TaxTMI 
TaxTMI 
2018 (3) TMI 810
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..... 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 Brothers has been utilized for making loans to subsidiary compani....
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....st 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 has relied on the following judicial pronouncements in support of contention that no disallowance of interest....
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.... 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 the AR's. The AO, after recording his reasons for working out the disallowance under Rule 8D(2), has not determined any direct expenditure incurred in relation to the income which does not form part of the total income a....
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....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 funds by way of demand loans and short term deposits were fo.* short term duration. Hence they cannot be said to have been deployed for the purposes of making investments during the year unless and until proximate relation/nexus is established by the A.O. that such investments have been source....
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....iness 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/shares have been made out of a common pool of funds in proportion to the borrowed funds and the own funds. I find that the Hon'ble Delhi ITAT have held in the case of Maharashtra Seamless Ltd. (supra) and Jindal Photo Ltd. (supra), that it is the duty on the part of the A.O. to prove that the specific cl....
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.... 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 the assessee must have incurred expenditure to earn tax free income. Similar are the decisions in i. Punjab National Bank v DCIT 1'03 TTJ 908 (Del) ii. Vidyut Investments Ltd. 10 SOT 284 (Del); and iii. D.J. Mehta v ITO 290IR 238 (Mum)(AT) In the case DCIT v Maharashtra Seamless Ltd. (Del) (ITA No. 4063....
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....rmination 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 Utilities (supra). In the case of the appellant, the interest paid on borrowing are presumed to be on the utilization of borrowed fund for the purpose of business carried on by the appellant i.e. investment banking and financing. In the facts of the appellant's case, the appellant during the year had sufficient own funds to explain the source of the addi....
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..... 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 the income assessable under the Act. In these facts, and having regard to. the principle laid down by the Hon:ble Jurisdictional High Court in the case of Reliance Utilities (supra), it is held that the entire interest expenditure is directly attributable to business income, which has been duly taxed by the A.O. Hence no disallowance under Rule 8D(2)(ii) can be made as ....
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....ure, 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 disallowance of interest is warranted under Rule 8D2(ii) of the IT Act. Accordingly, there is no infirmity in the order of CIT(A) for deleting the disallowance of interest u/s.14A. 20. Ground No.3 of Revenue's appeal are same as discussed by us in the Assessment Year 2007-08, following the reasoning given hereinabove, we do not find any infirmity in the order of CIT(A) for deleting disallowance of difference of interest u/s.36(1)(iii). We direct accordingly. 21. In the Assess....
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.... 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] * SAB Miller India Limited [ITA 7123/Mum/2012] * DClTvs HJnduja Global Solution Limited [ITA 1107/Mum/20I4 * Clariant Chemicals (I) Ltd vs Addll CIT [ITA 4281/Mum/201 1] * ITO vs Idea Cellular Ltd [ITA 3568/Mum/2008] 28. Respectfully following the proposition of law laid down by the Hon'ble Supreme Court and the Mumbai Tribunal narrated above, we do not find any merit for the disallowance of corporate membership fees paid to be treated as revenue expenditure incurred for business purposes. 29. In the appeal filed by revenue, the revenue is....
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....y 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.2008-09, 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. ITA No.315/Mum/2017(A.Y.2009-10) 37. This is an appeal filed by the revenue against the order of CIT(A) for the A.Y.2009-10, in the matter of order passed u/s.143(3) r.w.s. 147 of the IT Act. 38. In this appeal, Revenue is aggrieved for allowing setting of speculation loss from trading in shares out of income from trading in commodities. 39. Rival contentions have been hear....
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....ining 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 earned income in commodity trading and which was not on the recognized stock exchange and once this is the fact then the income earned so by the appellant cannot be treated as normal income within the purview of Section 43(5)(d) of the I.T.Act, 1961. The AO has not disproved that the commodity trading income was not out of unrecognized commodity exchange market and as long as when the appellant 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....
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....t 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 exclusionary terms (such as 'unless the context otherwise requires1) are used. [Para 10] The stated objective of section 73 apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Explanation to section 73 has been enacted to clarify beyond any shadow of doubt that share business of certain types or classes of companies are deemed to be speculative. That in another part of the statute, which deals with computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such exclusion is limited for the purpose of those provisions or sections. In the instant case....
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....t 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 2008-09 and for 1 month 22 days of FY 2009-10), any such transactions were to be treated as speculative. Therefore, it is clearly demonstrated by the Appellant that during the financial year 2008-09 relevant to present assessment year 2009-10, which is under consideration, the exchanges were not recognized. Hence, in the light of High Courts decision in the case of Bharat Ruia (supra) and DLF Commercials (supra), I am of the considered view that the transaction in commodities is speculative transaction; thus, the Appellant has correctly set off the speculation loss against such income from the commodity trading. Therefore, the action of the AO in treating the income of Rs. 16,07,83,147/- from commodity trading as non-speculation ....