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Commissioner of Income Tax, Jalandhar I, Jalandhar Versus M/s Max India Limited

2015 (12) TMI 972 - PUNJAB AND HARYANA HIGH COURT

Disallowance under section 14A - ITAT held no disallowance can be made under section 14A unless a clear cut nexus is established between the expenses disallowed and income earned ignoring the fact that both direct and indirect expenses are attributable to such investment - Held that:- The Tribunal after considering the matter held that no part of interest expenditure could be considered for the purpose of computing disallowance under Section 14A of the Act. Further, in the absence of any proxima .....

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pellant-revenue, it may be noticed that in Walfort Share and Stock Brokers P. Limited's case (2010 (7) TMI 15 - SUPREME COURT ), it held that the assessee was entitled to set off loss from transactions against its other Income chargeable to tax. The said view was affirmed by the High Court. The question before the Apex Court was whether loss arising in the course of dividend stripping transaction taking place prior to 1.4.2002 was disallowable on the ground that such loss was artificial as the d .....

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Mr. Gaurav Jain, Advocate Ajay Kumar Mittal,J. 1. The appellant-revenue has filed this appeal under Section 260A of the Income Tax Act, 1961 (in short, the Act ) against the order dated 8.3.2013, Annexure A.3 passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (in short, the Tribunal ) in ITA No.78(Asr)/2006 for the assessment year 2001-02, claiming following substantial question of law:- Whether the ITAT has erred in law and in facts in holding that no disallowance can be made .....

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) firms etc.- a flexible packaging material. The assessee company filed its return on 30.10.2001 declaring loss of ₹ 28,67,15,815/- and book profit of ₹ 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 .....

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by the assessee in relation to income which does not form part of the total income under the Act. Copy of the order of assessment under section 143(3) of the Act dated 30.3.2004 is annexed as Annexure A.1. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 19.1.2006, Annexure A.2, the CIT(A) partly allowed the appeal and restricted the addition/disallowance made by the Assessing Officer under Section 14A of the Act to  .....

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passed by the Tribunal is illegal and perverse in holding that no disallowance could be made under Section 14A of the Act unless a clear cut nexus was established between the expenses disallowed and the income earned. Reliance was placed upon judgment of the Apex Court in Commissioner of Income Tax vs. Walfort Share and Stock Brokers P. Limited, (2010) 326 ITR 1. 5. Learned counsel for the assessee relied upon CIT vs. Metalman Auto P. Limited, (2011) 336 ITR 434 and CIT vs. Hero Cycles Limited, .....

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tral Board of Direct Taxes (CBDT) with effect from 24.3.2008. Relying upon judgments of Delhi High Court in Maxopp Investment Limited vs. Commissioner of Income Tax, New Delhi, (2012) 347 ITR 272 and Bombay High Court in Godrej and Boyce Mfg. Co. Limited vs. DCIT and another, (2010) 328 ITR 81, it was submitted that sub section 2 of Section 14A of the Act and Rule 8B of the Rules have been held to be prospective. 6. The solitary issue that arises for consideration in this appeal is whether the a .....

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tal 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 ₹ 361.64 crore out of total capital and funds of ₹ 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 ₹ 2,11,14,273/- is exempt under s .....

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ario where the company had invested huge amounts in such investments and had claimed a loss of ₹ 14.82 crores on account of its corporate office, the assessee was called upon to allocate its expenses towards its investment activities and monitoring of these investments. Besides these expenses, large part of expenditure and energies of the treasury division of the company are also devoted towards these investments. The assessee replied to it vide letter dated 29.3.2004 and its submissions r .....

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time to the investment activities. iii)The assessee claimed that only the expenses incurred for earning the income i.e. specific to the securities on which dividend has been received, is disallowable. iv)The assessee's contentions have been gone through and are rejected in view of the following a) Section 14A talks about expenditure incurred by assessee in relation to income which has much larger scope than the limited scope of expenditure incurred for earning an income. Therefore, all expe .....

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y 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. ₹ 361.64 crores out of ₹ 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 plan .....

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the expenses in the corporate office, an amount of ₹ 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) while allowing partial relief to the assessee recorded as under:- I have considered the rival positions and analysed the averments of the appellant. Having done so, I am unable to acquiesce in the contentions of the appellant. It must be emphasized that the language of section 14A is very broad in i .....

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n order to compute income from dividend, interest on moneys borrowed for earning such income is to be deducted. In view of the above, I hold that provisions of Section 14A are applicable on the facts of the present case. But having held that a disallowance under Section 14A is called for, I feel that the AO has clearly erred in making a whopping adhoc disallowance for ₹ 1.50 crores. The AO has not discharged the onus of proving what amount had been incurred for earning the dividend income .....

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ould be expected to be spent on these activities rather than investment activities. Taking the totality of the circumstances into consideration, I hold that the disallowance of ₹ 1.50 crore made by the Assessing Officer is excessive looking at the diversified nature of the activities carried on by the appellant. I accordingly consider it just and fair to restrict the disallowance under Section 14A to ₹ 10 lacs. Therefore while an addition of ₹ 1.4 crores is deleted, the disallo .....

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evant 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 ₹ 263.13 crores. Out of the aforesaid total investments, investments to the extent of ₹ 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 b .....

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; 36.01 crores. As regards the balance investments, amounting to ₹ 67.65 crores (Rs. 263.13 crore - ₹ 195.48 crores) held as on 1.4.2000 the same included investment in shares of foreign subsidiary company and other Government securities/Bonds/mutual funds, the income wherefrom was not exempt from tax under the provisions of the Act, aggregated to ₹ 36.01 crores. The break up of the aforesaid investments is as under (PB87-88 of supplementary PB): Nature of investment Amount in .....

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om the application of the provisions of section 14A of the Act. A.2.2 Remaining investments, out of interest free funds ₹ 31.64 crores. The break up of balance investments, aggregating to ₹ 31.64 crores is as under PB 87-88: Nature of investment Amount in Rs. in crores Max Telecom Ventures Limited 30 (MTVL) Alliance Capital Mutual fund and others 1.64 Total 31.64 Out of the aforesaid investments, aggregating to ₹ 31.64 crores, it would be appreciated that, major investment rela .....

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8377; 22.65 crores from issue of zero coupon fully convertible debentures (FCD) which did not carry any interest. In addition to above, the assessee generated cash from operations of ₹ 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 ₹ 40.33 crores (Refer Schedule 3 of balance sheet for year ending 31.3.1996) o .....

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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 note reads as under:- As per the SEBI guidelines for disclosure and investor protection - clarification II, the proceed .....

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evident from the case flow statement of the year ending 31.3.1996, against the aforesaid aggregate interest bearing borrowing of ₹ 40.33 crores (from NCD), the assessee had acquired fixed assets from an amount of ₹ 35.20 crores and repaid existing loans of ₹ 6.38 crores. In that view of the matter, the investment in shares of MTVL was made of interest free funds and no portion of the interest bearing borrowed funds were utilized for making that investment, which were utilized .....

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ards earning exempt dividend income. The order of the learned CIT(A) also proceeds on the same basis, as the learned CIT(A) too has reduced the disallowance on adhoc basis. We are of the view that no disallowance under section 14A can be made without establishing proximate nexus on a reasonable basis between the expenditure incurred and the exempt income earned. This position is now well settled by catena of decisions. We also find that cash flow statement was part of the audited accounts filed .....

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ous 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 disall .....

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iture incurred by the assessee in relation to the income which did not form part of total income under the Act. Further the expenditure incurred in relation to investments which were for earning dividend Income but during the year did not yield any dividend, was not allowable. The expenses like conveyance, travelling, telephone and other incidental expenses were relatable to earning of exempt income. Therefore, an amount of ₹ 1.50 crore was apportioned as being in relation to such exempt i .....

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es carried on by the assessee, the CIT(A) restricted the disallowance to ₹ 10 lacs only. The Tribunal after considering the matter held that no part of interest expenditure could 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, no disallowance under section 14A of the Act could have been mad .....

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the earning of the exempted income. It was held as under:- 4. In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under Section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that di .....

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