TMI Blog2015 (8) TMI 605X X X X Extracts X X X X X X X X Extracts X X X X ..... t a disallowance u/s.14A could not have been made when there was no claim for exempt income during the relevant previous year. Such disallowance stands deleted. - Decided in favour of assessee. Disallowance u/s.57 in respect of the interest paid on borrowed funds - Held that:- t. None of the Authorities below have examined the purpose for which loan was borrowed from HDFC. U/s.57(iii) of the Act, expenditure should be incurred wholly and exclusively for the purpose of making or earning the income. The claim of the assessee is that interest earned on debentures is 'income from other sources'. Therefore the test for allowing deduction of expenses against 'interest income' laid down in Sec.57(iii) of the Act has to be satisfied. We are therefore of the view that it would be just and appropriate to set aside the order of CIT (A) on this issue and remand the issue to the AO for the limited purpose of verifying the purpose for which loans were borrowed by the assessee from HDFC Ltd, and which were utilised in making investment in debentures. If the borrowing is for working investments then the deduction u/s.57(iii) of the Act has to be allowed. - Decided in favour of assessee for stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - ITA No. 1417/Bang/2012, ITA No. 168/Bang/2013 - - - Dated:- 23-6-2015 - N. V. Vasudevan, JM And Abraham P. George, AM,JJ. For the Petitioner : Shri V Srinivasan, CA For the Respondent : Dr P K Srihari, Addl. CIT ORDER Per Abraham P. George, Accountant Member These are appeals filed by assessee and Revenue respectively, directed against the order of CIT (A)-III, Bangalore, dt.27.09.2012, for the assessment year 2009-10. 02. Assessee has raised five grounds in its appeal of which, grounds 1 and 5 are common needing no adjudication. Ground 4 is on levy of interest u/ss.234A, 234B and 234C of the Income-tax Act, 1961 ('the Act'in short), which is consequential in nature and also do not need need specific adjudication. Effective grounds 2 and 3 are reproduced hereunder: 2. The learned CIT (A) is not justified in sustaining the disallowance pf ₹ 3,81,18,472/- out of the total disallowance of ₹ 5,20,69,680/- u/s.14A of the Act under the facts and in the circumstances of the appellant's case. 3. The learned CIT(A) is not justified in upholding the disallowance of ₹ 1,64,97,300/- claimed u/s.57 of the Act in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he matter, he disallowed the loss of ₹ 1,13,69,446/- claimed for set off against the business profits of the non-80IB projects. 05. AO also found that assessee had closing value of investments of ₹ 54,77,66,006/- and opening value of investments of ₹ 57,27,60,174/-, income from which was exempt u/s.14A of the Act. He noted that in the profit and loss account assessee had charged ₹ 12,13,19,585/- as finance charges which inter alia included interest on fixed loans ₹ 8,58,54,952/- and interest on other loans of ₹ 3,28,42,343/-. Assessee was put on notice as to why Section 14A of the Act read along with Rule 8D of the IT Rules should not be applied. Reply of the assessee was that the investments made were in shares and debentures of one M/s. Sterling Urban Developments P. Ltd ('SUDPL' in short) during the financial year 2005-06. As per the assessee, it had borrowed ₹ 50 Crores from HDFC for making these investments. Assessee pointed out that there was a survey u/s.133A of the Act in the premises of the assessee, when the Department had taken a stand that proportionate interest on the loans utilised for investments in shares and debe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claim of interest outgo of ₹ 1,64,97,300/-. 08. Aggrieved with the above additions, assessee moved in appeal before the CIT (A). 09. Vis- -vis set off of loss of 80IB, against profits of non-80IB projects, CIT (A) was of the opinion that the procedure followed by the assessee was acceptable and for taking this view he relied on his own order in assessee's own casefor A. Y. 2008-09. Ld. CIT (A) held that assessee was eligible for claiming loss under 80IB project against its income from non-80IB project. 10. Vis- -vis the second issue viz., disallowance u/s.14A of the Act, argument of the assessee was that it had in its letter dt 15.11.2011 to the AO specifically mentioned that there was no exempt income earned by it during the relevant previous year and therefore no disallowance could be made u/s.14A of the Act. Assessee also placed reliance on the decision of Chennai Bench of the Tribunal in the case of Siva Industries v. ACIT (ITA.2148/Mds/2010, dt.20.05.2011). Further, as per the assessee, entire interest expenditure could not have been considered for application of Rule 8D(2)(ii) since part of the loans were utilised for its business. Assessee also pointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 of the Act. 13. Ld. Counsel for the assessee at the out set submitted that the issue regarding set off of loss of 80IB projects from profits of non-80IB projects had come up before the Tribunal in assessee's own case for A. Y. 2008-09 in ITA.487/Bang/2012, dt.31.01.2013 and the decision was in favour of the assessee. 14. Ld. DR fairly agreed that the issue stood covered in favour of the assessee by the decision of the Tribunal in assessee's own case in ITA.487/Bang/2012 (supra). 15. We have heard the contentions and perused the orders. CIT (A) relied on his own order for A. Y. 2008-09 in directing the AO to set off the loss from 80IB unit with the profits of non-80IB projects. This Tribunal on appeal filed by the Revenue, in its order dt 31.01.2013, held as under : 5.3.1 We have heard both parties and have carefully perused and considered the material on record. At the outset it must be mentioned here that the Hon'ble Apex Court in the case of Synco Industries Ltd (supra) was concerned with tot withstanding anything contained in any other provisions of Section 80 I(6) of the Act, as it existed at that relevant point of time and the same is extracted hereu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 of its order which are extracted and reproduced hereunder : 12. The contention that under section 80-I(6) the profits derived from one industrial undertaking cannot be set off against loss suffered from another and the profit is required to be computed as if profit making industrial undertaking was the only source of income, has no merits. Section 80-I(1) lays down that where the gross total income of the assessee includes any profits derived from the priority undertaking / unit / division, then in computing the total income of the assessee, a deduction from such profits of an amount equal to 20 per cent has to be made. Section 80-I(1) lays down the broad parameters indicating circumstances under which an assessee would be entitled to claim deduction. On the other hand section 80-I(6) deals with determination of the quantum of deduction - section 80- I(6) lays down the manner in which the quantum of deduction has to be worked out. After such computation of the quantum of deduction, one has to go back to section 80-I(1) which categorically states that where the gross total income includes any profits and gains derived from an industrial undertaking to which section 80-I appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be adjusted before determining the gross total income and as the gross total income was 'Nil' the assessee was not entitled to claim deduction under Chapter VI-A which includes section 80-I also. 13. The proposition of law, emerging from the above discussion is that the gross total income of the assessee has first got to be determined after adjusting losses, etc., and if the gross total income of the assessee is 'Nil' the assessee would not be entitled to deductions under Chapter VI-A of the Act. 5.3.3 The above decision of the Hon'ble Apex Court squarely supports the case of the assessee that the provisions of section 80 IA(5) of the Act would not restrict the operation of the provisions of section 70(1) of the Act with respect to the set off of the loss. The operation of the provision of section 80 IA(5) of the Act is restricted to the computation of the quantum of deduction for which it has to be considered that the eligible business is the only source of income. That restriction, however, cannot be applied to render the concept of gross total income in terms of section 80 B(5) to be determined before the set off of the losses under section 70( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the record carefully. The Assessing Officer has disallowed the interest expenditure on the ground that the assessee has borrowed the money which has been invested. The investment would ultimately result dividend income which will be exempt from tax. Therefore, the expenditure attributable to earning of such dividend income cannot be allowed to the assessee. Accordingly the Assessing Officer has disallowed the interest expenditure incurred on borrowed funds used for investment. Assessing Officer took the help of section 14A which prohibit an assessee to claim any expenditure which is attributable to earning of exempt income. On the other hand the stand of the assessee is that it has not received any exempt income during the year, therefore, section 14A is not applicable. This stand of the assessee has been accepted by the Coordinate Bench in the case of DCIT vs. M/s. Bhuwalka Steel Industries Ltd in ITA No.349/bang/2013. The finding of the Tribunal in this case read as under: 14. The only issue that arise for consideration in this appeal by the assessee is with regard to the disallowance made by the Assessing Officer by invoking the provisions of section 14A of the Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me indirect expenditure, which is not directly visible. Since it is already decided that the term 'expenditure' in section 14A includes indirect expenditure, the Assessing Officer's action in making a disallowance of ₹ 4,40,500/- is justified and the same is confirmed . 16. Before us the learned Counsel for the assessee pointed out that there was no exempt income earned by the assessee during the previous year. In this regard our attention was drawn to page 84 of the assessee's paper book which contains the computation of total income of the assessee. Our attention was drawn to the fact that no income is claimed as exempt in. the computation of total income. Our attention was also drawn to the profit and loss account at page 51 of the paper book and the item of miscellaneous income which is at schedule No.13 to the P L a/c. Though there is no break-up of miscellaneous receipts in schedule No.13 of the profit and loss account, the learned Counsel submitted that computation of total income would clearly evidence the fact that the assessee had no exempt income during the previous year. 17. The learned Counsel for the assessee relied on the following jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question, Section 14A of the Act. provides that for the purposes of computing the total income under the 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 the Act. Hence, what Section 1 4A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of ₹ 2,03,752/- made by the Assessing Officer was in order. 12. In the light of the above proposition, facts are required to be examined with the angle, whether the assessee has received any dividend income or any other income which is exempt. The assessee has been raising this plea right from the assessment procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the Coordinate Bench in the case of ASK Brothers Ltd (supra). Such disallowance stands deleted. 20. Coming to the disallowance of ₹ 1,67,97,300/- made u/s.57 of the Act, Ld. AR submitted that assessee itself had carved out the interest income from debentures from its income under the head 'profits and gains of business'and placed it under the head 'income from other sources. As per the Ld. AR, there was no dispute that the loan taken from HDFC was utilised for investing in the debentures. Thus according to him, borrowed funds were utilised for placing the debentures and interest paid for the borrowed funds had to be allowed. According to him, sub-section (iii) of Section 57 of the Act, entitled the assessee to claim such expenditure. Just because the interest rates on the debentures were lower in the relevant previous year would not mean that the expenditure incurred for raising the funds, for placing the debentures were to be disallowed. Ld. AR further submitted that for A. Y. 2008-09, interest income from debentures shown by the assessee under the head 'income from other sources' were accepted by the AO in an assessment done u/s.143(3) and int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27 and 28. Against such interest income, assessee had claimed interest out go of ₹ 2,52,41,251/- and claimed a loss of ₹ 61,91,251/- as well for that assessment year. In the assessment done u/s.143(3) of the Act, for the said year, AO had accepted this stand. Though placing of debentures in M/s. SUDPL might have been in furtherance of its business objects, the immediate source of the interest income was the debentures. Therefore, interest earned by it from such debentures were rightly classified under the head 'income from other sources'. The sole reason why the interest out go of ₹ 1,64,97,300/- has been disallowed by the AO is that if it was considered as income from business, the interest expenditure would fall under the personal expenditure. On the other hand, CIT (A) justified the disallowance on a ground that SUDPL had unjustifiably reduced the rate of interest from 10% to 1%, and this had resulted in drastic reduction in the debenture interest in turn leading to an exaggerated claim of loss which was a colourable device. To establish a colourable device, it is necessary to show that there was a series of legal steps taken by the assessee for bringi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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