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

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

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the judgment relied upon by the learned counsel for the appellant-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 disallo .....

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te For The Respondent : Mr. Ajay Vohra, Sr. Advocate with 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 la .....

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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 ₹ 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 sectio .....

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uction is not allowable in respect of expenditure incurred 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 .....

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. Learned counsel for the revenue submitted that the order 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. Li .....

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Rules, 1962 (in short, the Rules ) was notified by the Central 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 tha .....

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tal 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 ₹ 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 invest .....

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not form part of total income under the Act. In this scenario 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 repli .....

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round ₹ 80 lacs. The directors are not devoting much 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 expen .....

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s of ₹ 14.82 crore. A large part of it has definitely 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 inves .....

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. Looking to the extent of investments of the assessee and 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 emph .....

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this issue. The Hon'ble Supreme court had held that in 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 .....

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are, considerable time of the corporate office employees could 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 .....

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; 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 ₹ 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 .....

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tments, not resulting in earning of exempt income - ₹ 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 (PB8 .....

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is not exempt under the provisions of the Act is ousted from 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 c .....

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+40.13 crores). Further, the assessee received funds of ₹ 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 (Refe .....

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eet 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 note reads as under:- As per the SEBI guidelines for disclosu .....

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s of MTVL, a group company of the assessee. Further, as is 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 .....

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me expenditure must have been incurred by the assessee towards 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 c .....

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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 expendi .....

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f the Act, no deduction was allowable in respect of expenditure 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 c .....

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estment activities. Keeping in view the nature of activities 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 dis .....

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lished that incurring of expenditure had direct nexus with 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 .....

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