TMI Blog2012 (7) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... iry of the limitation to file the revised return, the assessee had discovered that no income had accrued to the assessee and accordingly the return had been revised for the reasons of withdrawal of the scheme by the Government, the action of the assessee in revising the return on principle of real income cannot be said to be false or against the provisions contained in Section 139(5) - in favour of assessee Considering the service charges as income of the year under consideration - Held that:- The matter is restored back to the file of AO to decide the taxability of income and exclusion of service charges, in the assessment year 2004-06 in view of decision regarding revised return - in favour of assessee. - ITA No.4215 & 4378/Ahd/2007 - - - Dated:- 31-1-2012 - Mukul Kumar Shrawat, B P Jain, JJ. For Appellant: Shri Sanja R Shah, AR For Respondent: Shri Alok Johri , CIT-DR ORDER Per: B P Jain: These cross-appeals of the Revenue and the assessee arise from the order of Ld. Commissioner of Inc-tax (Appeals)-Gandhinagar, Ahmedabad dated 26-09-2007 for the assessment year 2004-05. The Revenue has raised the grounds of appeal:- [1] The learned CIT(Appeals) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any taxable return amounts to an effort towards reduction in taxable income while claiming interest expenditure incurred on fund utilized for such investment. The above is not a permissible taxation planning in view of the historical decision of the Supreme Court given in the case of Macdnald. To deal with such situation, the Legislature in its wisdom has incorporated the section 14A, which reads as under:- Section 14A : Expenditure incurred in relation to income not includible in total income: For the purpose of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. 5.1 Considering the above fact, the assessee was asked that why the proportionate interest expenditure claimed in the Profit Loss Account to the extent of diversion of interest bearing funds to non-taxable yielding investment should not be disallowed u/s.14A of the IT Act. The assessee vide its letter dated 13/12/06 explained its position in the following manner: Your goodself has stated in your letter that we have claimed exemption u/s10(34) f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80-0M, therefore, the applicability of provision of section 14A was never considered at any stage before. Accordingly any decision taken by an appellant authority under such circumstances has no bearing or reliance to the issue under consideration at this stage. ii) As far as the assessee s argument i.e. utilization of its own interest-free funds to make the impugned investment is concerned, this statement itself may raise a vital and interesting issue that how the assessee would be able to differentiate in between its own fund and the borrowed fund from the total fund available to them at any point of time. It also leads to an interesting issue i.e. that since the assessee was paying huge amount of interest, then why and how it opted to invest a part of business fund in a particular manner, wherein the return of investment was lesser than the interest expenditure on the borrowed fund. iii) Regarding establishing the concept of nexus in between the amount borrowed and investment made is concerned, particularly it has no significance as being an internal decision based on its convenience, the assessee may decided to first invest and then borrow the fund or vice versa. As t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 14A, expressly prohibits allowance of such claims. (para 22) Section 14A is part of Chapter IV. In other words, it applies to expenditure referable to any head of income referred to in section 124. It was contended that dividend income is not exempt from tax but the Legislature has intended to collect the tax indirectly by deducting tax in the hands of company. This contention cannot be appreciated. There are lakhs of shareholders whose income falls below the taxable limit and in their case there may not be any assessable income which is liable to tax even if dividend income is held to be taxable in the hands of such assessees. Hence, if the intention of the Legislature is only to collect the tax from the recipients of the dividend through medium of company, then there should have been a provision, whereby the company should not be made to pay tax in respect of that part in the dividend, which is attributable to assessee who has not taxable in. In the absence of such a provision, it cannot be said that the tax is collected from the company though the Legislature intended to collect tax from the recipients of the dividends. At any rate, section 14A is couched in specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing funds are bound to merge with the assessee s own capital as well as non-interest-bearing funds, before making the disallowance and thereby fastening the tax liability on the assessee, the onus shall be on the Department to prove the diversion. Of course, the burden of proof needed is of the same level as in any other issue pertaining to Income-tax assessment. Operation of Section 14A, which is another facet of the same problem, therefore, has to be based on the same principle. As decided by the Hon ble ITAT Delhi in the case of Maruti Udhyog Ltd. Vs. DCIT 92 ITD 119, nexus between the borrowed funds and investments can be said to be established only where it is shown that interest free funds are not available with the assessee, in case of mixed accounts wherein all kinds of receipts were deposited. In the case of Wimco Seedlings Ltd. Vs. DCIT, the Hon ble ITAT Delhi E Bench stated that only expenditure which has been proved to be incurred in relation to earning of tax-free income can be disallowed and Section 14A cannot be extended to disallow artificially computed expenditure. This Third Member judgment specifically relied on the amendment to Section 14A by the Finance Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act that assessee had raised the loan of Rs.297.75 crores up to 1997-98 and majority of investments have been made before 1997-98 and assessee had been claiming deduction u/s.80M of the Act. The Assessing Officer in those yeas had made a disallowance of the interest expenses incurred for earning the dividend. Whereas the Ld. CIT(A) and the Tribunal in particular up to 1996-97 has deleted the disallowance so made along with deduction u/s.80M of the Act on the gross dividend receipt. Though in such a situation, the interest bearing funds are bound to merge with the assessee on capital which is non-interest bearing. There is no dispute to the fact that assessee is having the non-interest bearing funds as under:- Share capital Rs.256.97 crores Depreciation reserve Rs. 5.43 crores Provision for NPA Rs.111.55 crores Total funds Rs.380.95 crores Investments Rs.295.78 crores In view of the decision of ITAT Delhi Bench in the case of Maruti Udhyog Ltd. v. DCIT 92 ITD 119 (Del) the nexus between borrowed funds and investments can be said to be established only where it is shown that interest free funds are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith immediate effect and scheme of interest free loan in lieu if deferment of Sales tax as introduced vide GR dated 21-3-88, as amended time to time is hereby withdrawn. Thus, GOG has withdrawn the earlier GRs and hence no income was remained receivable. Therefore, in the subsequent year i.e. in A.Y. 2005-06 GIIC has reversed the income in the books of account. It is submitted that as no real income accrues to the assessee during the year under consideration the same is required to be excluded from the total income as shown in the revised return of income filed. Hence, I the same is rightly excluded from the income and no disallowance is required to be made while finalizing the assessment proceedings. Copy of the GOG R No.2797 is enclose herewith for your ready reference marked as Annexure-A 3.1 The assessee s contention was examined in the light of the provision of section 139(5) and the related facts and circumstances and the same is found not admissible for the following reasons: 3.2 The plain reading of the section 139(5) stipulates fulfillment of certain conditions to enable the assessee to exercise its rights for filing revised return of income, which are summar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not entitled to the service charges. Accordingly, the assessee revised the income in the subsequent year i.e. assessment year 2005-06. As no services were rendered, no income accrued to the assessee. On the basis of principle of real income, the same should not have been taxed that is the reason the assessee had in fact, has discovered the omission wrong statement in the original return and accordingly revised the return of income u/s.139(5) of the Act . The Ld. AR relied upon the judgment of Hon ble Allahabad High Court in the case of Dhampur Sugar Mills Ltd. v. CIT (1973) 90 ITR 236 (All) , judgment of Hon be Supreme Court of India in the case of CIT v. Bokaro Steel Ltd. (1999) as reported in 236 ITR 315 (SC) and the judgment of Hon ble jurisdictional High Court in the case of Deepak Nitrite Ltd. v. CIT (2008) as reported in 307 ITR 289 (Guj) . 9. On the other hand Ld. CIT-DR, Shri Johri argued that all the books of account of the assessee are audited and the assessee is a Limited Company . Once the books of account are closed no entry in the books of account can be passed and no reverse action can be taken. He supported the orders of both the authorities below accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that it has not been earned. In fact, the G.R relied upon by the appellant is quite ambiguous e.g. it did not say anything about such cases where the scheme had been fully implemented or is in the process of implementation, as in the appellant s case. It is worthwhile to reproduce the G.R. here: After careful consideration the Government of Gujarat has directed to cancel the above cited GRs dated 21/3/88, 1/8/90 and 29/6/2002 with immediate effect and scheme of interest free loan in lieu of deferment of Sales tax as introduced vide GR dated 21/3/88, as amended from time to time is hereby withdrawn. Therefore, the G.R does not create a situation where it can be stated that there is a change of the character of the receipt. But even if it is understood that the character of the receipt got changed, consequent to this G.R., this has happened only in September 2005, one and half year after the closure of the books of the appellant and appellant has also made adjustments in its books for the period pertaining to assessment year 2005-06. Therefore, a real income was very much in existence during the previous year 2003-04 i.e. assessment year 2004-05 and it was not a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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