Dismissal of appeal of revenue by Bombay High Court about disallowance under Section 14A in case of Delite Enterprises - need proper understanding- an analysis.

[C.A. DEV KUMAR KOTHARI]

Section 10(2A), 14A of Income-tax act, 1961.

CIT Vs. M/s. Delite Enterprises 2009 (2) TMI 498 (HC)

The AO disallowed interest u/s 14A on the ground that assessee had invested in capital of a partnership firm, share in profit from which are exempt (or would be exempt) u/s 10(2A).

The Tribunal deleted the disallowance on the ground that for the year there was no profit received from partnership firm and any tax free income was not derived from the firm.

Revenue preferred appeal before the Bombay High Court, the relevant question of law raised reads as follows, with highlights for analysis purpose:

Q.A   “Whether on the facts and in the circumstance of the case and in law the Hon’ble Tribunal was right in deleting the disallowance made by the Assessing Officer of interest paid by the Assessee Company on borrowed funds amounting to Rs.241.10 lakhs overlooking the fact that the borrowed funds were used by the Assessee Company to invest in the Capital of another Partnership Firm and since profits derived by the Assessee Company from a Partnership firm were exempt from tax u/s.10(2A) of the Income-tax Act, the interest expense related to such tax free profits is to be disallowed u/s.14A of the Income Tax Act?

Unfortunately there is not much discussion about facts in the judgment. From the question we find that it is admitted position that assessee used borrowed funds to invest in capital of partnership firm.

In the question  it is stated that  profit derived from firm were exempt?

However, on reading of the judgment of the High Court we find that the High Court has observed that there was no profit from the firm. 

The High Court observed and ordered as follows:

(B)  XXX 2. In so far as Question (A) is concerned, on facts we find that there is no profit for the relevant assessment year. Hence the question as framed would not arise.

3. Consequently Appeal dismissed.

Therefore, it seems that the High Court has, from facts found that there is no profit for the relevant previous year.

Accordingly the High Court has held that the question as framed would not arise.

Authors point of view:

In some circles it has been written that the High court has held that if there is no exempt income, S.14A will not apply.

With due respect to learned authors of such views, the author feel that the High Court has not at all considered  question as to whether in such circumstances S.14A would  apply or not.

It appears that the question raised was contrary to facts found by the Tribunal therefore, the question did not arise from the order of the Tribunal since facts found were not challenged. Facts found were that there was no tax free profit from firm, whereas question gave impression that the profit were exempt. For this reason the appeal seems to have been dismissed.

S.14A is not applicable because firm pays tax and partners derive taxable income also.:

Author is of firm view that since share in profit of the firm is tax free in hands of partner only because firm has paid tax on its tax free profit, therefore S.14A is not applicable. Furthermore, the partner may earn taxable income from the firm by way of interest on capital , salary and remuneration or commission, etc. Those taxable income will be of much more certainty than probability of share in profit. When from same investment taxable income is derived, how any part of cost of investment so made can be disallowed merely because  share  in post tax profit of firm is exempted in hands of partner.  

On reading of S.14A it is clear that the disallowance is attracted only when an income is altogether exempt in overall context of the Act and not merely when an exemption is granted in computation of income of recipient. This is also evident from the fact that S.14A was inserted in view of certain judgments of the Supreme court ** in which all expenses were allowed, though the income was exempt. In those cases income was altogether exempt and it was not case of income having been taxed in hands of distributor of income or in some other scheme of imposing tax as is case in relation to share in profit of firm, dividend from companies and mutual funds etc.

**

A. In case of Maharastrs Sugar 1971 (8) TMI 14 (SC) this relates to  – agricultural income which was not taxed in any manner under the I.T. Act by way of levy of tax on income which Central Government can levy under Indina Constitution.

B.In case of Indian Bank- 1964 (10) TMI 14 (SC) - interest on tax free securities was not taxed in any manner under I.T. Act.

C. In case of Rajasthan Warehousing - 2000 (2) TMI 5 (SC) In this case income of authority exempted u/s 10(29) was not taxed in any manner under I.T.Act.

CIT Vs. M/s. Delite Enterprises 2009 (2) TMI 498 (HC)