TaxTMI 
TaxTMI 
2018 (3) TMI 810
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....s covering the issues under consideration. 3. Common grievance of the revenue in all the years pertains to disallowance of interest u/s.36(1)(iii) of the IT Act being difference of interest on loan given to subsidiary companies, and disallowance of interest under rule 8D (2)(ii) of I.T.Act. 4. Common grievance of assessee in all the years pertains to disallowance u/s.14A r.w.R. 8D(2)(iii). 5. Rival contentions have been heard and record perused. 6. Facts in brief are that assessee is engaged in the business of advisory and transactional services, trading / investment in securities and derivatives. During the course of scrutiny assessment for the A.Y.2007-08, AO disallowed claim of deduction of interest paid to the extent of differential rate in between the borrowings made from M/s. Lehman Brothers and the interest charged on the short term leading to wholly owned subsidiary companies amounting to Rs. 65,09,590/-. The A.O. has discussed this issue in detail in para 4 of the assessment order. The relevant portion of A.O.'s order is extracted herein below: - "After analysis of Balance Sheet and fund flow, it emerges that the loan received from M/s.Lehman Broth....
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....the appellant would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans." In the case of CIT v Dalmia Cement Bharat Ltd. 330 ITR 595 (Del) it has been held as under. "We, therefore, answer the reference by ho/ding that the Tribunal was correct in holding that no portion of the interest paid by the assesses on its borrowed funds can be disallowed on the ground that a portion thereof has been diverted to subsidiary company." The other decisions relied by the A.R.'s also support the claim of the appellant that no disallowance is called for merely for the reason that the 5 year term borrowings from Lehman Brothers have been utilized for giving loans to wholly owned subsidiary companies at a lower rate of interest. 8.3 In the circumstances the disallowance of claim of deduction of interest paid to the extent of the differential rate in between the borrowings made from Lehman Brothers and the interest charged on the short term lending to wholly owned subsidiary companies of Rs.65,09,590/- is deleted. Thus, the appellant this ground of appeal is allowed." 8. During the course of hearing before us, the learned AR....
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.... heard and record perused. From the record, we found that assessee has agitated against the disallowance made u/s.14A r.w. Rule 8D. The assessee has earned dividend income on shares held as current investments and long term investments. The entire amount of dividend income has been claimed to be exempt u/s 10(34) & 10(35) of the Income-tax Act. In the computation of income enclosed with its return of income, the assessee had computed the expenses at Rs. 51,46,120/- as expenditure incurred in relation to earning of exempt income by way of dividends. The assessee's AR has claimed that the expenses incurred in relation to the earning of Dividend income were computed on a scientific and reasonable basis having regard to the accounts of the assessee of the previous year. However, AO did not accept assessee's contention and computed disallowance under Rule 8D (2)(ii) & 2(iii). 13. By the impugned order, CIT(A) deleted disallowance of interest under Rule 8D(2)(ii) after observing as under:- "8.11 Before considering whether the AO has correctly computed the disallowance under Rule 8D, it would be worthwhile to consider the findings of the A.O. and the submissions made by th....
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....debentures of Rs.25,60,00,000/- and obtained overdraft facility of Rs. 1,00,12,32,877/-; (vi) The unsecured loan of Rs.1,80,00,00,000/- was raised in the earlier year on issuance of fully convertible debentures to Lehman Brothers; (vii) During the previous year the appellant company raised unsecured loans on issuance of non-convertible debentures of Rs.4,25,00,00,000/- and commercial paper of Rs.3,75,00,00,000/-; (viii) During the previous year the appellant company has raised unsecured loans on inter-corporate deposits of Rs.3,10,00,000/-. The inter-corporate deposits are normally for the period of 3 months to 6 months tenure.; and (ix) The interest earned on loans and advances was more than the interest paid on secured/ unsecured loans. 8.13 On the basis of the aforesaid data/facts from the appellants balance sheet, it is evident that the appellant company had source of own funds (share capital, share premium & profits) and borrowed funds (unsecured loans repayable on demand and short term deposits). The own funds are in excess of the investments made in shares & securities. Further, in the facts of appellant's case, the additional....
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.... the A.O. was not correct in his action in taking the total interest expenditure which was debited to the profit and loss account of the appellant company for the said disallowance uls.14A of the Act though the A.O. has taxed the returned business income of the appellant company from such primary business activity of the appellant company under the head "Business and Profession' u/s.28 of the Income-tax Act. As the basic principles of taxation, expenditure incurred for earning of the income has to be allowed and hence I find that the A.O. was incorrect in his action to disallow the expenditure which otherwise is allowable u/s. 36(1 )(iii) of the Act as business expenditure. 8.15 Further, to the aforesaid position of appellants own funds and also having regard to the Jurisdictional High Court decision in the case of CIT v Reliance Utilities and Power Ltd. [supra], the appellants AR further argued that the onus is on the AO to establish that the investments in shares and securities are sourced from the appellants borrowed fund and in the absence of such determination of such nexus, it would be incorrect to draw a presumption that the investments in tax free securities/sh....
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....he AO regarding the correctness of the claim of the assessee. As such, Rule 8D of the Rules was not appropriately applied by the AO as correctly held by the CIT(A). It has not been done by the AO that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an ad hoc disallowance was made. The onus was on the AO to establish any such expenditure. This onus has not been discharged. In "CIT v Hero Cycles" (P & H) 323 ITR 518, under similar circumstances, it was held that the disallowance u/s. 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions. In "ACIT v Eicher Ltd." 101 TTJ (Del) 369, that it was held that the burden is on the AO to establish nexus of I' expenses incurred with the earning of exempt income, before making any disallowance u/s. 14A of the Act In "Maruti Udyog v DCIT 92 ITD 119 (Del), it has been held that before making any disallowance u/s. 14A of the Act, the onus to establish the nexus of the same with exempt income, is on the revenue. In "Wimco Seedlings Limited v DCIT" 107 ITD 267 (Del)(TM) it has been held that there can be no presumption that t....
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....e's stand that the investment in the tax free bonds has been made out of the funds of the shareholders of the AO." Having regard to the aforesaid judicial pronouncements, it is he!d that the onus is on the A.O. to establish that the investments in shares & securities are sourced from the appellants borrowed fund and in the absence of determination of such nexus, it would be incorrect to draw a presumption that the investments in tax free securities / shares have been made out of a common pool of funds in proportion to the borrowed funds and the own funds. 8.16 Alternatively, in case the ratio laid down by the Hon'ble Bench of Mumbai ITAT in the case of Morgan Stanley India Securities Pvt. Ltd. Vs. ACIT (Mum) reported in ITA No.5072/M/2005 & 6774/M/2008 for A.Y. 2001-02 & 2004-05 is applied in the facts of the appellant's case, it is seen that the net interest paid is in the negative (i.e. the gross interest received is in excess of interest paid). Once the netting of interest is done, there would be no disallowance u/r.8D(2)(ii) of the IT rules. While coming to the conclusion, I am fortified by the converse principle laid down in the case of Reliance U....
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....ds. The natural corollary of this principle would be that the borrowed funds would be presumed to have been utilized for the purposes of business carried on by an assessee, in case the own funds are sufficient to cover the value of investments. This principle, according to me, establishes a direct attribution of own funds to the value of investments made by an assessee. Further, as per provisions of section 36(1)(iii), interest expenditure on amounts borrowed and used for purposes of business is allowable as deduction while computing the total income under the head 'income from business or profession' Hence in case the borrowed funds have been used for the purposes of business, the entire interest expenditure is allowable u/s.36(1)(iii) of the Act, as the interest expenditure is directly attributable to the incomes or receipts assessable under the head Income from Business or Profession'. In the facts of appellants case, the entire interest expenditure has been claimed to be allowed as deduction u/s.36(1)(iii) of the Act. Thus, in the facts of the appellant's case, there can be no denial of the fact that the interest paid on borrowings are directly attributable to t....
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....ower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us in the context of factual matrix of the case. From the record we found that own funds of the assessee i.e., share capital and reserves at the end of the year is Rs. 13,49,75,79,368/- however, against this own fund assessee made investment of Rs. 10,59,23,39,574/-. Thus, there was extra own funds of Rs. 2,90,52,39,794/-. With regard to the interest expenditure, we found that interest expenses during the year was Rs. 77,23,08,554/- where as interest income was Rs. 93,48,14,787/-. Thus, there was net income of Rs. 16,25,06,233/- on account of interest. A clear finding has been recorded by CIT(A) both with respect to availability of own funds in excess of investment and assessee having interest income more than the interest expenditure. Since the interest income was more than the interest expenditure, no disallowance is warranted under Rule 8D (2)(ii). We direct accordingly. 19. Since the assessee's own funds were more than the investment, in view of the decision of Jurisdictional High Court in case of HDFC Bank Ltd., and Reliance Utilities and Power Limited, no d....
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....ear also AO has made disallowance u/s.14A r.w.R. 8D(2)(iii). In the return of income assessee has offered disallowance of Rs. 34,85,813/-. 24. From the record, we found that after excluding investment on which no exempt income was received by the assessee, disallowance works out to be Rs. 11,934/- against which assessee has already offered disallowance of Rs. 34,85,813/-, thus, there is an excess offer of disallowance to the tune of Rs. 34,73,879/-. 25. Following the reasoning given in the A.Y.2008-09, we restore the matter back to the file of AO and direct the AO to recompute the disallowance after excluding the investment on which no exempt income has been earned as well as investment in subsidiary companies. We direct accordingly. 26. AO has also disallowed corporate membership fees to Bombay Gymkhana. The AO has discussed the issue at para 6 page 98 and the CIT(A) at para 4.3.1 to 4.3.11 page 2 to 7. 27. We have considered rival contentions. The issue under consideration is squarely covered by the following decisions:- • CIT vs United Glass Manufacturing Company [2012-TIOL-102-SC] • Capgemini Business Services (India) Ltd [ITA 7779/Mum/2011....
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.....36(1)(iii). 34. With regard to the deletion of disallowance made by AO under Rule 8D(2)(ii) and deleted by CIT(A), we found that assessee was having own funds in the form of share capital and reserves amounting to Rs. 13,082,410,000/-. However, investment made by assessee was amounting to Rs. 11,536,050,000/- thus there was an excess own funds of Rs. 1,546,360,000/-. Clear finding to this effect has been given by CIT(A). As the own funds were more than the investment. Following the reasoning given hereinabove, we do not find any infirmity in the order of CIT(A) for deleting disallowance of interest made by AO under Rule 8D (2)(ii). 35. We also found that during the year, there was interest expenditure of Rs. 23,05,53,531/- as against interest income of Rs. 78,85,76,438/-. Thus, there was net interest income of Rs. 55,80,22,907/-. Since interest income was more than the interest expenditure, no disallowance is warranted under Rule 8D(2)(iii). We direct accordingly. 36. Assessee is aggrieved for disallowance made by AO under Rule 8D(2)(iii). We have considered rival contentions and gone through the orders of authorities below. Following the reasoning given in the A.Y.2008-0....
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....n shares rather the claim was with regard to loss in diminution of shares. As against this in the present case the appellant has incurred speculation loss on account of trading in equity segment which appellant itself has treated as speculation loss hence the judgment of Hon'ble High Court in the case of Prasad Agents (supra) is not applicable. As regards facts relating to income of the appellant, it has been explained that the appellant has incurred the speculation loss of Rs. 22,52,57,483/- which has been set off against the speculation income of Rs. 16,10,90,3477- earned from commodity trading (on unrecognized stock exchange) and remaining loss of Rs. 6,41,67,136/- has been carried forward to the subsequent assessment years to be set off against speculation income. The AO has quoted provision of section 43(5)(d) in para 5 of assessment order which says " an eligible transaction in respect of trading in derivatives referred to in clause AC of Section 2 of Securities Contract (Regulation Act) 1956 (42 of 1956) carried out in a recognized stock exchange/' Here it seems that the AO is confused in interpreting this proviso because there is no dispute that the appellant had ea....
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....sessee is no doubt correct in contending that the only definition of' derivatives' is to be found in section 43(5), yet the Court cannot ignore or overlook that the definition to the extent it excludes such transactions from the mischief of the expression 'speculative transactions' is confined in its application. Parliamentary intendment that such transactions are also excluded from the mischief of Explanation to section 73, however, is not borne out. [Para 8] It is no doubt tempting to hold that the expression 'derivatives' is defined only in section 43(5) and it excludes such transactions from the odium of speculative transactions, yet the Court would be doing violence to Parliamentary intendment. This is because a definition enacted for only a restricted purpose or objective should not be applied to achieve other ends or purposes. Doing so would be contrary to the statute. Thus contextual application of a definition or term is stressed, wherever the context and setting of a provision indicates an intention that an expression defined in some other place in the enactment, cannot be applied, that intent prevails, regardless of whether standard exclu....
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....facts are ignored by the AO. Therefore, the Appellant submits that the AO shall be directed to set off the speculation losses of Rs. 22,52,57,483/- against the speculation income of Rs. I6,10,90,347/- and remaining losses of Rs. 6,41,67,136/- shall be carried forward to the subsequent years for set off against the speculation income." 7.3. I have considered the facts of the case, assessment order passed by the AO and the submission made by the appellant. It has already been explained and discussed in para 6.3 above that the AO did not dispute that appellant carried out commodity trading transaction on unrecognized exchange and it has been held by me above that in this situation the action of the AO to disallow the adjustment of speculation loss and speculation income to the extent indicated there for the reason of facts and judicial pronouncements in the case of Bharat Ruia (supra) and DLF Commercials (supra). The appellant has done the trading in commodities on the unrecognized stock exchange at that point of time, which the appellant explained only after the notification dated 22.05.2009 and 21.12.2009 became recognized exchange and therefore prior to that (i.e. upto FY ....
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....re, there is nothing wrong for allowing set off speculation loss against speculation income and for carry forward of unabsorbed speculative loss to be set off against the future speculation income. The AO has not disproved that the commodity trading income was not out of unrecognized commodity exchange market and as long as when the assessee earned out of unrecognized commodity exchange, the income or loss out of transaction on such unrecognized exchange will remain speculative in nature- the amendment in Sec 43(5)(d) was only to provide benefit to the assessees to treat their losses as non speculative only when such losses were incurred while trading on any recognized stock exchange and not otherwise. 42. In view of decision of Hon'ble Bombay High Court in the case of Bharat Ruia in Income Tax Appeal No.1539/2010 dated 18/04/2011 and Delhi High Court in case of DLF Commercials Ltd., in ITA 94/2013 dated 11/07/2013 the assessee has correctly set off speculation loss on shares against speculative income from trading in commodity and carried forward the unabsorbed speculative loss to the subsequent year to be set of against speculative income. 43. The findings recorded by CIT(A....