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2015 (11) TMI 864 - ITAT MUMBAI

2015 (11) TMI 864 - ITAT MUMBAI - TMI - Treatment to interest income - business income or income from other sources - Held that:- It is clear from the findings recorded by the CIT(A) that the assessee company was engaged in the business of construction as well as lending of money, both constitute its main business activity. Both these objects were clear from the Memorandum and Articles of Association of assessee company. From the record we found that the investment and lending activity was a sep .....

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tention of the learned Department Representative has to be rejected on the face of it inasmuch as the entire income of the assessee is taxable under the Act. Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relating to that part of income is claimed by the assessee as deduction. In such cases only, the expenditure relating to the exempted income can be disallowed and not otherwise. Since in the present case t .....

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ereinabove the CIT(A) has correctly held that interest expenditure was incurred for the purpose of business, therefore, same is deductible u/s.36(1)(iiii) of the Act or u/s.57 of the Act. A clear finding has been recorded by CIT(A) that interest expenditure have direct nexus with the generation of income, therefore, as an alternate, the same is also allowable u/s.57 of the Act. The CIT(A) has dealt in great details AO's observation to the effect that unless interest income is earned, the interes .....

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e is no need to further apportion interest to the work-in-progress. This finding is based on material on record, therefore, do not require our interference. As the assessee had already credited interest of ₹ 10.89 crores to work in progress out of total interest of ₹ 11.63 crores, no further interest is required to be credited to work-in-progress. Accordingly, we confirm the action of CIT(A) in this regard. - Decided in favour of assessee - ITA No. 7629/Mum/2013, ITA No. 7674/Mum/201 .....

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22, Mumbai, this appeal petition is being submitted on the following grounds, which it is prayed may be considered without prejudice to one another. 1. The learned Commissioner of Income Tax Appeals- 22, erred in upholding the contention of the Assessing Officer that entire investment of ₹ 110 Crores in Redeemable Cumulative Preference Shares of Parmeka Pvt Ltd is made towards share capital and hence the entire interest payment of ₹ 1,46,49,245/- needs to be included while calculatin .....

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ay of face value of Preference Shares was ₹ 81,50,000/- and Amount payable by way of Premium was ₹ 109,21,00,000. • In Return, Your Appellant is entitled to : Dividend by way of 11% on Face Value Of Preference Shares of ₹ 81,50,000/- An amount equal to 15% per annum, internal rate of return on Premium amount of ₹ 1,09,21,00,0001- other wise than by way of dividend. • The dividend is always payable on face value of the shares (ignoring the Share Premium) and acco .....

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le calculating the disallowance u/s. 14A of the Income Tax Act, 1961 Sl.No. Name of the Party Interest 1 Marathon Nextgen Realty Ltd.-towards Investment in 11% CRPS of Face Value of ₹ 100/- each (81,,500 Nos.) totaling to ₹ 81,50,000/- 1,08,518/- Marathon Nextgen Realty Ltd.-towards Investment in 11% CRPS of Face Value of ₹ 100/- each (81,,500 Nos.) totaling to ₹ 81,50,000/- 1,45,40,727/- Total Rs. 1,46,49,245/- 2. The Learned CIT Appeal erred in upholding the working ado .....

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nsidered a sum of ₹ 17,54,95,547/- as "amount of expenditure by way of interest other than the amount of interest included in (i) incurred during the previous year". Here, the assessing officer has made a factual error. • Having accepted the fact that total interest paid and debited to Profit and Loss Account for the year totaling to ₹ 2,31,96,641/- and having disallowed a sum of ₹ 1,46,49,245/- under Item No.1, he could have disallowed only the balance sum of &# .....

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nterest & other Expenses comes to ₹ 3,14,02,200/-, when actually, the total interest paid amounted to ₹ 2,31,96,641/-." The revenue has taken following grounds in its appeal :- 1. (i) "On the facts and in the circumstances" of the case and in law, the Ld. CIT(A) erred in directing the AO to treat interest income as business income' instead of income from other sources as held by the AO." 1 (ii) "On the facts and in the circumstances of the case and in .....

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31,96,641/- either as business expenditure u/s 36(1)(iii) or u/s 57(iii) of I.T. Act and not to carry it to the WIP without appreciating that:- (a) Interest paid on borrowed funds for investment in shares of PPL has no nexus with interest income earned during the previous year and on the contrary, there is a direct nexus between funds borrowed and funds invested as the funds borrowed from MNRL specifically to invest in preference shares of PPL, and (b) The assessee company has neither borrowed n .....

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form part of cost of closing stock and is not for earning of interest income." 4 "on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO not to reduce the disallowance of ₹ 3,27,70,258/- u/s 14A from the WIP whereas only cost related to operation and creation of WIP is transferred to WIP." 5 "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that administrative and selling expen .....

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the assessee is private limited company engaged in the business of construction of commercial & residential complexes and investments. The assessee company is inter alia authorized to lend and advance money as per clause 42 of its object clause of its Memorandum and Article of Association. The company is a group concern of Marathon Group which consists of various companies. 4. During the course of scrutiny assessment the AO treated the interest income earned by the assessee as income from ot .....

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sidered and record perused. From the record we found that the assessee is engaged in the business of real estate and financing. Following are the group companies whose main object is development of real estate. i. Marathon Realty Pvt. Ltd. (MRPL) is the flagship of the Marathon Group. ii. Chhaganlal Khimji & Co Pvt. Ltd. (CKCL) is a subsidiary of MRPL. iii. Parmeka Pvt. Ltd . (PPL) is a 100% subsidiary of MRPL. Iv Marathon Nextgen Realty Ltd. (MNRL) is a listed company. The PPL is engaged in .....

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nt year advanced ₹ 120 Crores to CKCL. CKCL in turn subscribed to. the Preference Shares of PPL the broad contours of which are as follows: i. 81,500 Redeemable Cum. Pref. Shares of ₹ 100/- each 81,50,000/- ii. Premium of ₹ 13,400 on 81500 RCPS 1,09,21,00,000/- iii. Aggregating to 1,10,02,50,000/- The CKCL had entered into a Joint Venture in the form of a Memorandum of Understating with PPL wherein CKCL would receive a tax free dividend of 11 % on the face value of the Preferen .....

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ssessee to the tune of ₹ 3,65,62,742/- was assessed as income from other sources as against profits and gains of business as returned by the assessee. While doing so, the AO placed reliance on the judgment of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v/s. Commissioner of Income Tax, 227 ITR 172. 7. By the impugned order the CIT(A) decided in favour of the assessee and held that interest income was taxable under the head of business income af .....

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nd ₹ 104.49 crores respectively and there was an increase of ₹ 28.91 crores to the stock-in-trade during this year which include the cost of borrowing. Out of ₹ 11.63 crores borrowing cost (i.e: basically interest paid on the a sum of ₹ 10,89,78,43/- was apportioned and it was taken to stock-in-trade by the appellant. 2.4 During the year the appellant had borrowed ₹ 110.02 crores from M/s Marathon Nextgen Realty Ltd.(MNRPL). The borrowed funds were in turn invested .....

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thone Future X situated at Lower Parel, Mumbai. 2.5 The break-up of interest received available in the submission is reproduced hereunder for the sake of convenience. Sl.No. Name of the Party Outstanding as on 31st March 2010 Interest earned during the Financial Year 2009-10 1 Chetan R Shah 0 38,86,010 2 Sonal M Shah (603814) 91,15,121 3 Shailaja C Shah 0 75,12,540 4 Matrix Enclaves Projects Development Pvt. ltd. 6,94,10,379 32,33,754 5 Matrix Water Management Pvt. Ltd. 7,49,03,500 33,92,778 6 M .....

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of this. Perusal of clause 55 reveals that the appellant is permitted to carry on finance money lending as one of its objective. The content of this clause is reproduced here under: (55) To carry on business as financiers, concessionaries and ·merchants and-to undertake and carry out and execute all kinds of financial, commercial and other operations and to carry out any other, business (except insurance and banking business) which may seem to be capable of being conveniently carried on i .....

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ind the advances received from the customers, borrowed funds and surplus business funds only were lent to the group concerns which have earned the interest income and hence it constitute the business activity of the appellant. The appellant is in to business of real estate and it requires fund for making investment and to carry on the construction activity. As mentioned above funds borrowed from MNRPL was in turn invested in PPL which is engaged in construction of a commercial complex by name Ma .....

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not into finance activity. In, my view both construction as well as lending constitute the business activity hence, the claim of the appellant that the interest income earned is from business is in order. In view of the above discussion I am convinced that the claim of the appellant, that the interest earned is business income and accordingly the treatment given by the AO that it is interest from other sources has no merits. This ground of appeal is allowed." 8. With regard to disallowance .....

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000/- 1,08,518/- Marathon Nextgen Realty Ltd.-towards premium investment in 11% CRPS of ₹ 13,400/- each (81,500 nos.) totaling to ₹ 1,09,21,00,000/- 1,45,40,727 Marathon Nextgen Realty Ltd.-towards loans & Working Capital 67,01,248/- 2 Others-towards loans & working capital 18,46,148/- Total Interest on unsecured loans debited to P&L account 2,31,96,641/- 2.9 The AO found that the no interest was received from M/s.PPL for the huge investment made and at the same time inte .....

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which is holding 98.99% of the shares and hence, M/s PPL should have directly borrowed the surplus funds from M/s MNRPL rather than through the appellant company. In such a situation there shall be no interest cost debited in the appellant's books and MNRPL would' have earned the interest directly from M/s.PPL and the cost of interest would have booked only by M/s.PPL. 2.11 The crux of the finding of the AO is that income from JV would be admitted in future and hence, expenses cannot be .....

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d in view of this, appellant is not eligible for deduction u/s.57(iii). 2.12 The above finding of the AO cannot be accepted. The entire interest expenditure needs to be allowed u/s.36(1)(iii) of the I.T.Act. as-business expenditure in view the clear finding given by me in para 2.6 and 2.7 that .the appellant is carrying on the construction activity/money lending activity. When M/s.PPL is in the need of funds and appellant being one of the JV partner, there is legally no bar in routing such funds .....

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case of Rajendra Prasad Moody reported in 115 ITR 519 for the proposition that "earning of interest income is not necessary in order to qualify the interest expenditure for deduction". The head note and the relevant portion of the finding of the Hon'ble Supreme Court is as under- Income from other sources-Deductions-Expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income-Deduction of such expenditure whether conditional upon making o .....

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ust be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction it does not say that the expenditure shall be deductible only if any income is made or earned. Where the assessee borrowed monies for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not recei .....

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Mohamed Ghouse v. CIT [1963] 49 ITR '127 (Mad), Ormerods (India) P. Ltd. v. CIT [1959] 36 ITR 329 (Bom), Chhail Behari Lal v. CIT [1960] 39 ITR 696 (All), CIT v. Dr. Fida Hussain G. Abbasi [1969]71ITR 314 (MP), M.N. Ramaswamy Iyer v. CIT [1969] 71 ITR 218 (Ker) and CIT v. Gopal Ch. Patnaik [1978J 111 ITR 86 (Orissa) approved. Maharajadhiraj Sir Kameshwar Singh v. CIT [1957] 32 ITR 377 (Pat) and Madanlal Sohanlal v. CIT [1963J 47 ITR 1 (Cal) overruled" I am fully in agreement with this .....

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g to the AO, M/s.PPL cannot claim the interest expenses as revenue expenditure since the project undertaken was not completed during the year and more over it was not for earning of interest. No income was also offered by the appellant from this project during the year and hence, the AO was under the impression that the entire finance cost needs to go to WIP and shall form part of the balance sheet instead of P&L account. 2.15 I have carefully considered the' 'submission of the appel .....

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ptable and hence the conclusion drawn by the AO cannot be accepted 2.16 In view of the above discussion the appellant gets relief on all the three grounds and these grounds are allowed." 9. It is clear from the findings recorded by the CIT(A) that the assessee company was engaged in the business of construction as well as lending of money, both constitute its main business activity. Both these objects were clear from the Memorandum and Articles of Association of assessee company. From the r .....

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for directing the AO to treat the interest income as business income rather than income from other sources. 10. With regard to disallowance of ₹ 3,14,02,300/- u/s.14A of IT Act, the AO had discussed the issue in para 5.1 to 5.3.1 of the assessment order. The AO was of the view that on the investment of ₹ 110 crores towards acquisition of 11 % preference shares in M/s.PPL, the dividend income earned from the shares are exempt therefore, provisions of Sec.14A applies to the facts of th .....

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377; 3,14,02,300/· on account of interest disallowance as well as disallowance on account of the administrative expenses etc. 11. By the impugned order the CIT(A) confirmed the disallowance made u/s.14A after observing as under :- "3.3 I have carefully considered the submission of the appellant and the impugned assessment order. As discussed above in para 2.1 while giving the background towards investment of ₹ 110 crores into the preferential shares of M/s PPL, the appellant ha .....

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f the investment in shares. Hence, I am of the view that the entire investment of ₹ 110 crores is made towards the share capital and hence the entire interest payment ₹ 1,46,49,245/- needs to be included while calculating the disallowance u/s.14A. To this extent, I am in agreement with the AO and accordingly, uphold his action. 3.4 The grievance of the appellant in ground of appeal No.5 was that while computing the disallowance as per Ä" in the formula in Rule 8D, interest .....

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ii) and (iii), I find the working given by the AO in para 5.3.1 is in order and there is no need to interfere with his action. The appellant fails in these grounds and hence it is dismissed" 12. With regard to considering the administrative and selling expenses amounting to ₹ 58,55,328/- towards closing stock of work-in-progress(WIP) the AO had discussed the issue in para 6.1 of the assessment order. The AO found that the assessee had considered both the direct as well as indirect cos .....

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stock and did not allow the same as expenses to be debited in the P&L account. 13. By the impugned order the CIT(A) deleted the disallowance after observing as under :- "4.4 have carefully considered the submission of the appellant and the impugned assessment order. As per the submission made, 'AS-7 is no more applicable to the real estate transactions and builders doing development activity falls into AS-9. According to the guidance note issued by the Institute on accounting for r .....

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ontractors in advance of work performed: Thus, according to the directions issued by the Institute, the administrative and selling expenditure needs to be debited to the P&L account and not to the closing stock of WIP, In view of this I am not in agreement with the finding of the AO and accordingly the appellant gets relief. This ground of appeal is allowed." 14. The disallowance made u/s.14A by reducing closing stock of work in progress decided by the CIT(A) in assessee's favour af .....

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lowed either as business expenditure u/s 36(1)(iii) or u/s 57(iii) and in light of my finding in para 4.4 that the direct cost should be. taken to the profit and loss account, I feel it is not proper on the part of the AO to reduce the 14A disallowance from the WIP. In view of this, the conclusion drawn by the AO cannot be accepted and the AO is directed to take the WIP at ₹ 104.49 crores this ground of appeal is allowed." 15. With regard to short term capital gain treated by the AO a .....

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ns. 6.2 The submission of the appellant is as under :- "The Learned Assessing officer erred In wrongly taxing Short Term Capital Gain of ₹ 6,25,714/on Sale of Units of UTI Liquid Cash Plan as Income From Other Sources • While framing the Assessment Order, the Assessing Officer assessed the income from other sources at ₹ 3,65,62,742/-, the detailed break up of which is as under: Sr.No Item Amount 1 Short Term Capital Gain on sale of Units of UTI 6,35,714/- 2 Interest on Loan .....

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nd the other under the head income from other sources. • Your Appellant therefore submits that the Computation of Assessed Income may please be revised accordingly. 6.3 I have carefully considered the submission of the appellant and the impugned assessment order. The break up of the income from other sources in the above table shows that the AO took the sum ₹ 6,25,714/- which is a short term capital gain as income from other sources and finally computed ₹ 3,65,62,742/- under thi .....

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er the findings given hereinabove the CIT(A) has correctly held that interest expenditure was incurred for the purpose of business, therefore, same is deductible u/s.36(1)(iiii) of the Act or u/s.57 of the Act. A clear finding has been recorded by CIT(A) that interest expenditure have direct nexus with the generation of income, therefore, as an alternate, the same is also allowable u/s.57 of the Act. The CIT(A) has dealt in great details AO's observation to the effect that unless interest in .....

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ore, there is no need to further apportion interest to the work-in-progress. This finding is based on material on record, therefore, do not require our interference. As the assessee had already credited interest of ₹ 10.89 crores to work in progress out of total interest of ₹ 11.63 crores, no further interest is required to be credited to work-in-progress. Accordingly, we confirm the action of CIT(A) in this regard. 17. With regard to the disallowance of interest u/s.14A, the content .....

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n Realty Pvt. Ltd. to the extent of face value of preference shares of ₹ 81,50,000/- on which dividend is going to receive is direct expenditure as per clause (i) of Rule 8D(2) and that comes to ₹ 1,08,518/-. Other than that no direct or indirect expenditure were incurred for investment in the preference shares. Therefore, the balance interest paid of ₹ 1,45,40,727/- on the money borrowed for premium paid on the preference shares is not covered by the provisions of Section 14A, .....

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erence shares of ₹ 109.21 crores which is liable to be taxed, therefore, there is no justification for disallowance of interest attributable to such funds utilized for payments of premium on the preference shares. 18. During the year the assessee company has received interest income ₹ 3,59,27,028/- as against which total interest paid is ₹ 2,31,96,641/- and therefore, there is a net interest received by the assessee company is ₹ 1,27,20,363/-. Accordingly as per clause (i .....

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taken a ground that since the assessee was not in receipt of any exempt income during the year, therefore, no disallowance is warranted u/s.14A. For this purpose, reliance was placed on the decision of Hon'ble High Court in the case of M/s Shivam Motors Pvt. Ltd., - 2014-TIOL-754-HC-ALL-IT, wherein the Hon'ble High Court held as under:- "10. As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduc .....

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e 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." 20. Further reliance was placed on the decision of Hon'ble Gujarat High Court in the case of Corrtech Energy (P) Ltd., 45 taxmann.com 116 - 372 ITR 97, wherein it was held that .....

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se of Mr. M. Baskaran, ITA No.1717/Mds/2013, dated 31-7-2014, wherein the issue with regard to disallowance u/s.14A has been detail in great detail and it was held that no disallowance can be made u/s.14A when there is no exempt income. 22. On the other hand, ld. DR relied on the orders of the authorities below. 23. From the record we found that during the year under consideration the assessee company was not in receipt of any exempt income, therefore, as per the proposition of law laid down in .....

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on the view taken by the ITAT that in the absence of tax free income, no disallowance u/s.14A is permissible." b) The High Court while answering the said question held as under:- "As regards the second 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 .....

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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." c) The Gujarat High Court in the case of CIT Vs. Corrtech Energy Pvt.Ltd.(supra) held as under:- "We have given our thoughtful consideration to the facts and the decision relied upon by the ld AR. The Hon'ble Punjab & Haryana High Court in the case of CIT vs. Winsome Textile Industries Ltd. reported at (2009) 319 ITR 204 (P&H) .....

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raised by the assessee in its cross objection are allowed." 4. Counsel for the Revenue submitted that the Assessing Officer as well as CIT(Appeals) had applied formula of rule 80 of the Income Tax Rules, since this case arose after the assessment year 20092010. Since in the present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that subsection (1) of section 14A provides that for the purpose of computing tota .....

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n the decision of Division Bench of Punjab and Haryana High Court in case of Commissioner of Income Tax v Winsome Textile Industries Ltd reported in (2009) 319 ITR 204 (Punj & Har) in which also the Court had observed as under: "7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest .....

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Vs. Delite Enterprises (supra) held as under :- "The Revenue is in appeal on the following questions:- "Whether on the facts and in the circumstance of the case and in law the Hon'ble Tribunal was right in deleting the disallowance made by the Assessing Officer of interest paid by the Assessee Company on borrowed funds amounting to ₹ 241.10 lakhs overlooking the fact that the borrowed funds were used by the Assessee Company to invest in the Capital of another Partnership Fir .....

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/s.23(1) (a) of the Income-tax Act?" 2. In so far as Question (A) is concerned, on facts we find that there is no profit for the relevant assessment year. Hence the question as framed would not arise." e) Similar view has been taken by the Hon'be Punjab & Haryana High Court in the case of CIT Vs. M/s. Lakhani Marketing Incl. in ITA No.970 of 2008 dated 2.4.2014. The Hon'ble High Court while affirming the decisions of CIT(A) as well as the Tribunal in deleting the disallowan .....

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"7.2 Keeping in view the above facts and circumstances of the case it is held that the AO was not correct in applying section 14A of the IT Act in disallowing the expenditure on account of interest amounting to ₹ 46,91,684/-. It was incumbent on the AO to establish a nexus between the expenditure incurred and the income which was exempt under the Act. Facts clearly do not support the action of the AO. Disallowance is accordingly deleted. The AO is directed to recompute the income acc .....

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der the Act, and c) That there must be an expenditure incurred by the assessee, and d) That the expenditure must have a relation to the income which does not form part of the total income under the Act. 9. Therefore, unless and until, there is receipt of exempted income for the concerned assessment years (dividend from shares), we are of the view, Section 14A of the Act cannot be invoked. In this appeal, the revenue has not dispelled the findings of the CIT(A), nor the statement of the assessee .....

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