TMI Blog2012 (7) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... ided in favor of assessee. - ITA No.5779/Mum/2006, ITA No.208/Mum/2009, ITA No.5780/Mum/2006 - - - Dated:- 13-6-2012 - ITA No.5779/Mum/2006 ITA No.208/Mum/2009, ITA No.5780/Mum/2006, ITA No.6194/Mum/2006, ITA No.6742/Mum/2008, ITA No.1427/Mum/2008, ITA No.6266/Mum/2006, ITA No.6032/Mum/2006, ITA No.6033/Mum/2006, ITA No.5821/Mum/2006, ITA No.6196/Mum/2006, ITA No.6611/Mum/2006, ITA No.7318/Mum/2008, ITA No.210/Mum/2009, ITA No.1748/Mum/2009, ITA No.6198/Mum/2006 Avshesh Mercantile P. Ltd. (Now merged with: Entity Communication Pvt. Ltd.), Adbhuth Trading Co. P. Ltd., Ascent Tradecom Private Limited, (Now merged with: M/s. Evershine Traders Pvt. Ltd.), Lavanya Holdings and Trading Pvt. Ltd., Hansdhwani Trading Company Pvt. Ltd., Akshya Textiles Trading Agencies Pvt. Ltd., Esteem Textiles Trading Pvt. Ltd., Dadhichi Texfab Pvt. Ltd., Marvel Shipping Pvt. Ltd. (Previously known As: Arjun Shipping Private Ltd.), Kunjvan Texfab Pvt. Ltd., Vatayan Synthetics Pvt. Ltd. (Now merged with: M/s. Entity Communication Pvt. Ltd.), Ornamental Trading Enterprises Pvt. Ltd., (Now merged with: M/s. Entity Communication Pvt. Ltd.), Chandragupta Traders Pvt. Ltd., Lazor Syntex Pvt. Ltd., ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred for the purpose of its business which should be allowed u/s 36(1)(iii). As regards the applicability of section 14A, it was submitted that the only income by way of dividend on shares was exempt from tax in respect of securities notified for the purpose of section 10(23G). It was submitted that since the said shares were also capable of generating other income in the form of short term capital gain, income from stock lending, income by way of fees for providing of shares, as collateral etc., and it was not a case wherein the borrowed funds were exclusively utilized for making investment in order to earn the exempt dividend income. It was contended that the premium paid on redemption of premium notes, therefore, could not be considered as expenditure incurred in relation to income which did not form part of total income of the assessee companies so as to attract the provisions of section 14A. 3. The submissions made on behalf of the assessee companies were not found acceptable by the AO. According to him, even though making of investment in shares was the object contained in the Memorandum and Articles of Association of the assessee companies, the same alone was not a concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(Appeals) by way of appeals filed by the assessees. It was submitted before the learned CIT(Appeals) that the assessee companies had raised funds from Reliance Chemicals Ltd. through issue of optionally convertible premium notes and the said funds were invested in shares of RUPL. It was contended that making such investment in shares was the business of the assessee companies and, therefore, the premium paid on redemption of premium notes was an allowable business expenditure being in the nature of interest u/s 36(1)(iii) since the same was incurred for making investment which was the business of the assessee companies. As regards the applicability of section 14A, it was contended that the whole of income derivable from the investment made in RUPL was not exempt from tax. It was submitted that the said investment was capable of earning other income in the form of short term capital gain, income by way of giving the premium notes as collateral etc. and such income not being exempt from tax, the provisions of section 14A were not applicable. 6. The learned CIT(Appeals) did not find merit in the submissions made on behalf of the assessee companies. He found on perusal of the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hon ble Supreme Court in the case Rajendra Prasad Moody (supra) to hold that the only requirement was that the expenditure must be laid out or expended exclusively for making or earning exempt income and not that such income must have been actually earned. He, therefore, upheld the disallowance made by the AO on account of entire premium paid by the assessee on redemption of premium notes by invoking the provisions of section 14A. 7. The learned counsel for the assessee at the outset explained the relevant facts of the case giving rise to this main issue as involved in the present appeals. He submitted that he proposes to put forth five propositions in support of the assessee s case while challenging the disallowance made by the AO and confirmed by the learned CIT(Appeals) on account of premium paid on redemption of premium notes by invoking the provisions of section 14A. He submitted as a first proposition that only the dividend income and income from long term capital gain from the shares of RUPL was exempt from tax u/s 10(23G). He submitted that the said investment made in the shares of RUPL had the potential of earning other income also in the form of short term capital g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the decision of Hon ble jurisdictional High court and since, there was no exempt income earned by the assessee on the investment made in the shares of RUPL, no disallowance on account of premium paid on redemption of premium notes can be made u/s 14A as held by the Hon ble Bombay High Court in the case of Delite Enterprises (supra). 9. The learned counsel for the assessee then proceeded to put forth a third proposition by submitting that the exemption available u/s 10(23G) for income received from shares of RUPL was initially granted for the specific period of time and although it was extended further, it was not possible to anticipate such extension. He submitted that even the said extension was granted subject to satisfaction of certain conditions and if the said conditions had not been satisfied, the exemption u/s.10(23G) would not have been available. He contended that keeping in view all these uncertainties and contingencies, the premium paid by the assessee on redemption of premium notes utilized for making investment in the shares of RUPL could not be regarded as expenditure incurred in relation to earning of exempt income so as to invoke the provisions of section 14A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ching principle has to be applied for making disallowance u/s 14A. He relied on the decision of Hon ble Supreme Court in the case of Walfort Share and Stock Broker Pvt. Ltd. 326 ITR 1 and pointed out that at page No. 17 of the report, Hon ble Supreme Court has recognized the concepts of proximity and apportionment in the context of applicability of section 14A. 11. Lastly, the learned counsel for the assessee made an alternative submission that premium paid on redemption of premium notes may be treated as in the nature of interest and the same may be added to the cost of acquisition of shares of RUPL being the expenditure incurred for acquisition of the said shares. 12. The learned DR, on the other hand, strongly supported the impugned orders of the learned CIT(A) confirming the disallowance made by the AO on account of redemption premium by invoking the provisions of section 14A. He submitted that it is wrong to claim that there is no element of interest or interest like expenses involved in the payment of redemption premium. In this context, he relied on the provisions of section 2(28A) of the I.T. Act wherein interest is defined as interest payable in any manner in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alternative argument raised by the learned counsel for the assessee that the expenditure on redemption premium should be allowed as part of cost of acquisition of shares, the learned DR submitted that such cost can only be allowed in the year of actual capital gains shown by the assessees. He submitted that this argument nevertheless is raised only for the sake of arguments as an alternative since the fact on hand is that assesses have not done any transactions of sale of shares in the year under consideration giving rise to any capital gains and they have simply incurred expenditure on redemption premium which is in relation to exempt income. 15. As regards the argument of the learned counsel for the assessee that the investment in shares had the potential of earning taxable income also, the learned DR submitted that this aspect will not preclude the applicability of law u/s 14A as has been held by the Hon ble ITAT in the case of ITO vs. Daga Capital Management (P) Ltd. (2008) 119 TTJ (Mum) (SB) 289. In this regard, he invited our attention to Para 26 of the majority order wherein it was held as under: In view of the foregoing discussion we hold that the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of section 14A redundant and inoperative. He submitted that this argument of the learned counsel for the assessee, in any case, is not supported by the visible facts of the case as the assessees have neither earned nor offered any such income to tax from the deployment of RUPL shares. He contended that there is thus no substance in this argument and the same can not be accepted. 18. The learned DR further submitted that there is also no merit in the argument of the learned counsel for the assessee seeking apportionment of expenses towards tax-free income and taxable income. He contended that there is no such taxable income that has been earned by the assessees and even otherwise, there is no provision in the Income Tax Act allowing such apportionment. In support of this contention, he placed reliance on the decision of the ITAT in the case of Harish Krishnakant Bhatt 91 ITD 311 (Ahd.) and pointed out that similar argument raised on assessee s behalf in that case was rejected 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inder, the learned counsel for the assessee submitted that in the case of Delhi Enterprises Ltd. (supra), there were two assessment years involved in one of these two years, there was no taxable income. He submitted that the assessee had not earned any exempt income also in that year and it was held by the Tribunal that no disallowance u/s 14A could be made in the absence of any exempt income actually earned by the assessee. He contended that the said decision of the Tribunal has been upheld by the Hon ble Bombay High Court and the order of the Tribunal having been merged with the order of Hon ble Jurisdictional High Court, this bench has to follow the same being a binding precedent. 22. We have heard the rival submissions and also perused the relevant material on record. It is observed that the proceeds of premium notes (OCPN) on which the impugned redemption premium was paid by the assessee had been invested in the shares/debentures of RUPL and although the dividend 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, sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome in the form of share of profit from the firm. In backdrop of those facts and circumstances, the Tribunal upheld the decision of the learned CIT(A) allowing the claim of the assessee for deduction on account of interest paid on borrowed funds which were utilised for making investment in the firm as partner s capital. 24. The decision of the Tribunal in the case of Delite Enterprises (supra) was challenged by the Revenue in an appeal preferred before the Hon ble Bombay High Court and their Lordships considered following question which projected the grievance of the revenue on this issue: Whether on the facts and in the circumstances 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 the borrowed funds amounting to ₹ 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 disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s into the judgment, decision or order of the higher court after the confirmation, modification or reversal, as the case may be, and the decision of the lower court or forum has no independent existence thereafter in relation to the issue which was carried before the appellate court or forum. It was held that where the High Court comes to the conclusion that no substantial question of law arises on a particular issue, it can not be stated that the subject matter of controversy between the parties has not been dealt with by the High Court. It was held that when the decision of the Tribunal is affirmed on the issue brought before the High Court, it is the decision of the High Court which becomes operative and which is capable of being given effect to for all intents and purposes. Keeping in view the decision of Hon ble Gujarat High Court in the case of Nirma Industries Ltd. (supra), we have no hesitation to hold that the decision of the Hon 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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