TaxTMI 
TaxTMI 
TaxTMI 
2016 (11) TMI 1012
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....e clear by providing for Rule 8D(2) in subsequent assessment years? (ii) Whether on the facts of the case the ITAT is right in holding that the legal and professional expenses are allowable ignoring the fact that the assessee has failed to discharge its onus with respect to rendering of services by the payee?" 3. The assessee are engaged in various activities which they carry on through their different divisions, such as, the packaging, metallise, max foil, pharma, treasury and healthcare divisions. 4. The assessees filed a return declaring a 'nil' total income under the normal provisions with a brought forward loss and Rs. 6,80,27,490/- computed under section 115JB of the Income Tax Act, 1961. A revised return in the same terms was filed except to declare a short term capital gain arising from the sale of one of the divisions. The matter was taken up for scrutiny and a questionnaire was addressed to the assessee. Re: Question (i) 5. During the previous year relevant to assessment year 2002-03, the assessee admittedly earned exempted income by way of interest of which Rs. 55 lakhs was interest on Maharashtra State Electricity Bonds and Rs. 2,91,97,852/- was earned by way of d....
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....eceived as long term investment during the relevant previous year and that no expenditure was attributable towards earning the same as the dividend received was only incidental to the holding of shares; that the dividend was received by single dividend warrants, and therefore, no expenditure was incurred to earn such dividend; that the assessee had not claimed any expenditure in relation to income which did not form part of the total income; that there was no nexus between the dividend expenditure and the expenses which were sought to be deducted and that the revenue had failed to establish any nexus between the expenditure and the exempt income. 7. The CIT (Appeals) not only upheld the Assessing Officer's order of disallowance but enhanced the same to about Rs. 4.33 crores. The CIT (Appeals), however, noted as had the Assessing Officer that the assessee had failed to produce the bank statements though called upon to do so. The assessee on the other hand expressed its inability to produce the bank statements in respect of the utilization of the borrowed funds or to show the sources of funds for the investment made on the ground that the bank statements related to an 'old period' a....
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....ls) drew an adverse inference against the assessee. The CIT (Appeals) also analyzed the balance sheet and the cash flow statement submitted by the assessee for the relevant period. 8. We pause here to deal with certain observations made by the CIT (Appeals). It was observed that during the previous financial year i.e. the financial year 2001-02, the assessee's borrowings of interest bearing funds, had increased as had its net investments whereas its shareholders funds decreased. The CIT (Appeals) held that a natural presumption, therefore, arises from the balance sheet that the increase in borrowings had gone to fund the increase in investments yielding exempt income. 9. This presumption is unfounded. Merely because the interest free funds with the assessee have decreased during any period, it does not follow that the funds borrowed on interest were utilized for the purpose of investing in assets yielding exempt income. If even after the decrease the assessee has interest free funds sufficient to make the investment in assets yielding the exempt income, the presumption that it was such funds that were utilized for the said investment remains. There is no reason for it not to. The....
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.... investment from which exempt income is earned or can be earned. However, taking into account the fact that some loans do have a specific covenant for non-utilization in shares etc. and that borrowed funds invested in such shares may have been repaid from the profits or other non-interest bearing funds during the year, I think it fair to allow a 50% reduction on the borrowings so determined, on estimate, to take care of such situations. Since these funds change throughout the year, the averages of their values at the beginning and at the end of the year as per the balance sheet are considered to determine the ratios. Since many of the investments are coming from earlier years and the assessee had borrowed funds in earlier years also, I am of the view that the balance sheet of the assessee will be a better guide for apportionment of expenses as compared to the cash flow statement, since it takes into account the brought forward capital as well as the borrowings and investments. The financial cost of the borrowed funds is computed by the working out the average cost of funds, which is the total interest expenditure divided by the average of the borrowings at the beginning and at the ....
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....-aside the order of the CIT (Appeals) in so far as it disallowed the deduction of Rs. 4,52,94,905/- under section 14A on account of interest expenditure. The Tribunal, however, sustained the order in so far as it estimated Rs. 20 lacs towards administrative expenditure relating to the investment from which exempt income was earned. 13. The Tribunal rightly noted that the main thrust of the orders impugned before it was that the assessee had failed to furnish the bank statements and that, therefore, an adverse inference ought to be drawn against it. The Tribunal, however, also observed that the authorities indicated that the presumption as regards the utilization of interest free funds and borrowed funds in a mixed pool ought to be in favour of the assessee. The Tribunal noted that the assessee is a listed company and was required to publish its accounts and submit the same before various statutory authorities such as SEBI, Stock Exchanges as well as to the share holders and financial institutions. In view thereof the Tribunal did not accept the department's contention that the funds flow statements submitted by the assessee which in turn were prepared on the basis of the audit acc....
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....ayment of income-tax was not an expenditure laid out wholly and exclusively for the purpose of business as contemplated by sub- section (1) of Section 37 of the Income-tax Act, 1961?" In that case, the assessee had an over draft account with the bank. It claimed a sum of Rs. 28,488/- as an allowable expenditure under section 37(1) of the Act which represented the interest paid on the overdraft amount. The overdraft was for payment of income tax. The authorities as well as the High Court came to the conclusion that the payment of income tax would not fall within the scope of the expression "for the purpose of business". It was contended on behalf of the assessee, however, that it had deposited the entire profits in the over draft account and the amount thus deposited being much more than the tax liability, it should have been presumed that the taxes were paid out of the profits of the relevant year and not out of the over draft account for running of the business. The Supreme Court held as under:- "3. Mr. Dipak Bhattacharyya, learned counsel appearing for the appellant, argued with vehemence that the assessee having deposited the entire profits in the overdraft account and the amo....
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....the overdraft account, whether such profits were more than the tax amount paid for the relevant year and all other germane factors. But when the assessee never advanced the contention either before the Tribunal or before the High Court and the amplitude of the question posed before the High Court does not bring within its sweep the contention as is advanced by Mr Bhattacharyya, learned counsel in this Court, it would not be appropriate for this Court to look into the additional papers produced by the assessee for entertaining the contention and answering the same. It is true that the Calcutta High Court in Woolcombers case [(1982) 134 ITR 219 : (1981) 23 CTR 204 (Cal)] came to the conclusion that where profits were sufficient to meet the advance tax liability and profits were deposited into the overdraft account of the assessee then it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. But to raise the presumption in that particular case there were sufficient materials and the assessee had urged the contention before the High Court. The aforesaid decision has been followed in the case of R....
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....sumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case, [1982] 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there are funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-fre....
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....umption as held by this Court in Reliance Utilities and Power Ltd. (supra) while considering Section 36(1)(iii) of the Act would apply while considering the application of Section 14A of the Act. The aforesaid decision of this Court in HDFC Bank Ltd. (supra) on the above issue has also been accepted by the Revenue inasmuch as even though they have filed an appeal to the Supreme Court against that order on the other issue therein viz. broken period interest, no appeal has been preferred by the Revenue on the issue of invoking the principles laid down in Reliance Utilities and Power Ltd. (supra) in its application to Section 14A of the Act. Therefore, the issue which arose for consideration before the Tribunal had not been decided by this Court in Godrej and Boyce Manufacturing Co. Ltd. (supra). It arose and was so decided for the first time by this Court in HDFC Bank Ltd. (supra). Thus, there is no conflict as sought to be made out by the impugned order. Thus, the impugned order has proceeded on a fundamentally erroneous basis as the ratio decindi of the order in Godrej and Boyce Manufacturing Co. Ltd. (supra) had nothing to do with the test of presumption canvassed by the petitione....
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.... which one of us (S.J.Vazifdar, C.J.) was a party, followed the judgment in CIT v. Reliance Utilities and Power Ltd. 2009 (313) ITR (Bombay) (supra). It was held as follows:- "23. As we noted earlier, the funds/reserves of the appellant were sufficient to cover the interest free advances made by it of Rs. 10.29 crores 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) 313 ITR 340, 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." 20. In the circumstances, question No.(i) is answered in favour of the respondent-assessee. Re; Question No. (ii) 21. The issue in this regard raises essentially a question of fact and not one of law. It required the authorities to appreciate the facts and to take a decision on the basis of balance of probabilities. 22. According to the assessee it incurred expenditure of about Rs. 1.25 crores towards legal and professional charges paid to M/....