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TMI Blog2012 (7) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... es Pvt. Ltd., (Now merged with: M/s. Entity Communication Pvt. Ltd.), Chandragupta Traders Pvt. Ltd., Lazor Syntex Pvt. Ltd., versus Income-tax Officer -3(2)(1), Dy. Commissioner of Income-tax- Circle-3(3), Aayakar Bhavan, Mumbai SHRI P.M. JAGTAP, SHRI R.S. PADVEKAR, JJ. Appellant by: Shri J.D. Mistry Respondent by: Shri Subacham Ram O R D E R PER BENCH The main issue involved in all these 16 appeals relating to disallowance made by the AO and confirmed by the learned CIT(Appeals) on account of the premium paid on redemption of premium notes by invoking the provisions of section 14A is common. These appeals, therefore, have been heard together and are being disposed of by a single composite order. 2. All the assessees in the present case are investment and trading companies. They issued unsecured optionally convertible premium notes of Rs. 1 lakh each. As per the terms of the said issue, the premium note holders could convert the said premium notes into equity shares of the company at the end of maturity period or redeem the same at any time after the end of three years from the date of allotment. In case of early redemption, the premium note hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject contained in the Memorandum and Articles of Association of the assessee companies, the same alone was not a conclusive yardstick to ascertain the nature of business activity carried on by the assessee in the year under consideration. He noted in this regard that even in the tax audit report, the nature of business of the assessee companies was indicated as "trading" but there was no cogent material to support and substantiate the case of the assessee companies that making of investments in the shares of RUPL was a part of their business activities. Accordingly the contention of the assessee that premium paid on redemption of premium notes was in the nature of expenditure incurred for the purpose of their business was rejected by the AO. 4. As regards the applicability of section 14A, the AO held that even though the investment in shares had not yielded any tax free income in the form of dividend in the year under consideration, the expenditure incurred in the form of premium paid on redemption of premium notes was in relation to earning of such exempt income. He, therefore, held that the provisions of section 14A were clearly applicable irrespective of the fact that no exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not find merit in the submissions made on behalf of the assessee companies. He found on perusal of the profits & loss account of the assessee companies that the entire receipts of Rs. 92.84 lakhs credited therein was on account of dividend and interest income. He held that the income from dividend was assessable to tax under the head "Income from other sources" by virtue of section 56(2)(i). He also held that interest income mainly received by the assessee company on investment made in debentures with RUPL was also chargeable to tax under the head "Income from other sources" and the same being exempt from tax, expenditure incurred by the assessee on payment of premium on redemption in relation to the said income was covered by the provisions of section 14A. He held that the said debentures were held by the assessee as investment and not as a trading asset and the expenditure incurred on payment of premium on redemption was not the expenditure incurred for the purpose of business. He held that the premium paid on redemption of premium notes which had been utilized by the assessee for making investment in shares/debentures of RUPL was allowable as deduction only against interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the shares of RUPL had the potential of earning other income also in the form of short term capital gain, income from guarantee commission by offering the said shares as collateral security etc. He submitted that since such income was not exempt from tax, the premium paid on redemption of premium notes utilized for making investment in the shares of RUPL cannot be said to be expenditure incurred exclusively for earning of exempt income so as to attract the provisions of section 14A. He contended that the investment in shares of RUPL thus had the potential to earn exempt income as well as taxable income and the authorities below were not justified in proceeding to disallow the entire premium u/s 14A on the basis that the only potential income from the said shares was dividend which is exempt from tax. 8. The learned counsel for the assessee then put forth a second proposition that no exempt income in the form of dividend was actually received by the assessee from the shares of RUPL either in the year under consideration or even in any other year. In this regard, he relied on the decision of Madras Bench of ITAT in the case of Siva Industries and holdings Ltd. (ITA No.2148/Mad/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture incurred in relation to earning of exempt income so as to invoke the provisions of section 14A. In this regard, he invited our attention to the copy of Notification issued u/s 10(23G), which is placed at page No. 24 of his paper book, to show that the exemption was initially made available only to assessment year 1999-2000 to 2001-2002. He also invited our attention to the copy of relevant notification placed at page No. 29 of his paper book extending the exemption u/s 10(23G) upto assessment year 2004-05 subject to satisfaction of certain conditions. 10. The learned counsel for the assessee then submitted as fourth proposition that the premium paid on redemption of premium notes cannot be treated as in the nature of interest. He took us through the terms and conditions of premium notes issued in the year 1998 to point out that the tenure of the premium notes was that of 61 months. He submitted that the said premium notes were convertible into equity shares of the assessee company at the option of the premium note holders and had they been opted for such conversion, there would have been no occasion for the assessee to incur any expenditure on payment of premium on redempti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8A) of the I.T. Act wherein interest is defined as interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized. He contended that the said definition is wide enough to cover the impugned premium paid by the assessees in the present case on redemption on premium notes and the argument of learned counsel for the assessee raised in this regard is not tenable law. In support of this contention, the learned DR relied on the decision of Hon'ble Madras High Court in the case of Vishwapriya Financial Services & Securities Ltd. (2003) 127 Taxman 385 (Mad.). He submitted that though the nomenclature of the expenses is in the nature of the fixed amount based on option of premium notes holder, the same, in reality, is the cost paid for money borrowed from RCL. He contended that the expense by whatever name called is basically a payment to compensate RCL for obtaining its funds and investing the same in the equity shares and this legal character of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: "In view of the foregoing discussion we hold that the provisions of section 14A of the Act are applicable with respect of the dividend income earned by the assessee engaged in the business of dealing with shares and securities, on the shares held as stock-in-trade when earning of such dividend income is incidental to the trading in shares." The learned DR submitted that even in the case where dividend on shares is earned as incidental income, the provisions of section 14A are held to be applicable by the Tribunal. He submitted that the assessess in the present case have admittedly made investment in equity share of a company notified u/s 10(23G) and, therefore, the redemption premium paid is the expenditure which has been laid out for earning tax free income making the provisions of section 14A clearly applicable. He contended that if the argument of the assessee raised in this regard is accepted, the provisions of section 14A would become inoperative, ineffective or sterile. He submitted that it is settled law that nothing should be read in or read out in a fiscal provision and there is no room for any intendment in int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Tribunal in para 34 of its order by observing as under : "The fourth and the last contention of the assessee is that the interest expenditure is partly assessable source, i.e., when the assessee sells the shares it gives rise to capital gain. This contention, in our opinion, has no force firstly because the interest is not allowable deduction for computing capital gain unless it relates prior to the date of acquisition of shares or being the shares into existence. Secondly, because capital gain on the impugned shares does not form part of total income of the assessee until they are sold or transferred." 19. As regards the decision of Hon'ble Bombay High Court in the case of CIT vs. Delite Enterprises Ltd. (supra) relied upon by the learned counsel for the assessee, the learned DR submitted that there was a taxable income in that case and hence expenditure was held to be allowable by the Tribunal and the decision of the Tribunal was upheld by the Hon'ble High Court observing that there was no substantial question of law involved. In this regard, he relied on the decision of Hon'ble Bombay High Court in the case of Blue Star Ltd. vs. CIT 217 ITR 51 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end income and income from long term capital gain from the said investment was exempt from tax u/s 10(23G), perusal of the copy of relevant Notification issued u/s 10(23G) placed at page No. 24 of the paper book, shows that such exemption was initially granted only for the specific period i.e. assessment year 1999-2000 to 2001-2002. No doubt, the said exemption was further extended upto assessment year 2004-05 as submitted by the learned DR, a perusal of the copy of relevant notification placed at page No. 29 of the paper book clearly shows that such extension was granted subject to satisfaction of certain conditions. Keeping in view all these uncertainties and contingencies, we are inclined to agree with the contention of the learned counsel for the assessee that the premium paid by the assessee on redemption of premium notes (OCPN) utilized for making investment in the shares/debentures of RUPL can not be regarded as expenditure incurred exclusively in relation to earning of exempt income so as to invoke the provisions of section 14A. Moreover, the said investment had the potential of generating taxable income also as explained by the learned counsel for the assessee in the form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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? " Hon'ble Bombay High Court vide its judgment delivered on 26th February, 2009 held that when there was no share of profit from the Firm which otherwise would be exempt (as referred to in the question) for the relevant year, the question as framed by the Revenue would not arise. Consequently the decision of the Tribunal on this issue was upheld by Hon'ble High Court of Bombay and the appeal of the Revenue was dismissed. 25. At the time of hearing, the contention raised by the learned DR in this regard is that the appeal of the Revenue on the issue having been dismissed by the Hon'ble Bombay High Court merely observing that no question arises, it can not be treated as a decision rendered by the Hon'ble High Court on the merit of the issue which is binding on this Tribunal. We are unable to accept this contention of the learned DR. It is well settled proposition of judicial precedents that ia appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Bombay High Court in the case of Delite Enterprise Ltd. (supra) is a decision on merit which is binding precedent on us. As the issue involved in the present cases as well as all the material facts relevant thereto are similar to that of the case of Delite Enterprise (supra), we respectfully follow the said decision of the jurisdictional High Court and delete the disallowance made by the AO and confirmed by the learned CIT(A) on account of premium paid by the assessees on redemption of premium notes(OCPN) by invoking the provisions of section 14A of the Act. As regards the case laws cited by the learned DR, it is observed that in none of these cases, the facts involved were similar to the case of the present assessees in as much as the investment made therein was not found to be capable of earning taxable as well as exempt income which was actually not earned by the assessee in the relevant period as are the facts of the present case or that of the case of Delite Enterprise (supra) decided by the Hon'ble Bombay High Court. Accordingly, we decide the common issue involved in all these appeals in favour of the assesses following the decision of Jurisdictional High Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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