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Cheminvest Limited Versus Commissioner of Income Tax-VI

2015 (9) TMI 238 - DELHI HIGH COURT

Disallowance under Section 14A - whether disallowance can be made in a year in which no exempt income has been earned or received by the Assessee? - Held that:- In the present case, the factual position that has not been disputed is that the investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such in .....

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genuineness of the expenditure incurred by the Assessee is not in doubt, the question framed is required to be answered in favour of the Assessee and against the Revenue.

The Court answers the question framed by holding that the expression “does not form part of the total income” in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure .....

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Ms Suruchi Aggarwal, Senior Standing Counsel with Ms. Lakshmi Gurung, Advocate ORDER 1. This is an appeal filed by the Assessee under Section 260A of the Income Tax Act, 1961 ( Act ) against the order dated 4th January, 2013 passed by the Income Tax Appellate Tribunal ( ITAT ) in ITA No.87/DEL/2008 for the Assessment Year ( AY ) 2004-05. 2. Admit. 3. The following substantial question of law is arises for determination: Whether disallowance under Section 14A of the Act can be made in a year in .....

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lant from the amount invested in various shares. For the AY in question, the Appellant filed a return of income declaring a loss of ₹ 13,84,086/-. This case was picked up for scrutiny and the Assessing Officer (AO) completed the assessment under Section 143(3) of the Act disallowing ₹ 97,87,570/- out of the total expenditure incurred during the year under Section 14A of the Act. The reason recorded by the AO for this disallowance was that the borrowed funds were utilized for the purp .....

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8,70,000/-. Based on the aforementioned distinction, the AO in the assessment order dated 28th December, 2006, computed the disallowance as ₹ 97,87,570/- being the interest paid on borrowed funds invested in long terms shares. 7. Mr. Ajay Vohra, learned Senior counsel appearing for the Assessee, produced the balance sheet and profit and loss account as well as the computation of income prepared by the Assessee for the AY in question i.e. 2004-05. In the balance sheet, it is seen that the i .....

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ax return, the details of investments have been shown in two broad categories of capital assets and trading assets and the investment in Max India Limited is under the head trading assets with the investments in the investment companies shown under the head of capital assets . 8. The AO appears to have proportionately disallowed, for the purposes of Section 14A of the Act, the interest attributable to the long term investment (other than trade) for the purposes of earning exempted income. Since .....

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ection 14A of the Act. 10. In the appeals filed both by the Revenue and the Assessee before the ITAT, a Special Bench was constituted to decide the question regarding applicability of Section 14A of the Act in an year when no exempt income had been earned. The Special Bench by an order dated 5th August 2009 answered the question by inter alia referring to the decision of the Supreme Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). The reasoning of the Special Bench was as under: 22 .....

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ee or not. Section 14A does not envisage any such exception. This is even if the interest paid on borrowings for the purchase of share were allowable u/s 57 as an expenditure incurred for earning or making income as held by the Supreme Court in the case of Rajendra Prasad Moody (supra) or u/s 36 (l)(iii) as an expenditure incurred wholly and exclusively for the purposes of business as held by various decisions right from beginning of the Income Tax Act. When, prior to introduction of section 14A .....

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is so held by applying the decision of the Supreme Court in Rajendra Prasad Moody (supra) in the reverse case wherein it is that irrespective of dividend receipt, expenditure has to be allowed. Now since dividend is exempt, as a consequence thereof expenditure has to be disallowed." 11. The Special Bench of the ITAT negatived the submission of the Appellant that the language of both Sections 57 (iii) and Section 14A of the Act were materially different. The Appellant's further contentio .....

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nding the matter to the file of the AO for reconsideration of the issue afresh. The ITAT referred to the decision of this Court in Maxopp Investment Ltd. v. Commissioner of Income-tax, New Delhi (2012) 347 ITR 272 (Del). 13. At the hearing of this case on 6th July 2015, the Court had asked the parties to also address the issue of whether the interest paid on borrowings for the purposes of investment by the Assessee could be treated as business expenditure? 14. Mr. Vohra has placed before the Cou .....

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der the head income from other sources, would retain its character as business income for all intents and purposes. In the latter decision it was specifically held that the income from securities which forms part of the Assessee s trading assets or part of its income in business if loss incurs in business would be set off against that income in succeeding years. Mr. Vohra pointed out that even in the Assessee s case the business loss of previous year has been set off against the income of the su .....

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of this Court in Maxopp Investment Ltd. (supra) and to the decision of the Special Bench of the ITAT in this very case i.e. Cheminvest Ltd. v. CIT (2009) 317 ITR 86. The Court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in Commissioner of Income Tax, Faridabad v. M/s. Lakhani Marketing Incl. (decision dated 2nd April 2014 of the High Court of Punjab and Haryana in ITA No. 970/2008) which in turn referred to tw .....

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ssee had not earned any taxable income in the relevant AY in question corresponding expenditure could not be worked out for disallowance. 16. In CIT v. Holcim India (P) Ltd. (supra), the Court further explained as under: 15. Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into .....

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out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax. 17. On facts, it was noticed in CIT v. Holcim India (P) Ltd. (supra) that the Revenue had accepted the genuineness of the expenditure incurred by the Assessee in that case and that expenditure had been incurred to protect investment .....

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total income. 19. In light of the clear exposition of the law in Holcim India (P) Ltd. (supra) and in view of the admitted factual position in this case that the Assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the Assessee in the relevant AY and since the genuineness of the expenditure incurred by the Assessee is not in doubt, the question framed is required to be answered in favour of the Assessee and against the Revenue. 20. Since the S .....

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any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression "incurred for making or earning such income , did not mean that any income should in fact have been earned as a condition precedent for claiming the expenditure. The Court explained: What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the .....

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nefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure." 21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the .....

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