TMI Blog2013 (9) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... of units - application of section 94(7) - held that:- section 94(7) applies to any person that buys or acquires any securities or unit within a period of 3 months prior to the record date; if such person sells or transfers such securities or units within a period of 3 months after such date. - s regards the amendment w.e.f. 1-4-2005 by which the period of sale or transfer of the unit has been extended from 3 months to 9 months, it is observed that the amendment is clearly prospective and in no way can be said to be clarificatory in nature so that it can apply to Assessment Year 2004-05. The language used in the amended section 94(7) is plain and unambiguous. - Decided in favor of assessee. Receipt of dividend subsequent to the purchase of units, - As regards the observation made by the Assessing Officer that the units have been transacted in a way that the appellant had indulged in this device of dividend stripping with a view to reducing the tax liability, it is observed that the Assessing Officer has simply accused the appellant without bringing any material on record to substantiate such accusation. It is pertinent to note that the concerned mutual fund is a SEBI approved a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e legal principle that, the affairs of the assessee being in his special knowledge in terms of section 106 of the Evidence Act,. The onus under section 36(1)(iii) lies on the assessee to prove that each loan is used for the purposes of the business and there is no presumption in law that it is own capital or surplus funds that were diverted for non-business purposes, as settled in the cases of Kishanchand Chellaram vs. CIT 114 ITR 654 (Mad.), R. Dalmia vs. CIT 133 ITR 169 (Del), CIT vs. M.S. Venkateshwaran 222 ITR 163(Mad), K. Somasundaram Brothers vs. CIT 238 ITR 939(Mad), CIT vs. Motor GeneralFinance Ltd. 254 ITR 449 (Del) [confirmed by the Supreme Court 267 ITR 381] and CIT vs. Abhishek Industries Ltd., 286 ITR 01 (P H).3. 3. The Learned Commissioner of Income Tax (Appeals) has decided the issue as follows:- 4. The first ground of appeal is regarding the addition made on account of the differential interest between the interest paid by the appellant @ 13% on its borrowings and interest charged by it @ 9.5% and 9% on the loan granted by it. The Assessing Officer required the assessee to explain reasons for charging interest at reduced rate from its various group companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad, I decided the issue in favour of the assessee vide para-7 of my order dated 13-10-2006. Following the same the addition made during the year of Rs.1,02,40,777/- is deleted. 6. The second ground of appeal is regarding the disallowance of interest in respect of advances to Virtuous Finance Ltd. The Assessing Officer observed that the appellant had charged interest @ 10% in the year under consideration on its advances to M/s.VFL but had paid interest @ 13% on its borrowings during the year. The Assessing Officer observed that the facts and circumstances surrounding the transaction and charging of interest have been discussed in detail in block assessment order as well as in assessment year 1999-2000 in the appellant s own case. In response to the show cause, the appellant replied that VFL has used the funds advanced by the appellant for investment in the shares of M/s. Gujarat Lyka Organics Ltd., M.J. Pharmaceuticals Ltd., Ambalal Sarabhai Enterprises and TDPL. The interest charged from VFL has gradually decreased from 14% to 12% and 12% to 10% during the year depending upon the declining trend in the market. The appellant further submitted that there was no direct nexus betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act . In this case. a search was conducted on 7-12- 1998 and block assessment was completed on 31.12.2000. During the course of assessment proceedings, the Assessing officer[AO in short ] not iced that the assessee company charged interest on their advances to following concerns @ 11% to 12% p.a. 1. Airborne Investment Finance Private Limited 2. Alrox Investment Finance Private Limited 3. Sun Petrochemicals Private Limited 4. Lakshdeep Investment Finance Private Limited 5. Deeparadhana Investment Finance Private Limited 6. Bridgestone Investment Finance Private Limited 7. MacKinon Investment Finance Private Limited 8. 8. Sholapur Organics Limited 2.1 Since the aforesaid concerns were finance and investment companies of the assessee's own group while in the preceding AY 98-99, the assessee was charging interest @ 18% to 20% pa from outsiders and as concluded in assessment order of the earlier year that charging of interest at a lower rate was not an act ion arising out of commercial expediency but more of a planning measure, the AO asked the assessee to explain the reasons for charging lower rate of interest from the aforesaid companies in the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y CIT(A). The facts and figures provided reveal that the advances given to the parties in question from whom rate of interest has been charged are mainly short term advances basically in the nature of current account obviously fetching lesser rate of interest than the long term advances on which interest rate is normally higher. Further, it is not necessary to have recorded the terms and conditions for charging a particular rate of interest as the loans and advances are admittedly given by the assessee company to the group concerns in the course of normal commercial practice and with mutual understanding between the parties. It is also a fact that the assessee company has got substantial interest free own funds out of which the advances are made. It is not a case that interest bearing borrowed funds have been diverted to the group concerns interest free or on lower charge of interest or for the purpose other than the business. The decisions relied upon by the appellant duly support the case of the appellant. The disallowance of Rs.9,36,240/- is therefore ordered to be deleted. 5. Following his own findings in the AY 1999-2000, the ld. CIT(A) deleted the disallowance in the AYs 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year, we have no hesitation in upholding the findings of the learned CIT(A) in the light of the aforesaid decision of the ITAT in the assessee s own case for AY 1998-99. Therefore, ground no.1 in these appeals for the AY 1999-2000 to 2003-04 is dismissed. 8.1 Like wise an amount of Rs. 25,90,363/- was disallowed in the AY 2000-01 ,Rs. 8,38,036/- in the AY 2001-02 Rs.12,23,482/- in the AY 2002-03. 9. On appeal, the ld. CIT(A) deleted the disallowance in the AY 1999-2000 in the following terms: 8 This issue has been dealt with at great length by my predecessor while disposing the Appeal of the block assessment order of SPIL, I have perused the appellate order and find no reason to differ from the conclusions reached by my predecessor. I have also carefully considered the contentions of the Assessing Officer, the Appellant and the facts on record it is to be noted that VFL is a non banking finance company. VFL has in the past associated with SPIL for the acquisition of various companies like MJPL, GLOL, TDPL, ASEL etc. In such cases huge funds, have been blocked for acquisition of strategic stakes on behalf of and at the behest of SPIL. These facts are not disputed. The Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he outset , both the parties agreed that issue is squarely covered in favour of the assessee by the decision dated 31-05-2007 of the ITAT in the assessee s own case in IT(SS)A No.95/Ahd/2001 for the block period. 11. We have heard both the parties and gone through the facts of the case as also the decision of the ITAT. We f ind that while adjudicating a similar issue in their order dated 31-05-2007 in the assessee s own case in IT(SS)A No.95/Ahd/2001 in appeal against block assessment , the Tribunal held as under: - 33. We have carefully considered the submissions of the parties alongwith the order of the tax authorities and the case laws cited before us. We noted that the main reason for the disallowance was that as per the Assessing Officer the" reduction in interest was carried out as an after thought with a view to reduce the income of the Assessee in view of the losses in the hands of VFL. We find that the reduction in income of VFL was due to its blocking of funds in specified companies. The revenue has not disputed that advances to VFL was for business purpose and correspondingly interest @ 12% was allowed by the Assessing Officer. VFL has played a strategic role in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cided the issue as follows:- 8. The third ground of appeal is regarding the disallowance of interest paid on overdue bills of Rs.1,19,20,970/-. The Assessing Officer observed that the appellant company has paid interest on overdue supplier bills of SPIL @ 15% while it has paid interest on borrowed funds for bank @ 13% and had charged interest on the advances given to the group finance companies @ 9.5% / 9% and therefore, held that the appellant was not giving consistent treatment to the loans and advances taken by it and given by it during the course of business. In response to the show cause, the appellant argued that it was the authorized dealer of all products of SPIL in the domestic market and was supposed to make on the spot payment to M/s. SPIL and that SPIL is in a dictating position as far as appellant s business is concerned and that the interest expenditure in the hands of the appellant becomes the income of SPIL so that there was no loss of revenue. It also argued that the rate of interest depended upon the overall interest rate prevailing in the market. The Assessing Officer did not feel convinced with the explanation. He observed that although the addition on this i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9-2010 in Assessment Years 1999-00 to 2002-03 in ITA Nos.3272/Ahd.2002, 1623/Ahd/03, 1353 2180/Ahd/2005 and ITA No.8/Ahd/2007. 10. We find that the Tribunal vide its order dated 30.9.2010 has held as under:- 29. Ground No.3 in the appeals for the AY 2001-02 AY 2002- 03 as also ground no. 2 in the appeal for the AY 2003-04 relate to disallowance of Rs.1,48,57,545/-,Rs.2,29,43,683/- and Rs.4,25,44,081/ - respectively being interest paid to SPIL @ 21% pa on overdue balances resulting from purchases. The AO not iced during the course of assessment proceedings in the AY 2002-03 that the assessee paid interest on overdue supplier bills of Sun Pharmaceutical Industries Ltd. @ 21% p.a. and paid interest on borrowed funds from banks @15.5% pa while it charged interest from the advances given to the Finance Companies of the Sun Group @12% pa. To a query by the AO, the assessee submitted that a. they were authorized dealer of all products of M/s. SPIL in domestic market and are supposed to make on the spot payment to M/s. SPIL; b. the rate of interest depended upon the overall interest rate prevailing in the market , business opportunities provided by M/s. SPIL to the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of the appellant has grown consistently as seen from the table and had dramatically increased from Rs.132.05 crores in A.Y. 98-99 to Rs.305.77 crores in A.Y. 2001-02. It is observed that the appellant had huge requirements of finance/working capital in the nature of Sundry Debtors and inventory, to meet its growing business needs. Hence the commercial justification of going in for Suppliers credit can not be questioned. Coming now to the interest rate charged, I see tremendous force in the arguments of the appellant. The rate of interest has to be viewed in the overall circumstances of the case. Different type of fund will have different cost. Even the weightage need to be given for availability of the same and security etc. Commercial matters are best left to judgment of businessmen to decide. No interference is ordinarily called for unless the Assessing Officer has valid reasons to support his contention that the interest rate is malafide. My predecessor had earlier similar addition of Rs.56,63,331/- in A.Y. 1997-98, though made under section 40A(2) of the Act, wherein he had examined the addition on account of interest otherwise. It was clearly held therein that the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 4%, p.a., being deemed in excess, by applying s.40A(2)(a) of the Act In appeal, the same stood deleted by the Ld. CIT(A), accepting the assessee's contention that, firstly, the payee concerned stood not covered u/s. 40A(2)(b) of the Act. The assessee was facing dearth of finance and the rate of the market borrowings varied in the range of 24% p.a. to 30% p.a. As such, there is no cause for inferring the rate of 24% p.a. as excessive, so as to invoke (a) of the Act, particularly when there was no taxation motivation involved. Aggrieved, the Revenue is in appeal. 7 Before us, the Ld. D.R. relied on the order of the A.O. The AR on the other hand, relied in support of his case, on the decision in the case of Birla Gwalior Pvt. Ltd, vs. CIT, 44 ITR 747 (MP). Further, while arguing the case, he took us through the rectification application filed by the assessee (on 18-02- 2000), i.e., immediately after passing the assessment Order, seeking rectification of the finding by the AO i.e., of SPIL being an entity covered u/s. 40A(2)(b) of the Act and which was stated by him stands undisposed to date. 8. We have heard the parties, and perused the material on record. 8.1 We find that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest on the ground of reasonableness. Similar payment of interest has been allowed by the AO himself in the preceding two assessment years. The ld. CIT(A) also concluded that with rapid growth in the turnover of the company and the assessee having already borrowed huge amount of funds from the bank, chose to pay interest to its creditors. Since the interest has been paid wholly and exclusively for the purposes of the business while both the assessee and SPIL were liable to tax at the same rates, therefore the arrangement could not be said to for reducing the tax liability. Accordingly, the ld. CIT(A) concluded that the reasonableness of the expenditure could not be doubted. As pointed out by the Hon ble Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 , once it is established that there was nexus between the expenditure and the purpose of the business , the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g as under:- 11. The next ground of appeal is regarding the addition of Rs.1,92,58,879/- on account of dividend stripping by applying provisions of section 94(7) of the Income Tax Act. The facts in this regard are that the Assessing Officer observed that the appellant had claimed short term capital loss of Rs.2,13,48,253/- in respect of Birla Gilt Plus Liquid Plan, mutual fund from where it also received dividends of Rs.1,92,58,879/-. In response to the show cause as to why provisions of section 94(7) be not applied, the appellant clarified that the units have not been sold within a period of 3 month after the record date. The Assessing Officer further observed that the appellant had purchased units on 7-8-2003 i.e. just one day before the record date of dividend and the same were sold on 10-11-2003. From this, he observed that units were acquired within a period of 3 months before the record date. He also observed that the objective behind these transactions was to use this colorable device in order to reduce its tax liability with the motive of wiping out the capital gain. The Assessing Officer further stated that the provisions of section 94(7)(b) had been amended w.e.f. 1-4- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page-11 of the assessment order and the Assessing Officer has no objection to the correctness of these dates. That being so it is clear that provisions of section 94(7) do not apply to these transactions. As regards the amendment w.e.f. 1-4-2005 by which the period of sale or transfer of the unit has been extended from 3 months to 9 months, it is observed that the amendment is clearly prospective and in no way can be said to be clarificatory in nature so that it can apply to Assessment Year 2004-05. The language used in the amended section 94(7) is plain and unambiguous. Every amendment is prima-facie prospective unless it is expressly or by necessary implication made to have retrospective operation. In this particular case it has been made expressly effective from 1-4-2005. Under the circumstances, the Assessing Officer is not correct in holding that it will be applicable to the matters relating to Assessment Year 2004-05. As regards the observation made by the Assessing Officer that the units have been transacted in a way that the appellant had indulged in this device of dividend stripping with a view to reducing the tax liability, it is observed that the Assessing Officer has si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of acquisition of the units. The assessee earned income mainly from share trading and brokerage. The CFT Mutual Fund came out with an advertisement stating that tax free dividend income of 40 per cent. could be earned if investments were made before the record date March 24, 2000. The assessee by virtue of its purchase on March 24, 2000, became entitled to dividend on the units at Rs. 4 per unit and earned a dividend of Rs. 1,82,12,862.80. As a result of the dividend pay out, the value of the unit, stood reduced from Rs. 17.23 to Rs. 13.23 per unit on March 27, 2000. On March 27, 2000, the assessee sold all the units at Rs.13.23 per unit and collected an amount of Rs. 5,90,55,207.75, as well as an incentive of Rs. 23,76,778 in respect of the transaction. In all the assessee received back Rs. 7,96,44,847 as against the initial payment of Rs.8,00,00,000. In its return the assessee claimed the dividend received of Rs. 1,82,12,862.80 as exempt from tax under section 10(33) of the Act, and also claimed a set-off of Rs. 2,09,44,793 as loss incurred on the sale of the units. The Department disallowed the set-off claimed. However, the Appellate Tribunal, on appeal, deleted the disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals) erred in deleting the disallowance under section. 14A of the expenses of Rs.20,73,231/- incurred for earning dividend income exempt under section. 10(34)/ 10(35), including the interest on the borrowing of Rs. 4 crores for investment in the mutual funds for the sole purpose of earning dividend income which was not allowable in the computation of short term capital gains on sale of this investment. 17. The Learned Commissioner of Income Tax (Appeals) has decided the issue by observing as under:- 14. As regards Ground No.4,the Assessing Officer observed that the appellant had received a dividend of Rs.1,92,58,879/- from the investments made during the F.Y. under consideration and dividend of Rs.1,01,50,123/- had been received on investments made during the earlier years. Since the dividend income was exempt, the Assessing Officer asked the appellant to show cause as to why expenses like interest on borrowed funds for making investment and other expenses relating to the earning this exempt income be not disallowed under section.14A of the Act. The appellant replied that the shares are held as stock-in-trade and are mainly held for the purpose of earning profits on their sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be made in case of dividend income for which it has relied upon the decision of the Mumbai ITAT in the case of Mafatlal Holdings Ltd. vs. ACIT 85 TTJ 821. Further, it has been argued that where investments are held as stock-in-trade and there are sufficient interest free funds available, no such disallowance could be made. The appellant has also relied upon the decision of ITAT Delhi in the case of Maruti Udyog Ltd. vs. DICT 92 ITD 119 and ACIT vs. Eicher Ltd. 101 TTJ 369. Without prejudice to this claim, the appellant has argued that dividend income is passive and, therefore, if any amount of interest is considered attributable to the dividend income, then it can only be estimated in the ratio of dividend income to the total turnover of the company. It has also argued that once the Assessing Officer has made a disallowance under section 94(7) in respect of the dividend income of Rs.1,92,58,879/-, a disallowance under section 14A again amounts to double addition which cannot be permitted under the law. 16. I have considered the rival submissions and perused the case law. It is observed that the appellant had laid great emphasis on the word incurred used insection14A statin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me (of Rs.1,01,50,123/-) has been received , is also without any co-relation or nexus having been established between such expenditure and the dividend income. It is only notional. Under the circumstances, the disallowance made of Rs.20,73,231/- under section 14A of the Act is held to be ill-founded and is, therefore, cancelled. 18. The Ld Learned Departmental Representative submitted that Hon ble the Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income-tax (2010) 328 ITR 81(Bom) held that :- By the Finance Act of 2001, Parliament enacted section 14A of the Income-tax Act, 1961, with retrospective effect from April 1, 1962. Prior to the insertion of section 14A, the Revenue had sought to disallow the expenditure incurred in relation to exempt income. However, the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452and in Rajasthan State Warehousing Corporation v. CIT [2000] 242 ITR 450held that where there is one indivisible business giving rise to taxable income as well as exempt income, the entire expenditure incurred in relation to that business would have to be allowed even if a part of the income earned from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance Act, now provide that income by way of dividends referred to in section 115-O and income received in respect of the units of a mutual fund specified in clause (23)(b) shall not be included in computing the total income of any person for the previous year). Plainly dividend income and income from mutual funds are incomes which by virtue of the provisions of section 10, do not form part of the total income under the Act. Expenditure incurred in relation to the earning of such income has to be disallowed under section 14A. The expression "income which does not form part of the total income" under the Act must receive its plain and grammatical construction. Such income is income which is not includible in computing the total income of the assessee under the provisions of the Act for a previous year. Income-tax is a tax on income in the hands of the assessee. Hence, when section 14A disallows expenditure incurred by the assessee in relation to income which does not form part of the total income, it would include categories of income such as dividend from shares and income from mutual funds which under section 10 are not to be included in the total income. The charge under sub-se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Constitution. Different dates have been provided in the provisions of section 14A and rule 8D for their enforcement. Sub-section (1) of section 14A was inserted with retrospective effect from April 1, 1962, to overcome the decisions of the Supreme Court. At the same time, the theory of apportionment of expenditure between taxable and non-taxable income has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it has been observed that the words "expenditure incurred" in section 14A refer to expenditure on rent, tax, salary, interest, etc., in respect of which allowances are provided for. Thirdly, sub-sections (2) and (3) were introduced by a legislative amendment brought about by the Finance Act of 2006. Rule 8D has essentially put into place an artificial method of estimating the expenditure that can be regarded as being relatable to income that does not form part of the total income under the Act. Sub-section (4) of section 295 empowers the rule-making authority to give retrospective effect to subordinate legislation. However, unless expressly or by necessary implication, a contrary provision is made, no retrospecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-section (1) of section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for assessment year 2002-03 would stand remanded to the Assessing Officer. The Assessing Officer should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The Assessing Officer can adopt a reason-able basis for effecting the apportionment. While making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case. He submitted that the matter should be restored back to the file of Learned Assessing Officer fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned Assessing Officer with regard to investments made in this year. Regarding the disallowance of interest and other expenses of Rs.10,15,012/- the Learned Authorised Representative of the assessee submitted that as no disallowance for interest and other expenses was made in earlier years therefore, the order of the Learned Commissioner of Income Tax (Appeals) should be confirmed in respect thereof. We find from the Assessment Order that the Learned Assessing Officer has observed as under :- Regarding balance amount of dividend of Rs.1,01,50,123/-, the assessee submitted that this dividend has been received out of investments made in earlier years. In the absence of any fund flow statement and other details therefore, an amount @10% of the amount received, i.e. Rs.1,01,50,123/- is disallowed towards interest and other miscellaneous expenses incurred in relation to the investments made from where this exempt income has been received. It is also mentioned that similar disallowance was made in earlier year also. Therefore, the disallowance is of Rs.10,15,012/-. Therefore, the total disallowance under section 14A comes to Rs.20,73,231/-. Thus, it is observed that the disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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