TMI Blog2015 (9) TMI 1303X X X X Extracts X X X X X X X X Extracts X X X X ..... reciated, are always in a state of flux, so that the proximate or the immediate source of funds may not and, in any case, not generally, reflect the real or the effective source. The same can be assessed on the basis of a fund flow statement (for the period) coupled with the legal obligations incident, if any. As an example, where a business assumes working capital advance from bank, maintaining net current assets at the prescribed level, it could safely be assumed that the borrowed funds have financed its current assets to that extent, precluding an apportionment of the expenditure by way of bank interest - a direct expenditure, against any other income of the assessee. Similar would be a case of (say) a term loan for machinery, all of which fall in the category of dedicated funds. Can, excepting dedicated arrangements, a particular asset of the business be said to be financed in a particular manner? The assets being of the business, it is only the funds of the business as a whole, save dedicated funds, that can be said to finance its activities. Accordingly, we uphold the application of section 14A r/w rule 8D in the facts and circumstances of the case, dismissing the assessee’s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.143(3) of the Income Tax Act, 1961 ( the Act hereinafter) for the assessment year (A.Y.) 2008- 09 vide order dated 22.12.2010. 2. The appeal raises three grounds, which we shall take up in seriatim. Vide its first ground, the assessee agitates the disallowance in the sum of ₹ 366 lacs u/s.14A r/w rule 8D of the Income Tax Rules, 1962 ( the Rules hereinafter). Section 14A of the Act being a non obstante provision, with rule 8D being mandatory, even as clarified by the Hon'ble jurisdictional High Court in Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom), the reason for the controversy, as gathered from the reading of the assessment and the appellate order, is the assessee s contention of its tax-free investments, i.e., investments yielding tax-free income, being funded by the assessee s own capital, so that no disallowance of interest, i.e., on a proportionate basis, would arise in terms of r. 8D(2)(ii). The Revenue s contention, on the other hand, is that the capital raised by the assessee was specifically meant to meet the capital adequacy norms and, therefore, could not be presumed or inferred as having been invested in shares, including prefere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant securities as representing it s stock-in-trade, stands raised for the first time, i.e., before the tribunal. As regards the availability of adequate interest-free funds in the form of current deposit monies, does it mean that the assessee thereby conveniently drop its earlier stand qua sufficiency of own capital, which the Department contends of having been raised to meet the capital adequacy norms? However, the said argument, toward which the assessee has furnished a statement reflecting the amount held in current deposit accounts (at ₹ 215363 lacs), as against tax-free investments (Rs.5202 lacs), both, as on 31.3.2008, is to the same effect and purport, i.e., it has not incurred any expenditure on account of interest as it had sufficient interest free funds (capital) with it. As regards the second contention qua the securities representing trading assets, the same shall require being examined on merits only if the assessee had adduced any material to evidence its claim, accompanied by a petition for admission of additional evidence, which is absent. This is as the plea could be entertained only on the basis of a finding of the relevant investments as representing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be said to be so specified, and would not extend to the entire such capital or liability. In fact, we find no legal or accounting basis for the contention as being raised before us, which, as it appears, is guided solely by the motive to avoid the incidence of section 14A. Continuing further, the decision in the case of Indian Bank Ltd. (supra) is prior to co-option of s. 14A on the statute, and would thus not apply. The apex court in that case held that it was impermissible under the scheme of the Act for the assessing authority to look behind the expenditure and to determine as to whether it had the quality of producing taxable income. The said decision, among others, stands noted by the Hon'ble jurisdictional High Court in Godrej Boyce (supra), on which it was otherwise binding (refer paras 17, 23, 41, 55 and 79 of the Reports), to hold that section 14A was enacted as it was impermissible to apportion expenditure between the taxable and non-taxable incomes, for which there is a clear mandate now (refer: CIT vs. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC)). In our opinion, rather, the decision in the case of Godrej Boyce (supra) covers the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the judgment in Reliance Utilities and Power Ltd. (supra) (refer pg. 522/para 5 of the Reports). The question, with respect, as explained in Godrej Boyce (supra), is not of the availability of the funds per se , but whether it could be said that it was only these funds that had gone to fund the relevant investments, i.e., in view of the statutory presumption cast by section 14A. The decision in the case of Reliance Utilities and Power Ltd. (supra), it must be appreciated and noted, is in context of section 36(1)(iii), the parameters of which are different. Further, in the facts of that case, even as explained by its counsel in HDFC Bank Ltd. (supra), the company was able to show that the investments with reference to which the disallowance u/s.36(1)(iii) was sought to be made by the Revenue were strategic investments in two companies of the same group, out of self generated funds. The utilization of borrowed capital of ₹ 43.62 crores, raised by way of issue of debentures, was shown as utilized toward capital expenditure and inter-corporate deposits, both yielding taxable income, so that no part of the interest bearing funds had gone in the investment of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, further endorses the said finding; the assessee-bank acquiring these assets, along with other assets and a range of liabilities, as a successor-in-business. Again, the said decision, unlike in the case of Godrej Boyce (supra), does not dilate on the scope and parameters of section 14A, but considers the ratio arising out of the decision in the case of Reliance Utilities and Power Ltd. (supra), which is in the context of section 36(1)(iii) and, even more importantly, considered in Godrej Boyce (supra). In view of the foregoing, the same becomes distinguishable, so that we decide the issue following the binding decision in the case of Godrej Boyce (supra), as found and explained by the tribunal in the case of D. H. Securities (P.) Ltd. (supra), a decision by its larger constitution. In our view, it was incumbent on the parties to have brought its decision in the case of Godrej Boyce (supra) to the notice of the Hon ble Court in HDFC Bank Ltd. (supra). We are conscious that we are deciding an appeal in the case of the same assessee. So, however, we are deciding a purely legal issue, i.e., whether, in view of the statutory presumption cast by section 14A, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 8D, has been brought in place, where one composite indivisible business gives rise to more than one stream of income, of which (at least) one does not form part of the total income, as clarified by the Hon ble Court in Godrej Boyce (supra). Dividend income arises from the same shares held as stock-in-trade which give rise to the share trading income in the case of a share trader, or the banking income of a bank, as the assessee, i.e., business income, generally speaking. Now, the shares and securities giving rise to dividend income, even assuming to be held as stock-in-trade of the business, form an integral part thereof, which represents a source giving rise to both types of income, the share trading or the regular banking income, which is taxable, and the dividend income, which is not. Share trading or the banking activity can thus be said to have an inherent quality of producing both these incomes, a qualifying condition for apportionment of expenses, contemplated u/s.14A. How could, then, one may ask, interest expenditure in relation to such business, or in fact any expenditure of the said business, be said to be incurred either wholly and exclusively for either the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision by the Hon ble Court in Godrej Boyce (supra) answers the situation where the tax-exempt income arises on an asset which represents the stock-in-trade of the business. Why, in-as-much as it forms part of the stock-in-trade of the business, it is clearly a case of a proximate cause, making for an impregnable case for apportionment of expenses. Continuing further, as explained in Godrej Boyce (supra), rule 8D of the Rules was introduced only to deal with the challenge of apportionment by providing a uniform method for determining the amount of expenditure incurred in relation to income which did not form part of the total income in-as-much as all the assessees are not similarly placed, so that treating them equally poses a challenge. This is of-course under the mandate of law, i.e., section 14A(2) r/w s. 14(3) (refer para 70). It is only after an examination of the correctness of the assessee s claim, having regard to the accounts of the assessee, that a satisfaction (or otherwise), which is to be objectively arrived at on the basis of the accounts and after considering all the relevant facts and circumstances, is to be issued, and where not satisfied, rule 8D inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under various sub heads (at pgs.91-112 of the Reports), viz.- - Apportionment - Enactment of section 14A - Insertion of sub-sections (2) and (3) to section 14A - Section 115-O , besides others. Dividend income, in the case of a dealer in shares, as afore-noted, is of the same species as the share trading income, arise as it does from the same principal activity of trading in shares, which yields two types of income, i.e., the profit on the purchase and sale of shares, and by way of dividend income on the shares held as stock-in-trade for the time being. Like-wise, for a bank (or any other assessee) who may deal in shares or other tax-free investments as a part of its regular business activity. The same composite business yielding two streams of income, taxable and tax-exempt, apportionment of the expenses of the business would be required to be made in terms of sec. 14A r/w r. 8D, which rule is mandatory from the current year. Not so doing would be to defeat and, rather, contrary to the clear mandate of section 14A. On what basis, one may ask, could the expenses of the business be attributed only to one stream of income thereof ? The issue of apportionment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by us, for the reasons afore-stated, also explained by the tribunal per its other decisions, including by its larger constitution. The foregoing discussion is in fact preemptory in the absence of any claim, much less a finding, at any stage prior to the tribunal, of the relevant securities as forming a part of the assessee s stock-in-trade. There is also no material before us to hold so, nor in fact any plea for admission of any additional evidence, which would in fact require furnishing such evidence in the first place. The said discussion is thus without prejudice to our finding the assessee s argument, in the wake of this factual matrix, as not maintainable at the threshold. As regards the claim of adequacy of capital or interest-free funds (held in current deposit accounts), we have already clarified of there being no finding of fact qua the specific source/s of financing, even as the Hon ble Court has in Godrej Boyce (supra) clarified that even the fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee has incurred expenditure in relation to earning of such income. Even if, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 86, pg. 136), would, therefore, not apply. In our view, in fact, the Hon ble High Court in Godrej Boyce (supra), which also considers the decision in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC), has settled this aspect of the matter as well, even clarifying with regard to the play provided in the form of the satisfaction of the A.O., per sub sections (2) and (3) of sec. 14A. The decision in Reliance Utilities and Power Ltd. (supra), in any case, stands distinguished by the Hon ble High Court in Godrej Boyce (supra). The latter decision, clarifying the law in the matter, being not considered in HDFC Bank Ltd . (supra), rendered following East India Pharmaceutical Works Ltd. (supra) and Reliance Utilities and Power Ltd. (supra), both of which decisions stand considered [in Godrej Boyce (supra)], shall, unless disapproved or over-ruled by the Apex Court or a larger bench decision of the Hon ble jurisdictional High Court, continue to bind us. Further, the said decision stands, we may reiterate, discussed and explained at length by the tribunal in D. H. Securities (P) Ltd. (supra) a larger bench decision, and Damani Estates Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loss of capital, the expenditure is purely notional, having no basis on any actual or cognizable loss, not even stipulated or prescribed for being booked under an accounting theory or by any Accounting Standard, even as it is the provisions of the Act, i.e., the relevant law, that would prevail in the matter, as is the settled law. The expenditure could only be allowed if it is a revenue expenditure, incurred wholly and exclusively for the purpose of its business or otherwise fall u/ss.30 to 43D. Accordingly, applying the decision by the tribunal in Ranbaxy Ltd. vs. Addl. CIT [2010] 39 SOT 17 (URO), the ld. CIT(A) confirmed the impugned disallowance, distinguishing the decision by it in SSI Ltd. vs. Dy. CIT [2004] 85 TTJ 1049 (Chennai), in which, the issue, as explained by him, was different. 6. Before us, while the ld. DR would rely on the orders of the authorities below, the ld. AR would on the subsequent decision by the special bench of the Tribunal in the case of Biocon Ltd vs. Dy. CIT [2013] 25 ITR (Trib) 602 (Bang) (SB), warranted in view of the conflicting decisions in the matter by different benches of the Tribunal. Per the same, the tribunal, after considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees, which would mark or signify the extent of the value foregone or the discount allowed by the assessee on the latter issue. The ld. AR, on this being expressed by the Bench, would, while admitting that this aspect of the matter was not in controversy in Biocon Ltd. (supra), submit that the subscription price of the shares issued to the public is wholly irrelevant, for what has been foregone by the assessee-bank is the value it could have realized, i.e., the price at which the shares are traded on the bourses. We are wholly in disagreement. We may, however, for the sake of clarity, exemplify the precise aspect of the matter being discussed. The company issues shares to the public at (say) ₹ 55/- per share as against the market price (at the relevant time) of ₹ 80/-, while issues shares to its employees under ESOP at ₹ 20/-. The question is if the discount allowed on the shares issued to the employees, deductible in the computation of business income under the Act, should be taken at ₹ 60/- (80-20), i.e., with reference to their market price, or at ₹ 35/- (55-20), i.e., with reference to the issue price of the shares issued to and subscribed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his special, favourable treatment to its employees, i.e., vis- -vis public at large, or the body of its other than employee share applicants, which enables the value foregone to be considered as an expense , being only toward encouraging and retaining the employees representing a talent or resource, in its service. That is, the reason for the difference or discount being considered as an expense per se , and of it being suffered for a business purpose, is one and the same, or in any case intrinsically linked, so that one would not survive without the other. It is thus only the second difference, i.e., the excess of the public issue price over the price charged to the employees that would qualify as a discount in-as-much as that is the value foregone by it with reference to an arm s length transaction . From the employee s stand-point as well, that is the benefit that gets extended to them, i.e., for being an employee, so as to elicit his loyalty, and for which discount stands, in effect, allowed in the first place. It may be argued, as was indeed before us, as to what if there is no public issue ? The question is misconceived. What, for instance, if the shares are not tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conspectus of the case. The assessee s argument alluding to the absence of a public issue in a particular case, in fact, endorses our view of the matter being a purely factual matter . We are, in fact, fully supported by the decision in Biocon Ltd. (supra) in-as-much as in that case the market price of shares was taken as a surrogate measure of the value at which the shares could be issued to or made available to the public by the company. We may toward this reproduce a part of the said decision so as to exhibit the same: 9.2.6 There is no doubt that the amount of share There is no difference in two situations viz., one, when the company issues shares to public at market price and a part of the premium is given to the employees in lieu of their services and two, when the shares are directly issued to employees at a reduced rate. In both the situations, the employees stand compensated for their effort. If under the first situation, the company, say, on receipt of premium amounting to ₹ 100 from issue of shares to public, gives ₹ 60 as incentive to its employees, such incentive of ₹ 60 would be remuneration to employees and hence deductible. In the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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