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TMI Blog2015 (12) TMI 972X X X X Extracts X X X X X X X X Extracts X X X X ..... in the appeal may be noticed. The assessee company is in the business of manufacturing of pharmaceuticals, health care services etc. It is deriving its income from marketing of biaxially oriented polypropylenes (BOPP) firms etc.- a flexible packaging material. The assessee company filed its return on 30.10.2001 declaring loss of Rs. 28,67,15,815/- and book profit of Rs. 4,21,61,953/- under section 115JB of the Act which was processed under Section 143(1) of the Act. The case of the assessee was taken up for scrutiny. Notices under Sections 143(2)/142 (1) of the Act were issued to the assessee. Assessment in the case was completed under section 143(3) of the Act by the Assessing Officer on 30.3.2004 at assessed income under section 115JB of the Act after setting off of brought forward losses. The Assessing Officer while making assessment made the following additions/disallowances:- Disallowance of expenses on account of earning of exempt income. The AO has disallowed Rs. 1.50 crore as expenses apportioned for exempt income taking into account the extent of investment of the assessee and expenses in the corporate sector as the deduction is not allowable in respect of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld to be prospective. 6. The solitary issue that arises for consideration in this appeal is whether the assessee had incurred any expenditure in respect of which it has claimed income to be exempt under the Act. If yes, what was the expenditure which was incurred and claimed by the assessee as deduction under the Act? 7. The Assessing Officer disallowed Rs. 1.50 crores as expenses apportioned for exempt income under Section 14A of the Act. The finding recorded reads thus:- "7.Expenditure incurred in relation to income not includible in total income. A very huge portion of the assessee's capital is invested in strategic investments in subsidiary companies, joint ventures and other investments. These investments are in the form of securities, therefore the objective of the company in holding them is to earn dividends. Total funds of Rs. 361.64 crore out of total capital and funds of Rs. 654 crore i.e. more than 55% of company's funds is lying invested in such investments. The dividend income on some of these investments amounting to Rs. 2,11,14,273/- is exempt under section 10(33) of the IT Act and has been excluded correctly by the assessee from its total income. How ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itely gone towards holding and monitoring the investments which have yielded/were meant for earning dividend. The investments made in securities meant for earning dividend are more than 55% of total capital and funds i.e. Rs. 361.64 crores out of Rs. 654 crores. The investments are even simple securities of other companies but include lot of strategic investments in the form of subsidiaries companies and joint ventures. In these investments, there ought to be much energies spent, lot of planning involved and expenses incurred for such investments. d) Substantial time of its executives, expenses like conveyance, travelling, expenses on meetings, telephone and huge incidental expenses ought to be there on this account. As these expenses are definitely relatable to earning of an exempt income, therefore, these ought to be apportioned as in the case of Distributors (Baroda) Pvt. Limited vs. Union of India, (1985) 155 ITR 120(SC). Looking to the extent of investments of the assessee and the expenses in the corporate office, an amount of Rs. 1.50 crore is apportioned as being in relation to such exempt income and is disallowed under Section 14A of the IT Act, 1961." 8. The CIT(A) whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 14A could be made without establishing proximate nexus on a reasonable basis between the expenditure incurred and the exempt income earned. The relevant findings recorded by the Tribunal read thus:- "a. Interest expenditure Investments as on 1.4.2000 (Rs. 263.13 crores) A.I. Investments vesting on merger of MCL - Rs. 195.48 crores. As the beginning of the previous year relevant to assessment year 2000-01 (i.e. as on 1.4.2000), being the first year of disallowance under section 14A, the assessee held total investment in shares/mutual funds/government securities/bonds, aggregating to Rs. 263.13 crores. Out of the aforesaid total investments, investments to the extent of Rs. 195.48 crores, vested in the assessee on merger of MCL (PB- 99 of supplementary PB). It would be pertinent to point out that the erstwhile MCL had not made investment in shares, out of borrowed funds in as much as the MCL did not had any interest bearing borrowed funds, nor any interest expenditure was debited in the profit and loss account of that company, prior to merger with the assessee (PB-97 and 102 of supplementary PB). Therefore, the investments to the extent of Rs. 195.48 crores, held by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perations of Rs. 6.34 crores. The aforesaid total interest free receipts, it would be appreciated, were sufficient to make investment in shares of MTVL. That apart, in that year, the assessee had made additional interest bearing borrowing of Rs. 40.33 crores (Refer Schedule 3 of balance sheet for year ending 31.3.1996) on account of secured redeemable non convertible debentures (NCD). It would be pertinent to point out that the aforesaid NCD of Rs. 40.33 crores (carrying interest) and Zero Coupon FCD (interest free) of Rs. 22.65 crores were issued through a same letter of offer, which was placed on record before learned CIT(A) vide submission dated September 18, 2009 (PB 251). The object of aforesaid proceeds, as per the letter of offer, was to meet out the capital expenditure of the existing divisions, working capital requirements, repayment of term loans and investment in joint ventures. However Note 3 of the offer document (PB-251) stipulated that proceeds of NCD (interest bearing) were not utilized for investment in shares of group companies of joint ventures. The aforesaid object was to be met out of the proceeds of zero coupon FCDs. The relevant portion of the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , no disallowance under section 14A of the Act was called for. On perusal of cash flow statement, it is evident that the assessee had sufficient surplus funds available with it for making investments. Having regard to the various decisions cited by the learned AR in the case of mixed pool of funds, if the surplus funds available with the assessee on an overall basis during the financial year are sufficient to make investment, presumption needs to be drawn that surplus funds and not interest bearing funds could be said to have been used for making investments by the assessee in the financial instruments yielding exempt income. Hence, no part of interest expenditure can be considered for the purpose of computing disallowance under Section 14A of the Act. Further, in the absence of any proximate nexus having been established by the lower authorities between the administrative and other expenses and the exempt income, in our view, no disallowance under section 14A of the Act could have been made for the assessment year under consideration." 10. A perusal of the findings recorded above shows that in the opinion of the Assessing Officer, under Section 14A of the Act, no deduction was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under Section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of Section 14A, cannot be accepted. Disallowance under Section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand...." 12. Similar view was expressed by this Court in Metalman Auto P. Limited's case (supra). It was concluded by this Court that disallowance under Section 14A of the Act requires a finding of incurrence of expenditure for earning the exempt income. In case, no expenditure has been incurred, the disallowance under Section 14A is not justified. In other words, there cannot be presumption that certain expenditure is bound to be incurred for earning the exempt income. 13. Adverting to the judgment relied upon by the learned counsel for the appellant-revenue, it may be noticed that in Walfort ..... X X X X Extracts X X X X X X X X Extracts X X X X
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