the additional ground in relation to the said inclusion of interest into the income of the assessee. In the above circumstances, the question before the Hon'ble Supreme Court was "Where on the facts found by the authorities below a question of law arises (though not raised before the authorities) which bears on the tax liability of the assessee, whether the Tribunal has jurisdiction to examine the same?" The Hon'ble Supreme Court while answering the said question observed that under section 254 of the Income Tax Act, the power of the Tribunal in dealing with the appeals is expressed in the widest possible terms; the power of the Tribunal under section 254 is not restricted only to decide the grounds which arise from the order of the Commissioner of Income Tax (Appeals); that both the assessee as well as the department have a right to file an appeal/cross objection before the Tribunal and the Tribunal is not prevented from considering questions of law arising in assessment proceedings although not raised earlier. While answering the question in affirmative, ....
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....1st October, 1989, providing that the assessed income under section 143(3) shall not be less than the returned income was considered by the Hon'ble High Court and it was held that as per proviso to section 119 of the Act, the Board cannot issue instructions to the Income Tax Authority to make a particular assessment or to dispose of a particular case in a particular manner as well as not to interfere with the discretion of the Commissioner in exercise of his appellate functions. It was further held that the AO, while exercising his quasi judicial powers, was not bound by the said circular and should have exercised his powers independently. The Hon'ble High Court, therefore, directed the AO to make the assessment without keeping in mind the said circular. It may be further observed that the Hon'ble Bombay High Court in the case of 'Pruthvi Brokers & Shareholders Pvt. Ltd.' ITA No.3908 of 2010 decided on 21.06.12, while relying upon the various decisions of the Hon'ble Supreme Court and other Hon'ble High Courts has held that even if a claim is not made before the AO, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a cl....
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....processing fees also. 34. We have already held in the earlier paragraphs of this order that the assessee being an investment & finance company and a promoter of new companies and having interest in the business of these companies has made the investments for business purposes for having control over these subsidiary and associated companies, hence, in the light of the proposition of law laid down by the Hon'ble Bombay High court in the case of "CIT, Panaji, Goa vs. Phil Corpn. Ltd."(supra), Hon'ble Delhi High Court in the case of "Eicher Goodearth Ltd. vs. CIT" (supra) and the Hon'ble Supreme Court in "S.A. Builders vs. CIT" (supra), no interest disallowance is attracted u/s 36(iii) of the Act. On the same analogy, the processing fees paid by the assessee for obtaining such loans is also allowable as business expenditure. More over the issue is covered with the decision of the Hon'ble Supreme Court' in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, wherein the Supreme Court held that the expenditure in raising loans or issuing debentures would be revenue in nature, irrespective of whether the borrowing is a long term or short term one. This issue is accordingly decided ....